Aflac (AFL) Dividend Stock Analysis

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance. The company is a member of the dividend aristocrats’ index, has paid dividends since 1973 and increased them for 29 years in a row.

The company’s last dividend increase was in October 2011 when the Board of Directors approved a 10% increase to 33 cents/share. The company’s largest competitors include Nippon Life Insurance Company, Asahi Mutual Life Insurance Company and American fidelity Assurance Company.

Over the past decade this dividend growth stock has delivered an annualized total return of 5.20% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 11.60% per year. Analysts expect Aflac to earn $6.53 per share in 2012 and $6.58 per share in 2013. In comparison Aflac earned $4.18/share in 2011.

The company has consistently repurchased stock over the past 7 years, reducing its share count from 516 million shares in 2002 to 468 million in 2012.

The company generates 75% of sales from Japan, with the remainder coming from US operations. Aflac is offering its products in almost 90% of Banks in Japan, and more branches are expected to start pushing the products in the coming years. Aflac steadily increases the number of sales agents in Japan to push its products. Most of its policies offer coverage not insured through Japan’s health care system. As the Japanese population continues aging, the demand for supplemental insurance coverage is expected to grow. The real growth kick could be in the US, where a small portion of US businesses offer Aflac's policies. The fact that Aflac has built a strong brand in the US, based off the white duck, is another strong differentiator. One of the biggest reasons why company's stock is so cheap is probably due to investors' fears of European Bank exposure in Aflac's investment portfolio. The company has started a derisking program over two years ago, which should minimize investment losses.

The return on equity increased from 12.50% in 2003 to 24% in 2010, before decreasing to 16% in 2011. If analysts’ estimates about earnings per share materialize in 2012 and 2013, and there aren't losses from company's investment portfolio, I would see this indicator moving back above 20%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 20.40% per year over the past decade, which is higher than the growth in EPS. This was possible due to the expansion in dividend payout ratio. However, the rate of increase has slowed dramatically over the past five years.

A 20% growth in distributions translates into the dividend payment doubling almost every three and a half years. If we look at historical data, going as far back as 1984 we see that Aflac has actually managed to double its dividend every four and a half years on average.

The dividend payout ratio has doubled from 15% in 2002 to 30% in 2011. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Aflac is attractively valued at 8.40 times earnings, has an adequately covered dividend and yields 2.90%. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long AFL

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The most challenging aspect of dividend investing

Many dividend investors focus exclusively on finding the best dividend stocks. They spend countless hours analyzing companies, studying balance sheets and perfecting their entry criteria. Yet, when the companies that have taken so painstakingly to identify and research appreciate in price, investors decide to cash in and move onto the next idea. Unfortunately in most situations, investors end up worse off in the new idea, in comparison to just sitting tight and doing nothing.

I am always fascinated that investors who are quick to pull the trigger on gains they generate, freeze to death when the stocks cut or eliminate distributions. They become hopeful, when they should be fearful of losing their nest eggs. These investors end up hoping and praying that one day their dividend income will breakeven, meaning that they will generate as much income as when they originally made the investment.

These examples appear to be black and white, and too rigid. If investing has taught me anything, it is that things always change and that one has to remain flexible in their approach. Yet, one recurring pattern in my investment portfolio that I have noticed is that winners tend to keep winning, yet losers tend to keep on losing. In the world of dividend investing I have found that companies like the constituents of the dividend achievers list have a very high probability of continuing their streak of consistent dividend increases. I have also found that companies which cut or eliminate distributions are seldom good investments for the long term investor, even if they eventually decide to regain their dividend growth stock status.

What I am attempting to describe here is the fact that dividend investing is very difficult. It is not difficult because analyzing balance sheets, moats and business models is that hard. It is difficult, because a large component of the investment equation deals with investor psychology. Even if investors are shrewd enough to have selected the best dividend stocks in the world at the right price, they could still end up not making any money, or even worse – losing money.

Investors who purchased at the right price can do no wrong by simply holding onto the rising income stream, as long as the distribution is not cut or eliminated. The dividend trend should be their friend. Unfortunately, psychologically speaking, it is very difficult to hold onto a winning position. A position that goes up 50%, 100%, 200% and even more over a period ranging from a few months to a few years or even decades would make most investors want to ring the cash register. This would be the case even if the underlying fundamentals are still intact, and bullish trend in earnings and dividend payments is expected to continue onto the future.

Another psychological problem that dividend investing poses is that it is a slow process of building wealth and passive income. For many, it would take anywhere from one decade to several decades. Few investors have the tenacity to forgo current consumption and stick to a single investment strategy for years. People tend to give up easily when confronted with certain tasks where the payout is a long time away. It is very difficult to compare your long-term approach to dividend investing to the get rich quick mentality of most other investors, who might have made quick gains in volatile technology stocks over the past year. Investors who decide to take shortcuts to achieve their target dividend income, might end up being disappointed in the process. Some shortcuts include taking excessive leverage that could lead to huge investment losses even during a small market correction, or using options and futures without understanding them completely. Another shortcut could include loading up on high-yielding companies such as mortgage REITs like American Capital Agency (AGNC) or Annaly Capital (NLY). If short term interest rates start increasing faster than longer term interest rates, the distributions that these mortgage REITs pay would be in big jeopardy.

