S&P Dividend Aristocrats Index – An Incomplete List for Dividend Growth Investors

When I was first getting started with dividend growth investing, one of the biggest authorities on dividend investing was the S&P Dividend Aristocrats Index. This list of stocks was compiled by a respectable agency and included companies which had raised dividends for at least a quarter of a century each.

The more I researched my way into the world of dividend investing however, the more companies I uncovered which were not included in this elite index of stocks. Chevron (CVX) is an example of a company which has consistently raised distributions for 25 years in a row and is not part of the index. Colgate –Palmolive (CL) is a company which has rewarded shareholders with higher distributions for 49 consecutive years, yet it was only recently added to the index. In addition, most recently a company which had only raised distributions for much less than 25 years had been added to the index – Ecolab (ECL). The company has only boosted dividends for 21 years in a row. This did not make much sense, and as a result I have paid very little attention to this index which I previously viewed as elite. The list was too exclusive and was leaving out a lot of potentially great dividend growth stocks. You can view the S&P Dividend Aristocrats Index list here.

I did a little further research on the index, and found out the criteria for inclusion in it:

1. A company has to be a member of the S&P 500
2. A company must have increased dividends every year for at least 25 consecutive years
3. The company must meet minimum float-adjusted market capitalization and liquidity requirements defined in the index inclusion and index exclusion rules below.

After reviewing the criteria, I realized that this index might be great for someone who might decide to start a mutual fund or an ETF based on it, and earn recurring fees, rather than for the serious do it yourself dividend investor. As a dividend investor, I do not really focus exclusively on companies that are part of the S&P500 index. In fact, I want to have a list of all companies raised dividends for over 25 years, and then decide for myself which companies to focus on. I prefer to focus on quality, than remove companies because of irrelevant criteria.

Having minimum liquidity and float requirements is important if you are creating an index, as it would make it easy for big institutional investors to put money in them. For individual investors however, these requirements are irrelevant, as few have the tens of millions of dollars in net worth that would make investing in stocks with low trading volumes difficult.

While I was a big fan of the 25 year rule, I found out that in certain circumstances, companies which have raised distributions for at least 20 consecutive years could be added if few other firms fit the criteria for inclusion. These criteria are related to maintaining a minimum 40 companies in the index and preventing certain sectors from comprising over 30% of the index.

Other mysterious omissions from the S&P Dividend Aristocrat index are related to special dividends and stock spin-offs.

Back in the mid 2000’s, the company Nucor (NUE) was experiencing a really good profitability, and had record profits. The company raised regular distributions significantly, but also started paying a large special dividend every quarter. With the recession in 2008 and decline in prices for steel, the company scrapped its special dividends. At the same time it kept raising distributions to shareholders, albeit at a slower pace than before. The reason why S&P removed this stock from its list of Dividend Aristocrats in 2009 was probably because they were using computer data and saw a decrease in total dividends paid, without taking the time to really understand the driver behind the change. In 2012, Nucor managed to raise its quarterly dividend for the 40th consecutive year in a row.

Another mysterious deletion from the S&P Dividend Aristocrats index occurred in 2008, after Altria Group (MO) had spun off Kraft Foods in the previous year. While this resulted in a decrease in the amount of distributions paid to Altria shareholders after the spin-off, this was mostly due to the distribution of Kraft shares to investors. An investor who purchased Altria stock in early 2007, received shares in Kraft Foods. The total amount of dividends paid by their shares in Altria (MO) and the Kraft shares they received in 2008 more than exceeded the distributions paid in 2006 and 2007.

As a result, I have focused my attention exclusively on the Dividend Champions list by David Fish. It includes over 100 companies which have regularly boosted dividends for over 25 years in a row, which provides for a more thorough list of stocks for further research.

Full Disclosure : Long MO, NUE, CL ,CVX

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Six Exciting Dividend Increases for Long-term income investors

As part of my dividend growth plan, I invest in companies which consistently raise dividends. This would hopefully result in financial independence at my dividend crossover point, where dividends exceeds expenses. Before I purchase shares in a dividend paying company, I analyze it thoroughly and try to gauge whether it has what it takes to increase future profits, which are the fuel behind future dividend growth. This is a particularly difficult endeavor, since the environment that we see today would be much more different five, ten, twenty years from now. Nevertheless, I always enjoy when a company I have purchased, continues its streak of regular dividend increases that are fueled by improved operating performance. The rising stream of cold hard cash deposited in my brokerage account validates my investment thesis.

The following dividend stalwarts rewarded their long term investors with higher distributions over the past week:

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company raised quarterly distributions by 18.20% to 47 cents/share. This marked the 39th consecutive annual increase for this dividend champion. Over the past decade, Wal-Mart Stores has managed to boost dividends by 18.10%/year. Wal-Mart is one of the stocks where I want to increase my position, since it is rarely trading at the right yield. Currently, the company is very attractively valued at 14.50 times earnings and yields 2.70%. Average analyst estimates call for EPS of $5.37 in 2013 and $5.94 in 2014. I would consider adding to my position as soon as I have available funds. Check my analysis of the stock for more information.

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company raised quarterly distributions by 9.80% to 28 cents/share. This marked the 51st consecutive annual increase for this dividend king. Incidentally, Coca-Cola’s ten year average annual dividend growth rate is 9.80% as well. I recently added to my position in the stock on the weakness last week. Analysts expect EPS to reach $2.14 in 2013 and $2.33 by 2014. Earnings per share increased from 89 cents in 2003 to $1.97 in 2012. Unfortunately, the stock is fully valued at the moment at 19.50 times earnings, although the yield is 2.90%. Check my analysis of the stock for more information.

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in manufacturing and marketing health care products worldwide. The company raised quarterly distributions by 9.50% to 81 cents/share. This marked the 41st consecutive annual increase for this dividend champion. Over the past decade, Kimberly-Clark has managed to boost dividends by 9.50%/year. I like the fact that the company has managed to increase earnings from $3.22/share in 2002 to $4.74/share in 2012. I also like forward earnings of $5.59/share in 2014 and $5.98 by 2014. Unfortunately, despite the good current yield of 3.40%, the stock is fully valued at 19.90 times earnings. Check my analysis of the stock for more information.

NextEra Energy, Inc. (NEE), through its subsidiaries, engages in the generation, transmission, distribution, and sale of electric energy in the United States and Canada. The company raised quarterly distributions by10% to 66 cents/share. This marked the 19th consecutive annual increase for this dividend achiever. The stock is trading at 16 times earnings, and yields 3.60%. I like the ten year dividend growth rate of 7.50%/year. I also like the fact that the company has managed to boost earnings from $2/share in 2002 to $4.56 in 2012. I would initiate a position in the stock in the next few months, subject to availability of funds. Check my analysis of the stock for more details.

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. This dividend king extended its long streak of distribution hikes to 57, as it raised quarterly payments by 8.60% to 53.75 cents/share. I have looked at Genuine Parts for a couple of years, but always had other opportunities take priority over this one. The stock is attractive at 17.50 times earnings and yields a sustainable 3.10%. If I have extra cash, I might actually end up initiating a position in this stock in 2013.

