Diageo (DEO) Dividend analysis

Diageo plc engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine worldwide.
Diageo is an international dividend achiever. The company has been increasing its stock dividends for the past 10 consecutive years. From the end of 1997 up until August 2008 this dividend growth stock has delivered an annual average total return of 10.90 % to its shareholders. Diageo is the first international dividend company that I have analyzed in my pursuit of international exposure for my stock portfolio.

At the same time company has managed to deliver a 7.20% average annual increase in its EPS since 1998.

The ROE has increased from 29% in 1998 to 36% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 8.10% each year, which is higher than the growth in EPS. An 8% growth in dividends translates into the dividend payment doubling almost every 9 years. DEO has indeed managed to double its annual dividend payment of $1.395 in 1999 last year (2007).

If we invested $100,000 in DEO on December 31, 1997 we would have bought 2892 shares. In April 1998 your semi-annual dividend income would have been $2406. If you kept reinvesting the dividends though instead of spending them, your semi-annual dividend income would have risen to $6582 in September 2007 and $4272 by June 2008. For a period of 10 years, your annual dividend income would have increased by 67%. If you reinvested it though, your annual dividend income would have increased by 129.60%.

The dividend payout has remained above 50% for the majority of our study period with the exception of 2006. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that DEO is attractively valued with its low price/earnings multiple of 16 and above average yield at 3.60%. Even though the dividend payout is higher than the 50% I like the fact that it is has been steadily decreasing over the past decade.

I will keep looking for growing internationally based corporations which have increased their dividends and earnings consistently for at least five to ten years.

Disclosure: I do not own shares of DEO

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International Dividend Achievers for diversification

So far I have concentrated my attention primarily on the Dividend Aristocrats and the High-Yield Dividend aristocrats, both published by the S&P. Those lists include companies which are members of the S&P 1500 and which have raised their dividends for more than 25 consecutive years. I have also tried investigating the Broad Dividend Achievers as well, which are stocks that have increased their dividends for at least ten consecutive years.

That wasn't enough for me, however. In my quest for creating a diversified portfolio I have been searching for international dividend growers. There are several lists out there that focus on international dividend growth stocks – Mergents International Dividend Achievers index, S&P/TSX Canadian Dividend Aristocrats, S&P Europe 350 Dividend Aristocrats (EUR).
The list that caught my attention was the International Dividend Achievers list, prepared by Mergent Inc. It is broader than the S&P Europe and Canadian dividend aristocrat’s lists. To quote from the company's website:

The International Dividend Achievers™ Index is designed to track the performance of dividend paying American Depositary Receipts and foreign common stocks trading on major US exchanges. To become eligible for inclusion in the International Dividend Achievers Index a stock must be incorporated outside the United States, trade on the NYSE, NASDAQ or AMEX, and have increased its annual regular dividend payments for the last five or more consecutive years. In addition, requires that a stock's average daily cash volume exceed $500,000 per day in Nov. and Dec. prior to reconstitution.

The international dividend achievers index has closely tracked its benchmark over the past 10 years. It performed better than the benchmark in only 3 of the past 10 years however.

According to Mergents Inc, a $10,000 investment in the International Dividend Achievers Index ten years ago would be worth about $19,279 by the end of July 2008.

There's an ETF that tracks the index. The Ticker is PID.

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Introduction to Currency ETF’s

There are many currency ETF’s out there covering not only major pairs such as the Euro, British Pound, Japanese Yen and Swiss Frank but other exotic currencies such as the Chinese Yuan and the Brazilian Real. Currency ETF’s provide investors with instruments that trade like stocks and could be bought, sold and sold short at any time that the stock market is open. Several companies offer ETF’s on currencies and those include Barclays Bank, Deutsche Bank, Morgan Stanley, Wisdom Tree and Rydex.

In the process these companies have raised almost 4.6 billion dollars for exchange traded funds or notes which simply hold underlying currencies. I didn’t include other ETF’s that used strategies such as doubling the exposure to a specific currency, using a yield harvesting approach or ETF’s tracking the US Dollar Index.

Before you rush into currency ETF’s however there are the annual fees of .35% to 0.45 % for you to consider.

In addition to that, because currency ETF’s trade just like individual stocks you have to pay a commission to enter and exit the fund.

Thus on a $1000 investment in a currency ETF, you underperform the underlying by the amount of management fee, 0.4% plus a commission to buy the etf, which will vary from $4 at Sharebuilder to $7 at Scottrade.

If you must buy and hold or simply trade a currency then why don’t you simply open a forex account at a well known broker such as Oanda, and then don’t pay any management or stock trading fees. In addition to that Oanda will add the interest to your account on a daily basis, which allow for a faster compounding of the principal.

The only reason why one would hold currency etfs as opposed to opening an account with a forex broker is if their 401K plan only offers a currency etf and the investor must have some foreign currency exposure in a non taxable account.

To summarize whenever you think about buying a new investment product stop for a second and think how you could save money. Always check for alternatives whenever there are fees that you can avoid. If investors listen to this message, then they will save approximately 19 million dollar annually just from avoiding annual management fees. How much could be saved from avoiding trading commissions could probably end up in millions of dollars as well.

This article was selected to appear on"Money Hacks Carnival - The Print Media Edition"

PPG Industries (PPG) Dividend Stock Analysis

PPG is a leading manufacturer of coatings and resins, flat and fiber glass, and Industrial and specialty chemicals.
PPG Industries is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 36 consecutive years. From the end of 1997 up until August 2008 this dividend growth stock has delivered an annual average total return of 4.40 % to its shareholders.