The psychological dilemma of successful dividend investing is evident for situations where investors have purchased companies that have raised dividends for a certain number of years, and when they keep raising them in the future. Many investors have been taught at school or at their jobs that inactivity does not result in payoff. As a result, many end up selling winners, paying capital gains taxes on the proceeds and limiting their upside this way. Unfortunately, successful dividend investing is sometimes counterintuitive to this way of thinking, since it is all about being right and maximizing this to the fullest extent possible, even if it takes several decades of positive reinforcement.

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Nine Income Stocks Delivering Dividend Increases to Shareholders

There were more than twenty companies which announced dividend hikes over the past week. In this article, I have outlined the companies which have managed to boost distributions for at least five years in a row.  I have excluded companies which pay fluctuating dividends as well as companies which might have raised dividends for a few years in a row simply by accident. Past dividend growth is no guarantee of future success however. As a result I added a brief analysis after each consistent dividend stock.

The nine consistent dividend raisers from the past week include:

Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the United States and internationally. This master limited partnership announced its plans to increase unitholder distributions to 65 cents/unit in the third quarter and 65 cents/unit in the fourth quarter of 2012. Enterprise Products Partners has raised distributions for 16 years in a row and yields a healthy 4.90%.

Few income stocks commit to boosting distributions for several quarters in a advance. Only a business with dependable cashflows could afford to accomplish this. The increase in distributions is supported by fee-based projects in Eagle Ford Shale in South Texas, which recently went online. In addition, the company also announced that a few other fee-generating assets are on schedule to start delivering revenues by the end of 2012. Check my analysis of this MLP.

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. The company raised its quarterly dividend by 10% to 77 cents/share. This marked the 36th consecutive annual dividend increase for this dividend aristocrat. Yield: 3.30%

In general, the most recent dividend increase has been very similar to what I forecasted the company’s future annual dividend growth rate to be over the next few years. Analysts expect the Golden Arches to boost EPS by 7%/year for the next two years, from $5.27/share in 2011 to $6.03/share in 2013. As a result, future dividend increases in the 10% range could be easily supported by growth in business, reduction in share count and slight expansion in the dividend payout ratio. Check my analysis of McDonald’s.

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This REIT announced a slight distribution increase in its monthly dividends to $0.1514375 per share. This is an increase of 4.30% over the distribution paid this time last year. Realty Income has boosted distributions for 18 consecutive years, and was one of the few real estate investment trusts that didn’t cut dividends during the Financial Crisis. However, given the low yield of 4.40%, I view the stock as a hold. The weak distribution growth over the past five years, coupled with investor’s hunger for dividend yield, has pushed the stock above my buy point. However, I do like the intent to acquire American Realty Capital Trust (ARCT), which would generate additional FFO/share to increase distributions to $1.94/share after deal is closed. I would consider adding to my position at yields around 5%, but until then the stock is a hold for my income portfolio.

Microsoft Corporation (MSFT) develops, licenses, and supports software products and services; and designs and sells hardware worldwide. The company raised its quarterly distributions by 15% to 23 cents/share. This marked the eighth consecutive annual dividend increase for Microsoft. Yield: 3%

I like the fact that Microsoft is a virtual monopoly in the PC market with its Windows Operating system. When I previously analyzed the stock, I liked the valuation, potential for dividend growth and the company’s moat at present levels. However, I am still unsure of whether Microsoft will be able to maintain strong competitive position with software going forward, as an increasing number of users are switching from PC’s to Notebooks to Tablets. Moats are very difficult to maintain in the technology world, which is probably why I have been hesitant to add tech companies such as Microsoft (MSFT) and Intel (INTC) to my portfolio.

YUM! Brands, Inc. (YUM), together with its subsidiaries, operates as a quick service restaurant company in the United States and internationally. The company raised its quarterly distributions by 17.50% to 33.50 cents/share. This marked the ninth consecutive annual dividend increase for Yum! Brands. Yield: 2%

The company is expected to grow earnings from $2.74/share in 2011 to $3.73/share by 2013. Strong earnings growth will fuel double digit dividend increases at least by the end of the decade. Unfortunately, the stock is trading at more than 21 times earnings and only yields 2%. I was able to scoop some shares of this fast growing company a few years ago and would likely add to my position on any large dips in the stock price. I would add to my position if price falls to $54/share, or if the dividend goes up by 25% next year and price is unchanged from today’s levels I would likely be a buyer.

Texas Instruments Incorporated (TXN) engages in the design and sale of semiconductors to electronics designers and manufacturers worldwide. The company raised its quarterly distributions by 23.50% to 21 cents/share. This marked the ninth consecutive annual dividend increase for Texas Instruments. Yield: 2.90%

On the surface, Texas Instruments seems like a company with strong dividend growth, sustainable dividend payout and above average yield. In addition, the company would likely join the list of Dividend Achievers in 2013. However, investors who look closely at the numbers would realize that much of the dividend growth has been mostly due to expansion of the dividend payout ratio. Earnings have tended to be volatile, which means that future dividend growth above $1/share in annual dividends would be very difficult to achieve organically. In addition, it currently is trading at 21 times earnings. I find the stock to be a hold at current levels.

ConAgra Foods, Inc. (CAG) operates as a food company primarily in North America. The company operates through two segments, Consumer Foods and Commercial Foods. The company raised its quarterly dividend by 4.20% to 25 cents/share. This marked the 6th consecutive annual dividend increase for ConAgra. Yield: 3.60%

The company cut distributions in 2006, and has been increasing them very slowly since then. The trend in earnings per share has been erratic over the past decade, which led to the cut in 2006. I would continue monitoring the situation at ConAgra, but without any sustainable earnings growth over the next decade, the company might be unable to even achieve a dividend achiever status in four years.