Analog Devices, Inc. (ADI) engages in the design, manufacture, and marketing of analog, mixed-signal, and digital signal processing integrated circuits for use in industrial, automotive, consumer, and communication markets worldwide. The company raised quarterly distributions by 13.30% to 34 cents/share. This dividend achiever has raised distributions for 11 years in a row. It is slightly overvalued at 21.30 times earnings right now, although it yields 3%. I like the fact that the company has raised earnings from 0.82/share in 2003 to $2.18/share by 2012. I am very skeptical about technology companies in general, but would give ADI the benefit of the doubt, and thus analyze it in a future article.

Full Disclosure: Long WMT, KO, KMB

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BHP Billiton (BBL) Dividend Stock Analysis

BHP Billiton Plc (BBL), together with its subsidiaries, operates as a diversified natural resources company worldwide. This international dividend achiever has increased dividends for 13 years in a row.

The company’s last dividend increase was in August 2012 when the Board of Directors approved a 3.60% increase in the semi-annual distribution to $1.14 /share. The company’s peer group includes Rio Tinto (RIO), Vale (VALE) and Anglo-American (AAUKF).

Over the past decade this dividend growth stock has delivered an annualized total return of 19.60% to its shareholders.

The company has managed to increase EPS from $0.62/share in 2003 to $5.77 by 2012. Analysts expect BHP Billiton to earn $5.54 per share in 2013 and $5.70 per share in 2014.

The Australian BHP Billiton Limited (BHP) and the British BHP Billiton Plc (BBL) are separately listed with separate shareholder bodies, but they operate as one business with identical boards of directors and a single management structure. The headquarters of BHP Billiton Limited, and the global headquarters of the combined BHP Billiton Group, are located in Melbourne, Australia. The dual-listed company structure grants shareholders of the two companies the same proportional economic interests and ownership rights in the consolidated BHP Billiton Group, in such a way as to be equivalent to all shareholders of the two companies actually being shareholders in a single, unified entity. This structure was implemented in order to avoid adverse tax consequences and regulatory burdens. In order to eliminate currency exchange issues, the company's accounts are kept, and dividends paid, in United States dollars. For US investors, shares of BHP Billiton PLC (BBL) are recommended versus the Australian ones (BHP), as United Kingdom does not withhold any taxes on dividends paid to American Citizens. Each ADS represents two ordinary shares traded in London.

The company managed to boost earnings significantly between 2003 and 2008, as a result of several factors.. These include strong emerging markets demand for metals such as iron ore and copper particularly from China. Other factors included the rebound in global economy, and the increase in commodities prices. The 2008 – 2009 recession lead to decrease in profitability. Several competitors such as Rio Tinto (RIO) cut distributions to conserve cash, while BHP Billiton kept them as it had a strong balance sheet position at the time. The rebound in the global economy starting in 2009 has brought demand and commodities prices up, which increased profits.

Long-term growth could be aided by strategic acquisitions and investment in the business to uncover new fields for mining. Another bright spot includes the company's effort to diversify operations, as evidenced by its investment in natural gas assets. Unfortunately, only large acquisitions will likely make an impact on the company’s bottom line. However, these large scale acquisitions are more difficult to complete due to regulations and the fact that governments do not want to see large players consolidating. The company's attempt to acquire Potash and Rio-Tinto have been unsuccessful. In addition, earlier in 2012, the company scrapped its $80 billion in capital expenditures project pipeline. This occurred in the first year of the five year capital spending program. The company is scaling back on 50 billion worth of projects through 2016, but is still working on approximately $20 billion for which it had already committed the capital.

The company is a player in a commodities industry, and is a price taker. I do not see it as having much in competitive advantage, other than its scale of operations. Its performance is closely tied to global economic trends, and prices for metals. While it would be good to have exposure to “hard assets”, I do not believe that the company has the business characteristics that would enable it to continue raising distributions over the next decade. I believe the streak of consecutive dividend increases was mostly due to the company being at the right place at the right time a decade ago, right before the commodities boom started. Long-term successful dividend growth investing is focused on selling branded, proprietary products or having some other form of competitive advantage to allow firms to weather any short-term weakness in the economy.

The return on equity has oscillated wildly between 15% and 50%. Between 2003 and 2007, it rose from 15% to 49%, followed by a drop to 15% in 2009. By 2011 it bounced back up above 45%, before tumbling to 25% in 2012. I generally want to see at least a stable return on equity over time.

Over the past decade, BHP Billiton has managed to substantially boost distributions. In 2003 the company paid 29 cents/share, which has increased to $2.20/share by 2012. At the new rate of $1.14/share, the annual dividend is $2.28/share.

The dividend payout ratio has mostly remained below 50%, with the exception of a brief spike in 2009. 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 BHP Billiton PLC is attractively valued at 12 times earnings, yields 3.30% and has a sustainable distribution. I do not believe in diversifying for diversification sake. However, given the fact that the company is simply a price taker participant in a commodities industry, the most I can rate the stock is a hold.

Full Disclosure: None

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Dividend Stocks for Young Investors

One of the most prevalent myths about dividend stocks is that they are mostly for retired investors. The slow growing, unexciting businesses which tend to grow at predictable rates, are not seen to be sexy enough for young investors. This misconception can cost you millions of dollars in missed opportunities.

Dividend growth stocks are the perfect investment vehicles for investors in all ages. The fact that these companies are established and mature should not steer you away from investing in them. The reasonable growth means that these companies are trading at more attractive valuations in comparison with high-flyer technology companies such as Netflix (NFLX) or Blackberry (BBRY). This means that share prices will not decrease substantially when the economy experiences its next recession. In addition, the strong amounts of cash flow that these companies consistently generate, lead to stable and rising dividend checks, coupled with good market like total returns.

After all, companies such as International Business Machines (IBM), Exxon-Mobil (XOM), Coca Cola (KO), Kellogg (K) and Procter & Gamble (JNJ) have been established companies for many decades. Investors in these companies have managed to not only enjoy a rising stream of dividend incomes but strong total returns as well. The true powerful force behind such stocks is their long term wealth building potential. The products and services that they create fill in a basic need in the marketplace. There are no rapid shifts in consumer needs for products such as cornflakes, soda or fast food. As a result, companies with strong brands who capture consumers attention, are able to essentially build a long-term relationship with customers, which could span for generations.

One of the major advantages that younger investors in their 20s and 30s have is time. Investors in their 40s and 50s, who are just about to begin their retirement journeys, are more focused on current income and have less time to enjoy the long term compounding of their net worth. The time that young investors have, is an important asset, as it will allow them to compound their capital for several decades, which will result in more comfortable retirements.

One important similarity between older and younger investors however is that they both have comparable goals of living off dividends. The only difference is that investors in their 20s or 30s will have an investing process that spans a time period that is twice the length of retired income investors. The basic premise of purchasing wide-moat, dividend growth stocks with the potential to increase earnings over time is valid for both groups of investors. Both younger investors and retirees should also focus on companies which are attractively valued. Otherwise, long periods of time would be wasted waiting for the perfect growth stock to catch up.