Cracker Barrel Old Country Store, Inc. (CBRL), through its subsidiaries, engages in the development and operation of the Cracker Barrel Old Country Store restaurant and retail concept in the United States. The company raised its quarterly dividend by 25% to 50 cents/share. The new rate also represents a 100% increase over last year’s distribution of 25 cents/share. Cracker Barrel has raised dividends for 10 years in a row. The company looks attractively valued, and seems to have an adequately covered dividend. I would consider adding it to my list for further research. Yield: 3%

The First of Long Island Corporation (FLIC) operates as a bank holding company for The First National Bank of Long Island that provides financial services. The company raised its quarterly dividend by 8.70% to 25 cents/share. This marked the 17th consecutive annual dividend increase for First of Long Island Corporation. This bank has managed to quietly double EPS over the past decade, while raising distribuions by 13.40%/year on average over the same time period. I would consider adding it to my list for further research. Yield: 3.20%

Full Disclosure: Long EPD, MCD, YUM, O

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Walgreen (WAG) Dividend Stock Analysis 2012

Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. The company is a member of the dividend aristocrats index, has paid dividends since 1933 and increased them for 37 years in a row.

The company’s last dividend increase was in July 2012 when the Board of Directors approved a 22.20% increase to 27.50 cents/share. The company’s largest competitors include CVS Caremark (CVS), Rite Aid (RAD) and Wal-Mart Stores (WMT).

Over the past decade this dividend growth stock has delivered an annualized total return of 1.50% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 12.90% per year. Analysts expect Walgreen Co. to earn $2.60 per share in 2012 and $3.03 per share in 2013. In comparison Walgreen earned $2.94/share in 2011.

The company has consistently repurchased stock over the past 7 years, reducing its share count from 1,025 million shares in 2004 to 865 million in 2012.

One of the major headwinds that Walgreen was facing was that it stopped filling prescriptions for Express Scripts, which accounted for a large amount of sales. Express Scripts has since merged with Medco, forming one of the country’s largest Pharmacy Benefit Managers. The risk that Walgreen faced is that other Pharmacy Benefit Manager companies might try to squeeze it, which could further depress margins and earnings. However, recently it had signed an agreement with the company, which also alleviated concerns about Walgreen’s upcoming renewal with Medco. The issue with this deal is that Walgreen lost a lot of customers. Pharmacy customers tend to be loyal, and do not like to switch prescription providers easily.

Now that these concerns are alleviated, Walgreen also focused on acquisitions. It is in the process of acquiring a 45% interest in Alliance Boots, an international pharmacy and wholesale operator, for $6.7 billion in cash and stock. The $6.7 billion is broken into $4 billion in cash and 83.4 WAG million shares. Walgreens also has the option to acquire the remaining 55% of Alliance Boots in three years. The company expects synergies of $100 - $150 million would be realized from this deal in year one, rising to $1 billion by 2016.

Walgreens expects to increase comparable stores count by 2.50% – 3%. Store renovations, improving the product mix, and increasing inventory efficiency will add to profitability, as will realizing synergies from acquisitions such as the Duane Reade one. The company’s integration of Drugstore.com, will pave the way for expanding the company’s web presence.

The return on equity has remained stuck in range between 17% and 19% over the past decade, with the exception of a brief decrease below 15% in 2009 and 2010. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 18.90% per year over the past decade, which is higher than the growth in EPS.

A 12.90% growth in distributions translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1986 we see that Walgreen’s has actually managed to double its dividend every five years on average.

The dividend payout ratio has almost doubled from 15% in 2002 to 25.50 in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Walgreen is attractively valued at 12.30 times earnings, has an adequately covered dividend and yields 3%. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long WAG and WMT

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Money Management for Dividend Investors

Most dividend investors spend a large portion of their time looking for the perfect dividend stocks, analyzing fundamentals and deciding whether companies have the sustainable economic advantages to continue raising distributions in the long run. Identifying the best dividend stocks and worrying about entry price is just a part of successful dividend investing. Investors should also focus on diversification, in order to ensure that they do not have a major part of their income coming from just a handful of income stocks.

Investors who own a portfolio of income stocks, where a large portion of distributions comes from a handful of stocks could suffer if these securities or the sector they are in experience some turbulence. Financial stocks were some of dividend investor’s favorites before the crisis of 2007 – 2009. Investors who derived a large chunk of their income from financial stocks saw their dividend income decrease sharply, even if they had allocation to other companies which raised distributions during this dark period for income investors. As a result, dividend investors should focus on sound portfolio or money management, in order to avoid drastic dividend reductions from just a handful of income stocks they own.

There are several ways that dividend investors use money management in their portfolio building processes. Two methods include weighing your positions by yield or attempting to equal weight your positions. Both methods have advantages as well as shortcomings. There are other methods for weighing individual positions in a dividend portfolio, but the two previously mentioned ones are the most common ones in my discussions with dividend investors.

With equal weighted portfolios, investors have adequate diversification in the their portfolio as well as their distribution incomes. As a result, if one or two positions cut dividends in a given year, the overall impact on annual dividend income would not be detrimental. The negative of equal dividend weighting is that sometimes it would be difficult for investors to maintain the equal weighting for all of their positions, especially since stocks go up and down in value all the time.