Due to the longer time horizons that both younger and older investors currently have, the structure and composition of their portfolios 30 years from now will likely be much different than their starting portfolios today. Thus, investors have to be nimble and keep an open mind in selecting new potential additions to their portfolios. Our 20 something year old investor of today will likely be thinking about retiring 30 years from today. Our 50 something investor would hopefully be still enjoying life 30 years from now, while covering his expenses from his income stocks, and planning ahead to leave a substantial portion of their wealth to future generations or charity.

Another concerning thing that I observe with investors of all ages, is the concept of yield. Retired investors tend to focus exclusively on higher current yield, which could lead to dividend surprises down the road. Younger investors tend to focus on growth companies, while ignoring dividends whatsoever. The right path to follow should be to pick great companies, which can afford to grow earnings and dividends. It is very costly to impose your own living situation on the markets, rather than be nimble and embrace the markets. Older investors tend to focus on utilities, telecoms, REITs and MLPs. Any changes in current legislature will lead to cuts in MLPs and REITs distributions. Younger investors who focus exclusively on growth, will find that overpriced companies like Cerner (CERN), Netflix (NFLX) or Baidu (BIDU) can drop in price very quickly, when expected growth fails materialize.

The hidden truth behind dividend growth investing, is that investors of all ages and time-frames should mostly follow the same criteria for stock selection. After all, the goal of every investor is to select great stocks, which have the durable competitive advantages to increase earnings, which will lead to stock price gains and dividend increases. It so happens that these cash machines happen to leave a long trail of consistent dividend increases. The older investors could use the distributions to fund their retirements, whereas the younger investors could use the dividends to purchase more dividend stocks.

In other words, great companies such as PepsiCo (PEP), McDonald’s (MCD) or Procter & Gamble (PG) are good holdings for both younger and older investors today.

Full disclosure: Long PG, PEP, MCD, KO, K

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Dividend Champions Index – Five Year Total Return Performance

The list of dividend champions was created by David Fish, who painstakingly compiled the data, and updates it every single month. You can find the data from his site. In my review of the spreadsheet that he provides, I discussed how the group of dividend champions is without doubt the most comprehensive list of dividend growth stocks for further research. The other options that I used, such as the Dividend Aristocrats index lost my respect due to the exclusion of quality income companies because of bizarre reasons such as low trading volume or because the companies were not members of the S&P 500 index.

My only issue with the dividend champions index was that past performance was not calculated. As a result, I could not really use the index as a benchmark for calculating returns.

Luckily, Robert Alan Schwartz had been able to post the historical lists going back to the end of 2007. As a result, I was able to obtain the December version for each year between 2007 and 2011, and then calculate the returns of the index once/year. For example, in order to calculate 2008 returns for the index, I would obtain the December 2007 list of Dividend Champions. I would then pull the adjusted closing prices from Yahoo Finance for the last trading day of 2007 and for the last trading day of 2008. I would then calculate the percentage change between the two, and average it out. For the purposes of simplicity, I assumed that each company was equally weighted at the start of the year, and also assumed that dividends were automatically reinvested.

The main drawback was that I did not exclude dividend cutters from the index until the re-balancing in the next December. As a result, a company included in the December 2007 list would remain in it until December 2008, even if it cut distributions in May 2008. However, if a company was bought out and delisted in the middle of the year, I would use the last price available. In addition, when companies split, I also treated this event as a sale, with the amount sitting in cash until the re-balance date. On December 31, of the next year, I would rebalance the whole portfolio by selling off all prior year holdings, and then equal weighting all the companies on the list for the next year. The portfolio performance excluded capital gains and dividend taxes, as these vary for every individual investor.

Since 2007 the total return Dividend Champions index has outperformed the total return on the S&P 500 in three out of five years. A $100 investment in S&P 500 made on 12/31/2007 would have been worth $108.59 by 12/31/2012. The same investment in the Dividend Champions list of companies would have been worth $133.24 by 2012. As a group, dividend growth stocks do not fall as much during bear markets, and typically follow the markets on the uptrends. The only time when dividend growth stocks underperform is during the initial stages of a bull market when companies that are the most beaten down rally the most.

It is interesting to note that the year 2008 was pretty bad for financials, and the overall sentiment towards dividends was very negative. After reviewing the 2008 results however, I was reminded that several quality dividend stocks were bought out at significant premiums during those trying times for income investors – EnergySouth, Rohm & Haas, Anheuser Busch, and WW Wrigley come immediately to mind.
Overall, I am really surprised that ETF or Mutual Fund promoters have not crunched the numbers, and come up with products to capitalize on the Dividend Champions list.

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What does Buffett see in Heinz (HNZ)?

H. J. Heinz Company (HNZ), together with its subsidiaries, manufactures and markets food products for consumers, and foodservice and institutional customers in North America, Europe, the Asia Pacific, and internationally. The company had consistently boosted dividends since 2003. Over the past week, Heinz agreed to be acquired by Berkshire Hathaway and a private equity firm 3G Capital for $72.50/share. The size of this acquisition fits the elephant category that Buffett often describes in his annual letters to shareholders. In a previous article, I discussed why Buffett likes dividend stocks. This is another dividend growth stock, that attracted Buffett's attention. So what makes this company an interesting bet?

Warren Buffett, Chairman and CEO of Berkshire Hathaway said, “Heinz has strong, sustainable growth potential based on high quality standards, continuous innovation, excellent management and great tasting products. Their global success is a testament to the power of investing behind strong brand equities and the strength of their management team and processes. We are very pleased to be a part of this partnership.”

First of all, the company carries a strong brand name. Everywhere you go out to eat in North America, you can find Heinz ketchup. Consumers are aware of the brand, and are trained from very young age into being repeat customers, without even realizing it. As a result, the company has pricing power to pass on cost increases to customers.

Second, the company is being purchased at a decent valuation. Based on the expected EPS for 2013 of $3.54/share, the acquisition price is equal to 20.50 times earnings. Analysts are forecasting $3.79/share in 2014 earnings and a 6.60% annual growth over the next five years. The company is also paying $2.06/share in annual dividends, which would have likely increased, had it stayed public . Berkshire is expected to finance the deal with $12.12 billion, with $8 billion being in preferred stock yielding 9%, while the remainder will provide them with equity exposure in Heinz. They will split it with 3G Capital Partners.

Third, the business has room to grow internationally. Heinz has a 59% market share in the US ketchup market, while only a 26% internationally. With the “westernization” of emerging markets, and the rise in the middle class, Heinz will probably gain more prominence, which would result in higher sales and profits. Furthermore, the company also owns other strong brands such as Weight Watchers, Smart Ones and Ore-Ida.

Dividend stocks make great acquisitions. These slow and steady businesses with dependable growing cashflows are perfect for investors that own 1 share to 100% of the shares. In the case of Heinz, the company is trading at 20 times earnings today. However, it will likely grow at a steady rate, and deliver great dividends to owners for decades to come, as it has for decades before. The firm has paid dividends since 1911, and has raised them since 2003. Before that, it had raised dividends for almost 39 years in a row, but cut them at the end of 2002. Given the strong momentum in earnings, investors would have enjoyed much better long-term returns going forward. I have no doubt in my mind that Heinz would have managed to become a dividend achiever at the end of this year.

Full Disclosure: None

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ONEOK Partners (OKS) Dividend Stock Analysis

ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. The partnership has paid distributions since 1994, and increased them every year since 2006.

ONEOK Partners is a master limited partnership (MLP), which is a pass through corporate structure. As such, profits are not taxed at the entity level, but at the individual partner level. Investors in MLPs are called limited partners, shares are called units and dividends are called distributions. As a result of the fact that the net results are taxed at the individual partner level, the taxation of these distributions could be slightly more challenging when compared to taxation of dividends from typical dividend stocks such as Chevron (CVX) for example. ONEOK (OKE) is the general partner and owner of 43.40% in ONEOK Partners (OKS).

I replaced my investment in ONEOK Inc (OKE) for ONEOK Partners (OKS) units in 2011. In 2012 I sold the majority of my shares in Con Edison (ED) and bought more units of ONEOK Partners with the proceeds. You can read my arguments behind the trade in this article.

The partnership operates in three major segments:

Natural Gas Gathering and Processing Segment- Provides nondiscretionary services to producers
that include gathering and processing of natural gas produced from crude oil and natural gas wells. Revenues from this segment are derived primarily from POP and fee contracts. Under a POP contract, ONEOK retains a percentage of the NGLs and/or a percentage of the residue gas as payment for gathering, treating, compressing and processing the producer’s natural gas. While the partnership is exposed to commodity price risk in this segment, it is mitigated by the fact that the majority of exposure is hedged. This segment is expected to deliver approximately 25% of operating income in 2013.

Natural Gas Pipelines Segment – Operation of regulated natural gas transmission pipelines, natural gas storage facilities and natural gas gathering systems for nonprocessed gas. Natural Gas Pipelines segment’s revenues are derived typically from fee-based services provided to customers. This segment is expected to deliver approximately 14% - 15% of operating income in 2013.

Natural Gas Liquids Segment - Provide nondiscretionary services to producers that consist of facilities that gather, fractionate and treat NGLs and store NGL products primarily in Oklahoma, Kansas and Texas. Revenues for our Natural Gas Liquids segment are derived primarily from fee-based services provided to customers and physical optimization of assets. Physical optimization is a fancy term to describe purchase and transportation of NGL products in order to realize market or seasonal differentials in pricing. This segment is expected to account for over 60% of operating income in 2013.

Projected distribution and earnings growth are expected to be driven primarily by natural gas and natural gas liquids volume growth. The partnership also expects higher anticipated natural gas gathering and processing volumes and increased natural gas liquids gathering volumes as several projects from its $5.7 billion to $6.6 billion, four-year growth program are placed into service.

Approximately $1.5 billion to $1.8 billion will be spent to to construct a 1,300-mile crude-oil pipeline to transport light-sweet crude oil from the Bakken Shale in the Williston Basin in North Dakota to the Cushing, Okla., crude-oil market hub. Construction is expected to begin in late 2013 or early 2014 and be completed by early 2015. In addition, approximately $2.4 billion to $2.9 billion for natural gas liquids projects expected to inservice between 2013- 2015. The remaining $1.8 billion to $1.9 billion for natural gas gathering and processing projects mostly in the Bakken Shale.

Since 2005, ONEOK Partners has managed to boost distributions by 7.10% per year. The partnership expects 10% – 15% annual distribution growth through 2015 and plans to maintain at least a 1.05 times distributable cash flow coverage. Per its partnership agreement, the majority of available cash from operations should be distributed to general and limited partners.

Master limited partnerships such as ONEOK Partners have a geographic competitive advantage. The entry costs to build a pipeline and connect oil and gas wells with processing facilities is in the hundreds of millions if not several billions. The steep fee is a deterrent to competition, since running two pipelines adjacent to each other would not be profitable for either party. The business is heavily regulated by FERC, which sets rates to allow recovery of investment plus a proscribed rate of return.

There are several risks to investing in MLPs such as ONEOK Partners. Because the business is capital intensive in nature, and requires a lot of capital for future investment, increase in interest rates would reduce distributable cash flows per unit. The partnership distributes almost all of its cash flows to unitholders, which is why it finances growth through sale of debt or sale of additional units. Another risk involves government regulation, such as abolishment of MLP structure for example. This could lead to taxation of profits at the MLP level and the shareholder level, which would lead to distribution cuts. Distribution cuts would probably lead to decrease in unit prices, similar to what happened with Canadian Royalty Trusts in 2006.

A large portion of the distribution paid to limited partners is usually classified as a return of capital. This lowers the partner’s basis, until it reaches zero. As a result, a large part of the distribution received by the partners is tax deferred for a period of time. This is caused by the depreciation on long-term assets such as pipelines. Partners receive a K-1 form each year, which is slightly more complicated than a 1099 –Div form. When I filed my tax returns for 2011 however, the partnership sent me a pretty useful tax package, which visualized how I need to report the amounts from the K-1 package.

Currently, ONEOK Partners yields 4.80%, which is somewhat lower in comparison with other MLPs. However, the strong distribution growth more than compensates for low current yield. I would consider adding to my position subject to availability of funds.

Full Disclosure: Long OKS and CVX

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The World’s Best Dividend Portfolio

Creating income from a nest egg is a question that many baby boomers are spending countless nights figuring out. Many are relying on financial planners who are selling them annuities or some variation of the popular four percent rule.

For my retirement strategy I am relying on dividend growth stocks, which will provide dependable income, which increases over time and protects its purchasing power from inflation. I have a quantitative and qualitative process, which allows me to screen the hundreds of dividend growth stocks and narrow the list of candidates to 30 -40 individual companies.

Dividend growth investing is not some recent fad, as many market commentators would make you believe. Some of the richest families in the US, which have kept their wealth for several generations, seem to be living off dividends. If I were to start a dividend portfolio today, I would include the following stocks listed below.

Industrials

3M Company (MMM) operates as a diversified technology company worldwide. The company has raised dividends for 54 years in a row, and has a ten year dividend growth rate of 6.60%/year. Currently, the stock is trading at 16.20 times earnings and yields 2.30%. (analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide.The company has raised dividends for 19 years in a row, and has a ten year dividend growth rate of 15.30%/year. Currently, the stock is trading at 15.90 times earnings and yields 2.40%. (analysis)

Information Technology

Automatic Data Processing, Inc. (ADP) and its subsidiaries provide business outsourcing solutions.The company has raised dividends for 38 years in a row, and has a ten year dividend growth rate of 13.10%/year. Currently, the stock is trading at 21.40 times earnings and yields 2.80%. (analysis)

Health Care

Johnson & Johnson (JNJ), together with its subsidiaries, engages in the research and development, manufacture, and sale of various products in the health care field worldwide.The company has raised dividends for 50 years in a row, and has a ten year dividend growth rate of 11.70%/year. Currently, the stock is trading at 15.30 times earnings and yields 3.30%. (analysis)

Financials

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance.The company has raised dividends for 30 years in a row, and has a ten year dividend growth rate of 19.30%/year. Currently, the stock is trading at 8.30 times earnings and yields 2.60%. (analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States.The company has raised dividends for 19 years in a row, and has a ten year dividend growth rate of 4.20%/year. Currently, the stock yields 5%. (analysis)