Some investors also weight their portfolios based on yield. As a result, companies with high dividends get a higher proportion of the portfolio, which leads to higher current yields. Many companies have higher yields when their stock prices are depressed. Other companies of such sectors as utilities, REITs and MLPs have traditionally paid higher than average dividend yields. The risk of weighting portfolios based on yield is that investors would end up being concentrated in just a handful of high yielding sectors, which could make a portfolio riskier than expected. In addition, an overrepresentation of higher yielding stocks could offer a big blow to total dividend income if these income stocks have unsustainable distributions and end up cutting or eliminating entirely their fat distributions. During the financial crisis, investors who had a higher allocation to high yielding Financials and REITs that cut dividends, suffered huge blows to their dividend incomes. The goal of successful dividend investing is to keep receiving a stable dividend income, and not having to go back to work.

I typically attempt to weigh my positions equally, as long as the underlying valuations make sense. I own more than 40 individual issues in my dividend portfolio, which have been accumulated over a very long period of time. As a result, less than half of the positions I own are underrepresented. This is because I would sometimes purchase shares in a company that temporarily become undervalued. After that the shares would increase in value, making the stock overvalued. As a result I would not increase my position for many years, yet I would keep the stock as long as the dividend is maintained or increased. For example, my position in Family Dollar (FDO) was purchased a few years ago when the stock was trading at much lower valuations than today and was offering a much higher yield. Because I find the stock to be relatively overvalued I have not really added to it in years. This means that it’s relative proportion in my income portfolio has been decreasing over time, especially since I add money to work every month.

I would however attempt to keep companies that are attractively valued currently at close to equal dollar values. For example, let’s look at a situation where I owned $5,000 worth of Phillip Morris International (PM), and I had a $3000 position in PepsiCo (PEP). Let’s assume that I found PepsiCo (PEP) to be attractively valued. I would try to add to my PepsiCo position until I own $5000 worth of PepsiCo (PEP) stock. Currently, the top 30 stocks in my portfolio by weight account for 86% of my total portfolio value. I find 24 of them to be attractive enough to attract new funds from me this year.

Currently, I find both Phillip Morris International (PM) and PepsiCo (PEP) to be attractively valued.  In addition I also find United Technologies (UTX) and Kimberly-Clark (KMB) to be priced within my buy range, and I have added to my positions in both stocks over the past month. Unfortunately, my portfolio is already overweight in both PepsiCo(PEP)and Phillip Morris International (PM), which is why I would not be able to add money there for a period ranging from six to twelve months.

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. This dividend achiever has raised distributions for 19 years in a row. Over the past decade, United Technologies has managed to boost distributions by 15.30%/year. The company trades at 17.30 times earnings, yields 2.70% and has a sustainable distribution coverage. Check my analysis of the stock.

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in manufacturing and marketing health care products worldwide. This dividend aristocrat has raised distributions for 40 years in a row. Over the past decade, Kimberly-Clark has managed to boost distributions by 9.70%/year.  The company trades at 18.20 times earnings, yields 3.60% and has a sustainable distribution coverage. Check my analysis of the stock.

Full Disclosure: Long PEP, PM, FDO

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This article was featured in Nerdy Finance #9: We’re Back!

Phillip Morris International Delivers a Fifth Consecutive Dividend Hike

The past week was characterized by very slow dividend increase activity. However, it was not slow if you were a shareholder of Phillip Morris International, which manufactures and sells cigarettes and other tobacco products. The company raised its quarterly dividend by 10.40% to 85 cents/share. This marked the fifth consecutive annual dividend increase for this global tobacco conglomerate. Check my recent analysis of the stock.

The average annual dividend increase over the past five years has been 13.20%. In addition, the company spends aggressively on stock buybacks. The number of outstanding shares has been reduced from 2.062 billion in 2008 to 1.701 billion in 2012.Back in June 2012 the company announced a 3 year stock buyback program, worth $18 billion.

Based on expected 2012 earnings of $5.18/share, the forward dividend payout ratio stands at 65%, which is sustainable. The company is also estimated to earn 11% more per share in 2013, which would likely translate into a quarterly dividend payment of 94 cents/share by the end of 2013. The expected EPS in 2013 is double what the EPS was in 2007 of $2.87/share. I find the stock attractively valued at 17.30 times earnings, yielding 3.80% and having a sustainable dividend payout ratio. Since Phillip Morris International is my largest position, I would likely not have the opportunity to add to it for several months. However, I like the long term economics of PMI’s business, and the prospects for earnings growth of around 10%-12%/year for the foreseeable future.

There are a few risks that investors in Phillip Morris International face. The largest challenge includes stricter regulatory environment in most developed countries that PMI operates in. The recent introduction of plain packaging for cigarettes sold in Australia would likely hurt competition, as companies like PMI would have a hard time differentiating their products based on strong brands and quality of products. Luckily, there aren’t any countries that seem likely to embrace a similar approach to Australia at least in the next five years or so. In addition, since PMI operates in so many countries worldwide, chances are that set-backs in one country would be more than offset against gains in other places.

Atlantic Tele-Network, Inc. (ATNI), through its subsidiaries, provides wireless and wire line telecommunications services in North America, Bermuda, and the Caribbean. The company raised its quarterly dividend by 8.70% to 25 cents/share. This marked the 14th consecutive annual dividend increase for this dividend achiever. Atlantic Tele-Network looks attractively valued at 18 times earnings, yields 2.50% and has an adequately covered distribution. I like the fact that the company has managed to boost earnings and distributions over the past decade. I would add the stock to my list for further analysis.