Materials

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide.The company has raised dividends for 30 years in a row, and has a ten year dividend growth rate of 11.80%/year. Currently, the stock is trading at 15.60 times earnings and yields 2.90%. (analysis)

Consumer Staples

The Clorox Company (CLX) manufactures and markets consumer and professional products worldwide.The company has raised dividends for 35 years in a row, and has a ten year dividend growth rate of 11.30%/year. Currently, the stock is trading at 18.90 times earnings and yields 3.20%. (analysis)

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide.The company has raised dividends for 50 years in a row, and has a ten year dividend growth rate of 9.80%/year. Currently, the stock is trading at 20.30 times earnings and yields 2.70%. (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in manufacturing and marketing health care products worldwide.The company has raised dividends for 40 years in a row, and has a ten year dividend growth rate of 9.50%/year. Currently, the stock is trading at 20.60 times earnings and yields 3.30%. (analysis)

PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide.The company has raised dividends for 40 years in a row, and has a ten year dividend growth rate of 13.60%/year. Currently, the stock is trading at 19.40 times earnings and yields 2.90%. (analysis)

The Procter & Gamble Company (PG), together with its subsidiaries, engages in the manufacture and sale of a range of branded consumer packaged goods.The company has raised dividends for 56 years in a row, and has a ten year dividend growth rate of 10.80%/year. Currently, the stock is trading at 17.30 times earnings and yields 3%. (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide.The company has raised dividends for 38 years in a row, and has a ten year dividend growth rate of 18.10%/year. Currently, the stock is trading at 14.70 times earnings and yields 2.20%. (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide.The company has raised dividends for 49 years in a row, and has a ten year dividend growth rate of 13%/year. Currently, the stock is trading at 21.40 times earnings and yields 2.30%. (analysis)

Walgreen Co. (WAG), together with its subsidiaries, operates a network of drugstores in the United States.The company has raised dividends for 37 years in a row, and has a ten year dividend growth rate of 21.20%/year. Currently, the stock is trading at 18.70 times earnings and yields 2.70%. (analysis)

Energy

ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, natural gas, natural gas liquids, liquefied natural gas and bitumen on a worldwide basis.The company has raised dividends for 12 years in a row, and has a ten year dividend growth rate of 15.10%/year. Currently, the stock is trading at 8.60 times earnings and yields 4.60%. (analysis)

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.The partnership has raised distributions for 15 years in a row, and has a ten year dividend growth rate of 6.70%/year. Currently, the partnership yields 4.80%. (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide.The company has raised dividends for 25 years in a row, and has a ten year dividend growth rate of 9.60%/year. Currently, the stock is trading at 8.60 times earnings and yields 3.10%. (analysis)

Consumer Discretionary

McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the global restaurant industry.The company has raised dividends for 36 years in a row, and has a ten year dividend growth rate of 28.40%/year. Currently, the stock is trading at 17.70 times earnings and yields 3.20%. (analysis)

YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally.The company has raised dividends for 9 years in a row, and has a five year dividend growth rate of 17.80%/year. Currently, the stock is trading at 18.80 times earnings and yields 2.20%. (analysis)

Utilities

Dominion Resources, Inc. (D), together with its subsidiaries, engages in producing and transporting energy in the United States.The company has raised dividends for 10 years in a row, and has a ten year dividend growth rate of 5%/year. Currently, the stock is trading at 17.50 times earnings and yields 4.10%.

Piedmont Natural Gas Company, Inc. (PNY), an energy services company, engages in the distribution of natural gas to residential, commercial, industrial, and power generation customers in portions of North Carolina, South Carolina, and Tennessee.The company has raised dividends for 34 years in a row, and has a ten year dividend growth rate of 4.10%/year. Currently, the stock is trading at 19.40 times earnings and yields 3.80%. (analysis)

While diversification is important, I would advise against purchasing inferior stocks from sectors which are not exhibiting the strong fundamentals for long term dividend growth. In addition, diversification over time in the form of dollar cost averaging is important as well. While several of the companies listed above do not meet my entry criteria now, almost all companies met them at some point over the past year. As a result, I have no exposure to the telecommunications sector. In addition, this portfolio is underweight in materials, information technology and industrials. The portfolio is overweight in consumer staples names however, which are defensive in nature. Since consumer use these companies’ products irrespective of whether the economy is expanding or contracting, these companies are well suited to be an overweight core of this portfolio.

Full Disclosure: Long all stocks mentioned, except for PNY

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Five Dividend Champions Actively Boosting Distributions to Shareholders

Over the past week, several dividend companies raised distributions to shareholders. I narrowed down the list to five companies, each of which had raised dividends for over a quarter of a century. In order to be successful however, dividend investors need to be able to isolate those companies with a strong dividend raising record, which also have bright prospects ahead of them. Purchasing a small piece of their business should also be done only at attractive valuations, after a thorough analysis has been completed. The five dividend champions that announced dividend hikes over the past week, are reviewed below and include:

3M Company (MMM) operates as a diversified technology company worldwide. The company raised its dividends by 7.60% to 63.50 cents/share. This marked the 55th consecutive annual dividend increase for this dividend king. Over the past decade, the company has managed to boost distributions by 6.60%/year. Currently, 3M Company is attractively valued at 16.20 times earnings and yields 2.50%. I like the potential for earnings and dividend growth for 3M company. The company has managed to boost earnings from $2.53/share in 2002 to $6.32/share by 2012. Forward earnings/share are expected to reach $6.84 in 2013 and $7.51 in 2014. As a result, I plan on adding to my position in the stock subject to availability of funds, as long as the price is below $101.60. Check my analysis of the stock for more information.

Archer-Daniels-Midland Company (ADM) manufactures and sells protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients. The company raised its dividends by 8.60% to 19 cents/share. This marked the 37th consecutive annual dividend increase for this dividend champion. The company raised distributions after 5 quarters, rather than four, which probably scared many investors off. At the previous dividend increase in 2011 however, the company maintained the new dividend rate for only 3 quarters, before raisin it again. Over the past decade, the company has managed to boost distributions by 12.30%/year. Currently, Archer-Daniels-Midland is attractively valued at 14.60 times earnings and yields 2.50%. I own a very small position in the stock, and I plan to update my research before committing more capital to it.

Bemis Company, Inc. (BMS) manufactures and sells flexible packaging products and pressure sensitive materials in North America, Latin America, Europe, and the Asia Pacific. The company raised its dividends by 4% to 26 cents/share. This marked the 30th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to boost distributions by 6.80%/year. While the stock yields 2.70%, I find that the stock is currently overvalued at 22.10 times earnings and as such a hold.

WGL Holdings, Inc. (WGL), through its subsidiaries, sells and delivers natural gas, and provides energy-related products and services. The company raised its dividends by 5% to 42 cents/share. This marked the 37th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to boost distributions by 2.30%/year. Currently, WGL Holdings is attractively valued at 15.40 times earnings and yields 3.90%. Given the slow earnings and distributions growth over the past decade, and the projected low growth ahead, I view this stock as a hold at best.

Diebold, Incorporated (DBD) provides integrated self-service delivery and security systems and services primarily to the financial, commercial, government, and retail markets worldwide. The company raised its dividends by almost one percent to 28.75 cents/share. This marked the 60th consecutive annual dividend increase for this dividend king. Over the past decade, the company has managed to boost distributions by 5.60%/year. Currently, Diebold is attractively valued at 15 times forward earnings and yields 3.90%. While 60 years of consecutive dividend growth is a record for a dividend growth stock, I am not so bullish on the stock going forward. Over the past decade, earnings have been very volatile, and the near term prospects for growth are not that rosy either. Dividend investors should focus more on prospects for future total returns, rather than a super lengthy past record of dividend raises such as in this case. Check my analysis of the stock for more details.

Full Disclosure: Long MMM, ADM

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Warren Buffett’s Dividend Stock Strategy

Warren Buffett is without doubt the best investor the world has ever seen. Starting with a few hundred dollars in 1956, he managed to transform his stake to $20 million by the time he liquidated Buffett Partnership Limited in 1969. His entire net worth by then was in Berkshire Hathaway (BRK.B) stock, a small textile mill which he transformed into a diversified holding company.

After reading his letters to shareholders, and analyzing SEC filings, I have uncovered an interesting trend in his long-term investments at Berkshire. Notably, Buffett has focused on companies which tend to grow income without much in additional capital investment. This is possible when you invest in a business that has strong pricing power, because consumers are addicted to the brand name product or because you have some other form of strong competitive advantage. The 1972 purchase of See’s Candies is a prime example of this. In his 2007 Letter to Shareholders, Buffett mentioned the following:

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.

It is evident that he invests in businesses with minimal capital needs, and utilizes the profits to purchase other businesses. This is similar to what a dividend investor typically does – accumulate distributions and then invest them in the best long-term opportunities at the time. In essence, the 1972 investment in See’s Candies is producing mind-boggling yields on cost currently. Warren’s investments in Washington Post (WPO), Coca-Cola (KO) and American Express (AXP) have also resulted in double or even triple digit yields on cost.

In 1973, Buffett initiated a position in Washington Post (WPO) for $10,628 million. His shares have an effective cost basis of $6.15/share. At the annual dividend of $9.80/share, his company’s yield on cost is 159%.

Between 1991 and 1994 Buffett acquired over 151,670,700 million shares of American Express (AXP) at a cost of $1.287 billion, which translates into $7.96/share. His initial investment was using preferred shares that were convertible into ordinary shares at a fixed price, plus additions to his holdings. At the present annual dividend of 80cetns/share, his yield on cost is exceeding 10%.

Between 1988 and 1994, Berkshire Hathaway accumulated 400 million split-adjusted shares of Coca-Cola (KO), for $1.30 billion dollars. His average cost per share comes out to approximately $3.25. Based on the annual dividend of $1.02/share, Berkshire’s yield on cost is a stunning 31.40%/year. This means that simply by accumulating the dividends for three years, Berkshire will recover its investment, but still retain ownership in Coke and have a claim on future distributions. In his 2010 Letter to Shareholders:

Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn't be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.

Unfortunately, as his holding company got bigger and had billions to allocate on a monthly basis, his focus has been mostly on large-cap “elephant” acquisitions. The 2010 acquisition of Burlington Northern is a prime example of this change in strategy.

It is also interesting that most of the businesses that Buffett has purchased such as Geico, Flightsafety International or Wesco Financial had achieved either the dividend achievers or dividend champions status. His purchase of quality, wide-moat companies with growing earnings, has paid huge and rising dividends for Berkshire Hathaway. These seeds have been reinvested in additional businesses, thus expanding cash flow available for investments dramatically. This is a strategy that is similar to the strategy that many dividend growth investors tend to employ. Inspired by Buffett’s legacy, I have been quietly building my own dividend machine, mini Berkshire.

Full Disclosure: Long KO

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YUM! Brands (YUM) Dividend Stock Analysis

YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally. Dividend stock has paid dividends since 2004, and has increased dividends for 8 years in a row.

The company’s last dividend increase was in September 2012 when the Board of Directors approved a 17.50% increase in the quarterly distribution to 33.50 cents /share. The company’s peer group includes McDonald’s (MCD), Burger King (BKW) and Domino’s Pizza (DPZ).

Over the past decade this dividend growth stock has delivered an annualized total return of 21.10% to its shareholders.

The company has managed to deliver a 12.60% average increase in annual EPS since 2002. Analysts expect YUM! Brands to earn $3.27 per share in 2012 and $3.67 per share in 2013. In comparison, the company earned $2.74/share in 2011. Over the next five years, analysts expect EPS to rise by 14.27%/annum.

The company’s long-term earnings will be driven by its international segment, where it expects to open new restaurants. The company owned over 14,500 restaurants internationally and 4,500 in China. In total, Yum! Brands had approximately 37,000 restaurants. Chinese units are expected to generate 5% in annual same-store sales growth. Yum! expects to keep increasing the number of restaurants in the double digits in order to capitalize on the growth in emerging middle class there. Rising incomes are making Yum!’s brands even more affordable for an increasing number of people. In fact, the consuming class is expected to double over the next 10 years, going from 300 million to at least 600 million people, as significant urbanization continues.
With this tailwind, Yum! Brand’s new-unit development pace should continue at a high rate, and same store sales should continue to grow. India could be another major source of growth as well. The company believes that its new unit progress with KFC in India is very similar to what they saw in China during its first 10 years. Currently, Yum! owns approximately 450 units in India, and plans to add 150 units in 2013. Overall, the company expects to increase international units by 3%-4%/year, with same store sales exceeding 2%.

Although the US units have not been as hot as the international segment, they have a lot of room for growth also. The company is just getting started with introducing breakfast menu items, and also increasing hours of operations. The number of units has declined from 18,500 in 2007 to 18,000 by 2011.

While the recent reports have not been overly optimistic, I believe that the best acquisitions are made when there is blood on the streets. The third quarter report showed sharply lower sales in the company's China stores for last 2 weeks of 2012 due to the poultry supply situation. This is not an issue that affects just Yum! however, although the media has found it easier to focus on a single target. The company now expects slight decrease in EPS in 2013, although long-term prospects are still bullish. The company is in the process of performing a comprehensive view of Chinese operations, in order to strengthen supply chain, ensure better quality assurance and implement the Shanghai FDA report recommendations. Restoring consumer confidence would probably take time, and there might be a few more earnings dissapointments over the next few quarters, before the tide turns back up

The company generates a very high return on equity, which never fell below 50%. I generally want to see at least a stable return on equity over time.

Ever since Yum! Brands started paying dividends in 2004, it has managed to increase them at a fast clip. The quarterly dividend has increased from 5 cents/share in 2004 to 33.50 cents/share by 2012. Over the past five years, dividends have growth by 17.80%/annum, which is faster than earnings growth.