The other company raising distributions included The Kroger Co. (KR), which operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. The company raised its quarterly dividend by 30.40% to 15 cents/share. This marked the seventh consecutive annual dividend increase for the company. Yield: 2.50%

Kroger boasts a five year dividend growth rate of 17%/year. After a nearly 18 year hiatus, Kroger started paying dividends in 2006. The company had been a consistent dividend raiser until 1988, when it took out a large loan and issued a large cash dividend to investors in order to fend off potential acquirers. Over the past decade, Kroger has been unable to grow earnings per share, despite repurchasing over a quarter of outstanding shares during the period. Without earnings growth, future dividend growth is limited.

Full Disclosure: Long PM

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Illinois Tool Works (ITW) Dividend Stock Analysis 2012

Illinois Tool Works Inc. (ITW) manufactures various industrial products and equipment worldwide. The company is a member of the dividend aristocrats index, has paid dividends since 1933 and increased them for 49 years in a row.

The company’s last dividend increase was in July 2012 when the Board of Directors approved an 6% increase to 38 cents/share. The company’s largest competitors include General Electric (GE), Cooper Industries (CBE) and Manitowoc (MTW).

Over the past decade this dividend growth stock has delivered an annualized total return of 7.40% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 11.70% per year. Analysts expect Illinois Tool Works to earn $4.14 per share in 2012 and $4.53 per share in 2013. In comparison Illinois Tool Works earned $4.08/share in 2011.

Over 60% of company’s revenues are derived internationally. Over time, Illinois Tool Works expects that increased sales from developing markets such as Brazil, China and India will lead to higher profitability in the long run. Other drivers behind growth include the ability of the company to innovate as well to keep focusing on the areas which derive maximum value to customers. Continued streamlining of operations should reduce waste in the system, and reduce costs. Strategic sourcing , aiming to lower costs for materials as well as the continued focus on divesting non core assets, should further drive profitability for ITW over the next decade. By focusing on consistent stock buybacks as well, Illinois Tool Works should also be able to increase EPS over time. Over the past decade, the company reduced the amount of shares outstandin from 613 million in 2002 to 483 million in 2011.

The return on equity has closely followed the rise and fall of the economy throughout various economic cycles. This indicator rose between 2002 and 2006, declined between 2007 – 2009 and has been increasing ever since 2010. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 12.90% per year over the past decade, which is slightlyhigher than to the growth in EPS.

A 12.90% growth in distributions translates into the dividend payment doubling every five and a half years. If we look at historical data, going as far back as 1990 we see that Illinois Tool Works has actually managed to double its dividend every five years on average.

The dividend payout ratio has remained around 30% over the past decade, with the exception of a brief spike between 2008 – 2010 due to the recession. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Illinois Tool Works is attractively valued at 12.80 times earnings, has an adequately covered dividend and yields 2.50%. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long ITW

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Dividend Investors are Getting Paid for Holding Dividend Stocks

Dividends provide a return on investment, which is much more stable than relying on capital gains. Investors who select quality dividend paying companies with long histories of dividend increases can ignore the day to day fluctuations in the markets. As long as the company is paying the dividend every month/quarter like clockwork, and can afford to do so, any declines in stock prices will be more of an opportunity to buy stocks at a discount than a reason to be worried about putting food on the table. Dividend investors are thus essentially getting paid for holding on to their stocks. They could choose to spend those dividends on everyday expenses, or they could choose to buy more shares when the time is right.

Investors should choose companies which have strong competitive advantages to keep increasing earnings over the next decades. This would create a trickledown effect as it would allow these corporations to raise dividends. By reinvesting a portion of earnings back into the business, these dividend paying companies would be able to expand operations and remain competitive. Due to inflation, the purchasing power of the dollar is decreasing each year. That’s why it is important to select companies with growing distributions, in order to maintain the purchasing power of your income. When this is achieved, the dividend investor can safely live off dividends in retirement, while letting their principal compound quietly in the meantime. In essence, dividend investors are having their cake and eating it too- they generate an income stream that maintains purchasing power while also enjoying capital gains that maintain the purchasing power of their principal as well.

Contrast this to traditional retirement strategies focusing on asset depletion, where a flat market can lead to running out of money prematurely. A retiree who had the misfortune to retire in 2000, invested their nest egg in index funds and followed the four percent rule, would have less than seven years worth of expenses today. A retiree which purchased dividend growth stocks and spent only the dividends received, would be in a much better situation.

Receiving dividends in your brokerage account is reassuring, even during times of increased volatility in the stock market. The following attractively valued dividend stocks essentially pay their stockholders to hold their stock:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend aristocrat has regularly boosted distributions for 50 years in a row. Yield: 3.60% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. It franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, desserts, snacks, and other beverages, as well as full or limited breakfast menu. This dividend aristocrat has regularly boosted distributions for 35 years in a row. Yield: 3.10% (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. Its portfolio of international and local brands includes Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company has consistently raised distributions since its spin-off from Altria Group in 2008. Yield: 3.40% (analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. This dividend achiever has regularly boosted distributions for 18 years in a row. Yield: 4.20%  (analysis)

While focusing on the best dividend stocks will provide investors with an edge in the markets, investors should not forget about diversification either. Having adequate exposure to the market leaders in several sectors should lessen the risk for income portfolios. In addition, investors should also avoid paying top dollar for dividend stocks. Overpaying for your investments can lead to sub-par returns for long periods of time.