The dividend payout ratio increased from 0% in 2002 to 40% in 2012. This is a direct result of Yum!’s initiation of a dividend policy, and raising distributions at a faster rate than earnings. Future dividend growth would likely be closer to the growth rate in earnings per share. 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 YUM! Brands is trading at 18.30 times earnings, yields 2.20% and has a sustainable distribution. The stock is a little richly valued for my taste, and I would probably try to buy some on dips below $54/share. Of course, if the stock price is flat in 2013, but dividends increase to 40 cents/share, my entry price would increase to $64 /share. It is important to remain disciplined, and only invest in the best companies at the best prices. The issues with Chinese poultry supply would most probably present investors with an attractive opportunity to acquire a great long-term holding at depressed valuations.

Full Disclosure: Long YUM and MCD

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Most Widely Held Dividend Growth Stocks

Most of the dividend growth stocks are household names, representing large-cap multinational corporations. The sheer size of these companies, and magnitude of operations typically give them an edge over competitors. These large-cap stocks are typically market leaders in the respective industries they are leading.

I recently uncovered a listing of most widely held stocks in US, provided by WSJ. I scanned through the list, and uncovered the following companies:

AT&T Inc. (T), together with its subsidiaries, provides telecommunications services to consumers, businesses, and other providers worldwide. The company has boosted dividends for 29 years in a row. Since 2001 the annual dividend growth has averaged 5.30%/year. The stock is trading at 28.40 times earnings and yields 5.20%. Check my analysis for more detail on the company.

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 has boosted dividends for 44 years in a row. Since 2001 the annual dividend growth has averaged 11.60%/year. The stock is trading at 16.60 times earnings and yields 5.20%. Check my analysis for more detail on the company.

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has boosted dividends for 25 years in a row. Since 2001 the annual dividend growth has averaged 8.80%/year. The stock is trading at 9.60 times earnings and yields 3.10%. Check my analysis for more detail on the company.

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company has boosted dividends for 50 years in a row. Since 2001 the annual dividend growth has averaged 10.10%/year. The stock is trading at 19.60 times earnings and yields 2.70%. Check my analysis for more detail on the company.

Emerson Electric Co. (EMR), a diversified technology company, engages in designing and supplying products and technology, and providing engineering services and solutions to the industrial, commercial, and consumer markets worldwide. The company has boosted dividends for 56 years in a row. Since 2001 the annual dividend growth has averaged 6.40%/year. The stock is trading at 21.80 times earnings and yields 2.90%. Check my analysis for more detail on the company.

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. The company has boosted dividends for 30 years in a row. Since 2001 the annual dividend growth has averaged 7.40%/year. The stock is trading at 9.50 times earnings and yields 2.50%. Check my analysis for more detail on the company.

Intel Corporation (INTC) designs, manufactures, and sells integrated digital technology platforms primarily in the Asia-Pacific, the Americas, Europe, and Japan.The company has boosted dividends for 10 years in a row. Since 2001 the annual dividend growth has averaged 25.60%/year. The stock is trading at 10 times earnings and yields 4.30%. Check my analysis for more detail on the company.

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. The company has boosted dividends for 17 years in a row. Since 2001 the annual dividend growth has averaged 18.10%/year. The stock is trading at 14.30 times earnings and yields 1.70%. Check my analysis for more detail on the company.

Johnson & Johnson (JNJ), together with its subsidiaries, engages in the research and development, manufacture, and sale of various products in the health care field worldwide.The company has boosted dividends for 50 years in a row. Since 2001 the annual dividend growth has averaged 12.40%/year. The stock is trading at 15.20 times earnings and yields 3.30%. Check my analysis for more detail on the company.

Lowe’s Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer.The company has boosted dividends for 50 years in a row. Since 2001 the annual dividend growth has averaged 29.60%/year. The stock is trading at 23.10 times earnings and yields 1.70%. Check my analysis for more detail on the company.

PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide.The company has boosted dividends for 40 years in a row. Since 2001 the annual dividend growth has averaged 13.30%/year. The stock is trading at 19.30 times earnings and yields 3%. Check my analysis for more detail on the company.

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products.The company has boosted dividends since 2008. The stock is trading at 17.60 times earnings and yields 3.90%. Check my analysis for more detail on the company.

Target Corporation (TGT) operates general merchandise stores in the United States.The company has boosted dividends for 45 years in a row. Since 2001 the annual dividend growth has averaged 17.50%/year. The stock is trading at 13.60 times earnings and yields 2.40%. Check my analysis for more detail on the company.

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company has boosted dividends for 19 years in a row. Since 2001 the annual dividend growth has averaged 15.30%/year. The stock is trading at 15.90 times earnings and yields 2.40%. Check my analysis for more detail on the company.

Walgreen Co. (WAG), together with its subsidiaries, operates a network of drugstores in the United States. The company has boosted dividends for 37 years in a row. Since 2001 the annual dividend growth has averaged 18.90%/year. The stock is trading at 18.20 times earnings and yields 2.80%. Check my analysis for more detail on the company.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has boosted dividends for 38 years in a row. Since 2001 the annual dividend growth has averaged 17.90%/year. The stock is trading at 14.50 times earnings and yields 2.30%. Check my analysis for more detail on the company.

I essentially isolated companies, which have shown a history of consistent dividend increases. Based on my interactions with dividend investors, I have come to the conclusion that most of these shares are widely held by many income investors.

Full Disclosure:

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Four Consumer Stocks for a 2013 Economic Expansion

With the continuing rebound of the global economy for a fourth consecutive year, corporate revenues and profits are at record highs. US multinational corporations, which have substantial operations abroad, are very well positioned for the expansion in the number of middle class consumers in the developing markets. While there is some weakness in developed economies of Europe, the long-term trends of rapid growth in emerging market economies will be more than sufficient to boost activity on a global basis. There certainly are benefits to having truly global operations, as economies fare on different cycles. For example, in the late 1990’s, many emerging markets in such as Russia experienced negative growth and high inflation. The Asian financial crisis in the mid to late 1990’s also affected many countries such as Thailand, Indonesia and Hong-Kong. In the 2000’s however, the Russian economy expanded. The Asian economies have been growing as well, fueled by China and India.

I expect the following companies to benefit from the rise of the middle class in emerging markets due to their strong brand names and because of their status:

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. Some of the best opportunities for Coca-Cola include the emerging markets of India and China, with their 2 billion plus consumers. In the US, consumers take around 400 servings of Coke products/year. In China however, consumers take just 34 servings of Coke products/year. This figure is even lover for India with 11 servings/year. The company is trading at 19.50 times earnings and yields 2.80%. This dividend king has managed to boost distributions for 50 years in a row. (analysis)

The Procter & Gamble Company (PG), together with its subsidiaries, engages in the manufacture and sale of a range of branded consumer packaged goods. The company is positioned very well for the increase in number of middle-class consumers in the emerging market world. As more consumers worldwide increase their disposable incomes, they would be introduced and able to spend more on items that the typical American consumer takes for granted today. It also has a stable recurring revenues in the developed countries in North America and Europe, which grow more slowly, but provide stable cash flow. The company is trading at 17.10 times earnings and yields 3%. This dividend king has managed to boost distributions for 56 years in a row.  (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. While the number of smokers in the developed world has been flat to decreasing, number of smokers in the emerging markets is on the rise. In addition, legislation to ban smoking at the same levels as in the US are at least one – two decades away. The company is trading at 17.60 times earnings and yields 3.90%. Philip Morris International has managed to regularly hike dividends in every year since 2008.  (analysis)

YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally. Yum! has managed to outmaneuver close rival McDonald’s in China, opening 4,500 restaurants to date. The company also sees the situation in India being similar to China from ten years ago. The possibilities for strong same-store sales coupled with an increase in total number in units, provide for a stable base for explosive long-term growth for the company. The company is trading at 19.10 times earnings and yields 2.10%. YUM! Brands has managed to boost distributions for 9 years in a row.