Full Disclosure: Long JNJ, WMT, O, PM

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High Dividend Growth Stocks in 2012

This year has been characterized as a record year for dividend distributions paid to shareholders by cash rich companies. The sentiment is even more bullish amongst the elite dividend aristocrats list, which includes large-cap corporations each of which have managed to boost distributions for at least 25 consecutive years in a row. Out of 51 members of the index at 12/31/2011, 35 have increased distributions in 2012, while the remaining companies have not had the chance to announce changes in dividends so far this year. I went through the list of dividend increases, and decided to focus on the companies with the fastest dividend growth rates.

In general, companies that raise distributions at a fast rate will be able to generate a high yield on cost for their investors. This of course will happen only if the high dividend growth rates can be sustained out of rapid growth in earnings or if the companies start out with a low dividend payout ratio. I analyzed each of the high dividend growth aristocrats for 2012 below, in order to determine whether the high dividend growth is a one-time deal or not. If companies have the characteristic to boost distributions rapidly for a sustained period of time, and if investors are able to get on board at attractive valuations, high yields on cost could be achieved in a relatively short periods of time. The companies on the list include:

Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. In June, the company raised annual distributions by 22.20% to $1.10/share. The ten year dividend growth rate has been 18.90%/year. This dividend aristocrat has raised distributions for 37 years in a row. The stock is attractively valued at 12 times earnings, yields 3.10% and has an adequately covered distribution. I like the high dividend growth rate at the firm and the attractive valuation and as a result I recently added to my position in the stock. (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. In April, the company raised annual distributions by 21.30% to $2.28/share. The ten year dividend growth rate has been 7.40%/year. This dividend aristocrat has raised distributions for 30 years in a row. The stock is attractively valued at 9.50 times earnings, yields 2.60% and has an adequately covered distribution. While I like the recent strong increase in distributions, I think the yield is lower in comparison to Chevron (CVX). (analysis)

W.W. Grainger, Inc. (GWW) engages in the distribution of maintenance, repair, and operating supplies, as well as other related products and services for businesses and institutions primarily in the United States and Canada. In April, the company raised annual distributions by 21.20% to $3.20/share. The ten year dividend growth rate has been 13.70%/year. This dividend aristocrat has raised distributions for 41 years in a row. The stock is slightly overvalued at 20.90 times earnings, yields 1.60% and has an adequately covered distribution. While I own the stock, I consider it a hold at current valuations, which means I would not add money to this position and would reinvest dividends elsewhere.

Target Corporation (TGT) operates general merchandise stores in the United States. In June, the company raised annual distributions by 20% to $1.44/share. The ten year dividend growth rate has been 17.50%/year. This dividend aristocrat has raised distributions for 45 years in a row. The stock is attractively valued at 14.70 times earnings and has an adequately covered distribution but yields only 2.30%. In my analysis of the stock, I outlined that I would much rather play retail sector by owning Wal-Mart Stores (WMT), which is the heavyweight champion in the sector.

Stanley Black & Decker, Inc. (SWK) provides power and hand tools, mechanical access solutions, and electronic security and monitoring systems primarily in the United States, Europe, Latin America, and Canada. In July, the company raised annual distributions by 19.50% to $1.96/share. The ten year dividend growth rate has been 5.70%/year. This dividend aristocrat has raised distributions for 45 years in a row. The stock is slightly overvalued at 20.40 times earnings, although it yields 2.70% and has an adequately covered distribution. I would consider analyzing the stock further in order to determine if it has what it takes to sustain future dividend increases.

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. In January, the company raised annual distributions by 16.70% to $0.84/share. The ten year dividend growth rate has been 11.80%/year. This dividend aristocrat has raised distributions for 36 years in a row. The stock is valued at 17.80 times earnings, yields 1.30% and has an adequately covered distribution. Because of the low current yield, it is outside of my buy range. As a result I do not plan on adding to my position in the stock, and I would consider re-investing dividends received in other attractively priced dividend paying companies. (analysis)

Lowe’s Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer. In June, the company raised annual distributions by 14.30% to $0.64/share. The ten year dividend growth rate has been 29.60%/year. This dividend aristocrat has raised distributions for 50 years in a row. The stock is valued at 19 times earnings, yields 2.30% and has an adequately covered distribution. I would consider addin to my position in the stock on dips below $25.60. (analysis)

Sigma-Aldrich Corporation (SIAL), a life science and high technology company, develops, manufactures, purchases, and distributes various chemicals, biochemicals, and equipment worldwide. In February, the company raised annual distributions by 11.10% to $0.80/share. The ten year dividend growth rate has been 15.90%/year. This dividend aristocrat has raised distributions for 36 years in a row. The stock is valued at 19.60 times earnings, yields 1.10% and has an adequately covered distribution. While the company has maintained a double digit dividend growth rate, I find the current yield to be low. As a result I would pass on the stock for now, but would continue monitoring if stock trades at lower valuations.

Dover Corporation (DOV) manufactures and sells a range of specialized products and components, and provides related services and consumables. In August, the company raised annual distributions by 11.10% to $1.40/share. The ten year dividend growth rate has been 8.50%/year. This dividend aristocrat has raised distributions for 57 years in a row. The stock is attractively valued at 12.80 times earnings, yields 2.40% and has an adequately covered distribution. I would add the company to my list for further analysis.