Full Disclosure: Long KO, PG, PM, YUM

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Should dividend investors hold on to Abbott (ABT) and Abbvie (ABBV) following the split?

I have been a shareholder of Abbott Laboratories for several years. I liked the fact that the company was constantly undervalued, and also managed to offer a very attractive yield plus an above average dividend growth. My last addition to my position occurred in the final weeks of 2012. In my last analysis of the stock, I was bullish on its business going forward.

On January 1, 2013, Abbott Laboratories split into two companies, one which retained its name Abbott Laboratories (ABT), and another named Abbvie (ABBV). For every share of legacy Abbott Laboratories, shareholders received one share of Abbvie (ABBV) and one share of the new Abbott (ABT). Following the split, Abbott has declared a dividend of 14 cents/share, while Abbvie declared a dividend of 40 cents/share. The total annual dividend combined for both companies of $2.16 is above the $2.04/share annual dividend declared by legacy Abbott in 2012. This former dividend champion had boosted distributions for 40 consecutive years. For legacy Abbott shareholders, this new dividend from the sum of the parts translates into the 41st consecutive year of higher dividend income.

Abbott (ABT) is focused on nutritionals, diagnostics, generic drugs and medical devices. The company yields 1.70%, but has the potential to grow earnings significantly over the next few years. Abbott Laboratories is expected to earn $1.95/share in 2013, which translates into a forward P/E of 16.80. Approximately 40% of sales will be derived from emerging markets, while 27% are derived from the US. The company has opportunities in medical products that have consistent earnings per share growth and strong sales, coupled with large mix of products addressing different areas of health care. Abbott is the leader in each of its four segments, which contribute almost equally diversified revenues for it. For example, in its medical devices segment, Abbott is number one for Lasik surgeries and a number two for Cataract surgery. Other positive trends behind each of the four businesses include favorable long-term healthcare and emerging markets growth. There is an increased demand for healthcare products due to aging of population in much of the developed world as well as the increase in chronic disease.

In the generic drugs segment, BRIC’s account for over 30% of sales, which are expanding at the high teens. Emerging markets as a whole accounted for 60% of sales in this segment in 2012, which could increase to 70 -75% by 2015. Driving trends behind this include population growth coupled with rising incomes. Other growth factors include improving access to healthcare for people who have not had access to modern facilities before.

In the medical devices segment, growth could be driven by continued innovation, margin expansion, as well as capitalizing on emerging market growth. The firm is a leader in LASIK and holds a number two spot in cataract segment of the market. Cataract is a market segment identified as very profitable and growing rapidly by Abbott. The company is developing new technologies to drive market share growth. In addition, Abbott is advancing new product pipeline to address unmet testing needs of insulin-users. New products such as its drug-eluting stents, coupled with cost reductions, could lead to margin improvements in this segment.

In the Nutrition segment, growth could be driven by several factors such as high number of emerging markets birth rates, tripling of aging population in the next 35 years,a 70% increase in the emerging market middle class households by 2016, as well as the growing awareness of nutrition by consumers. The company expects to add over a billion in incremental sales from innovations by 2016, and also plans on expanding aggressively in seven key emerging markets. In addition, the firm also plans on increasing margins from 13% of sales in 2011 ro over 20% in sales through a few initiatives on product packaging, supply chain & distribution, and improving efficiencies for manufacturing processes at different plant locations.

Growth in the diagnostics segment could come from higher sales in emerging markets, margin expansion and new products that are result of continuous reinvestment in R&D. This segment has managed to increase margins from 8% in 2007 to 18 in 2012. The company expects margins to be higher than 20% by 2016. Abbott expects a 4% – 5% growth in this segment through 2016, most of which would come from emerging markets such as China, Brazil and Russia. Diagnostics products represent less than 5% of hospitals costs, but drive majority of decisions. With the increased awareness of health and disease prevention and increased amount of healthcare spending, this segment offers the opportunity for more growth, provided that adequate products to meet demand are offered to clients.

Abbvie (ABBV) is focused on numerous drugs including Humira, Kaletra, Lupron, Synagis etc.. Almost 55% of revenues are generates in the US, and 14% in emerging markets. The drug generates 9 billion in sales worldwide, which has grown by approximately $1 billion/year since 2008. Humira generates approximately 50% of revenues for Abbvie, but % of income. Abbvie’s patent for Humira in the US expires at the end of 2016, while the European equivalent is expected to expire by April 2018. However, since HUMIRA is a biologic and biologics cannot be readily substituted, it is uncertain what impact the loss of patent protection would have on the sales of HUMIRA. This provides a higher barrier for entry. As a result, sales are not going to fall right off the cliff, since it would be more difficult for competitors to reverse engineer it and create a generic substitute. In the meantime, the drug is expected to provide low double digit sales growth at least until 2016-2017.

The strong cash flow generated, should be sufficient to advance Abbvie’s pipeline of drugs. The company has more than twenty compounds in Phase II or Phase III development. Over the next three year, Abbvie expects to launch a few new products treating Hepatitis C Virus, Parkinson’s disease, multiple myeloma, multiple sclerosis and an inhibitor for chronic lymphocytic leukemia. In addition, the company could grow by expanding presence in Emerging markets such as Brazil, China, Russia, Mexico, India and Turkey. Strategic acquisitions could also pave the way for future growth in revenues.

One of the drugs that could offset some of Humira’s decreasing sales after 2017 is its Hepatitis C Virus product, for which market entry is targeted for early 2015. This is a $3 billion dollar market, which could grow 5- 6 times by 2020. The US, Japan, Brazil, China and Russia represent over 90% of worldwide sales.

Abbvie is expected to earn $3.06/share in 2013, which translates into forward P/E of 12.20. The company also yields 4.40%, and has an adequately covered distribution.

Usually spin-offs perform very well after the event, with the stocks delivering outstanding returns on aggregate in the first year or two after the event. I would wait for a few years to see how both companies develop as separate entities. I did like the legacy company with its long history of earnings and dividend growth, and believe that both Abbott and Abbvie will grow shareholder wealth over the next decade. So far, Abbvie looks like a company that is more mature and therefore pays out a higher proportion of earnings than Abbott. Hence, Abbvie’s yield at 4.40% is higher than the yield on Abbott. I would monitor the growth in distributions, and would automatically sell if dividends are cut or eliminated in either firm. However, since both companies have not had a chance to operate for long periods of time, I would simply hold on to my position.

Full Disclosure: Long ABT and ABBV

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