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. In March, the company raised annual distributions by 10.30% to $2.56/share. The ten year dividend growth rate has been 11.10%/year. This dividend aristocrat has raised distributions for 30 years in a row. The stock is attractively valued at 13.30 times earnings, yields 3.10% and has an adequately covered distribution. I like the fact that APD had managed to consistently boost dividends at a double-digit rate, and I also find the stock to be a bargain at this time. I recently added to my position in the stock. (analysis)

Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. In February, the company raised annual distributions by 10% to $1.98/share. The ten year dividend growth rate has been 4.80%/year. This dividend aristocrat has raised distributions for 56 years in a row. The stock is attractively valued at 16.30 times earnings, yields 3.20% and has an adequately covered distribution. However, the dividend growth rate over the past decade makes me want to wait for higher yields before I consider initiating a position in the stock. (analysis)

Full Disclosure: Long WAG, XOM, GWW,FDO, LOW, APD

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Target Corporation (TGT) Dividend Stock Analysis

Target Corporation (TGT) operates general merchandise stores in the United States. The company is a member of the dividend aristocrats index, has paid dividends since 1965 and increased them for 45 years in a row.

The company’s last dividend increase was in June 2012 when the Board of Directors approved a 20% increase to 36 cents/share. The company’s largest competitors include Wal-Mart Stores (WMT), Dollar Tree (DLTR) and Costco (COST).

Over the past decade this dividend growth stock has delivered an annualized total return of 6% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 10% per year. Analysts expect Target to earn $4.35 per share in 2013 and $4.86 per share in 2014. In comparison Target earned $4.28/share in 2012.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 10% per year. Analysts expect Target to earn $4.35 per share in 2013 and $4.86 per share in 2014. In comparison Target earned $4.28/share in 2012.

Future growth would likely be focused on expanding same-store sales and renovating existing stores, rather than simply by opening a large number of locations. Future growth could be realized by the increased penetration of the RED Card, which the company’s cashiers keep promoting to customers. Another venue for growth that could increase the number of customer visits is the remodeling of its stores, which would add fresh foods to the stores. The company is targeting middle-class and upper income consumers, which are more interested in quality and diversity of product offerings, rather than simply looking at the lowest prices. It has in essence managed to differentiate itself from Wal-Mart (WMT), while also retaining its status as a discounter.

The company also is on track to bring the number of stores in Canada do 130 by 2013, which could lead to long-term profits. Currently, the costs associated with jumpstarting its Canada operations have been dilutive for earnings, and would be for the next few years.

Target Stores has a goal of earning $8/share by 2018, which would be driven by 5% sales growth in US, share repurchases, store openings in Canada, as well as square footage growth. Risks to growth include worsening of the economy, failure to execute its strategy of effectively differentiating itself from arch rival Wal-Mart as well as credit card risks.

The return on equity has remained consistently in a tight range between 15% and 19%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 17.50% per year over the past decade, which is higher than to the growth in EPS.

A 17.50% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1988 we see that Target has actually managed to double its dividend every six years on average.

The dividend payout ratio has increased from 13.30% in 2003 to 25.70% in 2012. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Target Stores is attractively valued at 14.90 times earnings and has an adequately covered dividend but only yields 2.30%. In comparison, rival Wal-Mart (WMT) trades at 15.80 times earnings and only yields 2.10%. Target could be a decent addition to a portfolio on dips below $57; however Wal-Mart (WMT) continues to be my preferred way to play big box retailers.

Full Disclosure: Long WMT

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How to retire with dividend stocks

Dividend investing is a long term process. Investors should buy stocks with the intention of holding them forever, as long as the business fundamentals are still intact. The companies that are best suited for long term buy and hold investors have strong brands, strong competitive advantages, rising earnings and pay their shareholders to hold them. These stocks pay shareholders by sharing a portion of their earnings every year in the form of dividend, which is increased every year. Stocks that regularly raise dividends produce an income stream which keeps up with inflation, and could easily be spent, without having to dip into principal or reinvest a portion of it back in order to maintain purchasing power of income. Investors in fixed income on the other hand have to reinvest a portion of their interest income every year, in order to maintain the purchasing power of their income, unless they want to dip into principal.

Once investors have set their sights on dividend stocks, they should patiently accumulate positions in their best ideas. A company that pays 2%-3% today is generally ignored by most dividend investors. However, if this stock manages to double distributions at least every decade, they would generate a very respectable income stream when their investor decides to retire. The truth is that these yield-chasing dividend investors “need” a stock yielding 6%-8% only because they have not saved enough money for retirement. Most often these investors buy securities without analyzing whether the dividend is secure. Not all high yielding stocks are bad of course. Buying a stock just because it has a high current yield however, without analyzing it in detail, is a sure recipe for disaster.

We have all heard about the power of compounding. A $1000 investment, which generates 12% in annual total returns, will be worth $16,000 in 24 years. An investor who buys dividend stocks and reinvests distributions for decades, will be able to accumulate a sizeable portfolio by the time they are ready to retire. However, if those dividend stocks also regularly increased these distributions, the investor would enjoy a turbocharged power of compounding in their wealth.

The process of dividend investing will not get you rich quick overnight. However, the slow and steady approach provides attractive long term returns on capital, while minimizing the frequency of mistakes that more active traders make. Investing $1000/month in a portfolio of dividend stocks yielding 3% today, which has a dividend growth of 12% per year, would generate over $26,300 in annual dividend income in 24 years. If dividends are reinvested, chances are that this investment would generate much more than $39,600 per year in 24 years. As a result, for every dollar that you save in your 20s and put in dividend stocks, you would generate one dollar in dividend income in your 50s or 60s.

Market downturns are particularly helpful to investors who plan on living off dividends in retirement, because they provide an ideal opportunity to purchase world class dividend stocks at a discount.

Chevron Corporation (CVX), engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. This dividend champion has raised distributions for 25 years in a row. The company has also managed to boost distributions by 8.80% per year over the past decade. Yield: 3.20% (analysis)

Kimberly-Clark Corporation (KMB), engages in the manufacture and marketing of health care products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care. This dividend champion has raised distributions for 40 years in a row. The company has also managed to boost distributions by 9.70% per year over the past decade. Yield: 3.50% (analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. This dividend achiever has raised distributions for 19 years in a row. The company has also managed to boost distributions by 15.30% per year over the past decade. Yield: 2.70% (analysis)

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. This dividend aristocrat has raised distributions for 40 years in a row. The company has also managed to boost distributions by 13.30% per year over the past decade. Yield: 2.90% (analysis)

The Clorox Company (CLX) manufactures and markets consumer and institutional products worldwide. The company operates in four segments: Cleaning, Lifestyle, Household, and International. This dividend aristocrat has raised distributions for years in a row. The company has also managed to boost distributions by % per year over the past decade. Yield: 3.50% (analysis)

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend aristocrat has raised distributions for 30 years in a row. The company has also managed to boost distributions by 11.10% per year over the past decade. Yield: 3.10% (analysis)

Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. This dividend aristocrat has raised distributions for 37 years in a row. The company has also managed to boost distributions by 18.90% per year over the past decade. Yield: 3.10% (analysis)

The truth is that investors do not need a nest egg of $1 million to retire. They do need however to have saved and invested regularly in quality dividend stocks, purchased at attractive valuations over their investing career.

Full Disclosure: Long All Stocks listed above

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Three High Dividend Stocks Raising Distributions

The decrease in interest rates over the past four years has placed a strain on retirees who traditionally relied on bonds for income in retirement. With 30 year bonds yielding 2.80% and fears of rampant inflation many of these individuals are increasingly investing their assets in dividend paying stocks. Dividend paying stocks provide a tax efficient stream of income as well as the possibility for dividend increases over time, which will provide a hedge against inflation.

Over the past week, several dividend growers announced their plans to boost distributions to shareholders. I have listed companies which have boosted distributions for over five years in a row, along with my brief comment behind each. The companies include:

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. The company raised its quarterly distributions by 7.30% to 44 cents/share. Altria is a dividend champion, which has raised distributions for 44 years in a row. Yield: 5.10% (analysis)

Altria’s new annual dividend comes out to $1.88/share. Looking at projected earnings per share of $2.20 for 2012 and $2.37 in 2013, this represents a forward dividend payout ratio of 85% and 79% respectively. While I tend to avoid stocks with high dividend payout ratios, I typically make exceptions on a case by case basis after analyzing the specific situation. In Altria’s case, the company does not need to invest a lot in in order to grow the business, because of the regulatory environment. Tobacco companies cannot advertise, and cigarette usage has been flat or declining slightly in the US. As a result, the company does not need to invest in new factories. However, it does invest in efforts to contain costs and continuously improve and streamline operations in order to lower expenses. In addition, a large part of the sale price for cigarettes is actually excise taxes, whereas the portion that tobacco companies get to collect is relatively small. Given the high margins that cigarette manufacturers enjoy, and the fact that they can keep raising prices to more than offset against declines in consumption, companies like Altria are almost guaranteed increased profits for years to come. So essentially, Altria generates a lot of cash every year, with not a lot of options to spend it. It typically spends cash on share buybacks and dividends.

As a result, I would consider adding to my position in Altria subject to availability of funds.

Harris Corporation (HRS), together with its subsidiaries, operates as a communications and information technology company that serves government and commercial markets worldwide. The company raised its quarterly distributions by 12.10% to 37 cents/share. This is the second dividend increase in a year. Harris Corporation is a dividend achiever, which has raised distributions for 11 years in a row. Yield: 3.10%

Over the past decade, Harris has been able to boost dividends at 26.60%/year. It is currently attractively priced at 9.80 times earnings and has adequately covered dividends. I have included the $3.62 non-cash charge recorded in Q2 2012 into EPS, since it represents a one-time event that does not affect EPS from continuing operations. Analysts are also expecting EPS to rise to $5.17 in 2013 and $5.29 by 2014. I would add the company to my list for further research.

BancFirst Corporation (BANF) operates as the holding company for BancFirst that provides commercial banking services to retail customers and small to medium-sized businesses in Oklahoma. The company raised its quarterly distributions by 7.40% to 29 cents/share. BancFirst Corporation is a dividend achiever, which has raised distributions for 19 years in a row. Yield: 2.80%

The company is attractively valued at 12.80 times earnings and has an adequately covered dividend. In addition, BancFirst has managed to boost distributions by 11%/year over the past decade. The company has also managed to increase profitability over the past decade. Analysts are also expecting EPS to rise to $3.18 in 2012 and $3.20 by 2013. I would add it to my list for further research.

Full Disclosure: Long MO

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