At the same time company has managed to deliver an 1.20% average annual increase in its EPS since 1998.

The ROE has ranged between 16% and 27% with the exception of a brief spike down in 2001 and 2002.

Annual dividend payments have increased over the past 10 years by an average of 4.00% annually, which is much higher than the growth in EPS. A 4% growth in dividends translates into the dividend payment doubling almost every 18 years. If we look at historical data, going as far back as 1987, PPG has actually managed to double its dividend payment every ten years on average.

If we invested $100,000 in PPG on December 31, 1997 we would have bought 1850 shares. In February 1998 your quarterly dividend income would have been $629. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1318.20 by August 2008. For a period of 10 years, your quarterly dividend income would have increased by 53%. If you reinvested it though, your quarterly dividend income would have increased by 110%.

The dividend payout has largely remained under 60% over our study period, with the exception of the brief spike to 70% in 2001. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that PPG is attractively valued with its low price/earnings multiple of 16 and low DPR as well as an attractive yield.

Disclosure: I do not own shares of PPG

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Dividend Growth and Earnings Per Share versus Total Return

This post originally appeared on The Div-Net one week ago.

Ever since I started analyzing stocks on my blog, I have been gathering information about several stocks in my data folders. I wanted to check what was the relationship between the ten year dividend growth rate and the ten year total return of the stocks that I previously covered on my blog. This is not a comprehensive list and the sample is biased as it mostly contains dividend aristocrats that I believed were priced attractively at the time (although most recently I have been writing about stocks that weren’t priced attractively). The average annual total return, eps and dividend growth for the 1998-2007 period were 8.8%, 9.9% and 10.5% respectively.

From that list I managed to select only the stocks which delivered at least a ten percent average annual EPS and dividend increases. A 10% increase in dividends double your annual dividend income after seven years. There were fifteen stocks that fit this list. The average total return was 10.46% for this group, with average dividend growth at 14% versus the 13.4% average EPS growth over the 1998-2007 period.

How did slower dividend growers perform over the past decade? I then screened for stocks which had EPS and dividend growth at less than ten percent. This screen produced thirteen candidates. The average total return was 8.35% for this group, with average dividend growth at 5.75% versus the 4.80% average EPS growth over the 1998-2007 period.

It’s interesting to note that stocks in the 46 company sample that merely raised their dividends by 10% on average over the past ten years achieved an average annual total return of 8.60%, which was slightly lower when compared to the 9.10% total return of stocks which had an annual dividend growth rate of less than 10% per annum.

The stocks that delivered at least a ten percent eps growth outperformed the rest of the group by over 2.4%. Companies that delivered an EPS growth which was higher than 10% per annum produced a total return of 10.2% versus 7.70% for the companies that produced EPS growth which was less than ten percent.

To summarize in order to be successful at dividend investing, the astute investor should not just check the dividend growth rate in isolation, but check the overall fundamental picture of the company in order to ensure that the dividend growth rate is covered by the growth in earnings per share.

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Is $1,000,000 enough to retire on? Is $2,000,000 enough money to retire on?

In my free time I regularly read Yahoo finance or the CNN Money articles related to personal finance and retirement. People are told that they need to save as much as possible for retirement, because they will be spending somewhat close to 75% of their pre-retirement incomes per year. In addition to that most so called financial guru’s claim that Social Security and Medicare will be either bankrupt or providing only enough coverage for the elderly that would allow them to enjoy cat food and insufficient health care in retirement. In order for people to be able to retire comfortably in those gloomy future years, they have to save as much as possible and invest it all in the stock market, in order to generate one or two million at the time of their retirement, which would then allow them to withdraw fund during their non-working years.

I generally disagree with these articles, since they are way too general. They are written with the intend to target as many people as possible. But they are far away from the truth.

In my opinion, it is important to have paid in full your primary residence at the time of your retirement. Once this is done, the income requirements are much lower than during your working years. Most financial experts recommend that the annual mortgage payment for a primary residence should not exceed 35%-40% of the family’s income. If you are currently spending 30% on your income in order to be able to pay off your house by the time you retire, then you will be able to live on 30% less income during retirement.

In addition to that, if dividend and capital gains income continues to get a preferential tax treatment, you will need less investment income for each dollar of job income that the investment income is replacing. The best thing of investment income is that you don’t have to pay Social Security and Medicare on it.

Finally, in order to determine your income needs in retirement, you should subtract the amount of money which you normally contribute to your salary every pay period. I wouldn’t expect that you will need to save for retirement, in retirement. If you contribute 10% of your salary to a 401K plan for example, then you need to subtract that percentage from your income needs.

A potential wild card that could possibly derail one’s retirement is the rising costs of healthcare. We are constantly reminded how healthcare costs are rising exponentially and how they would become even more expensive in the future. I do think however that in the future health costs increases will not rise more than the rate of inflation, after stricter insurance reimbursement policies require health management organizations to be more selective in their billing to patients and the procedures that are recommended.

After one’s retirement needs have been estimated, it is a good idea to create an investment plan, which would help you in your quest to reach your goals. A solid mix of dividend stocks and some bonds would be a good place to start. Don’t have time to play a stock picker- then select a mix of index funds. Then set it up on autopilot by investing a fixed amount from your paycheck every pay period.

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State Street Corporation (STT) Dividend Stock Analysis

State Street Corporation, through its subsidiaries, provides a range of products and services for the institutional investors worldwide. It operates in two divisions, Investment Servicing and Investment Management. These divisions provide a range of products and services, which include mutual funds and other collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments and other investment pools, and investment managers.

State Street is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 27 consecutive years. From the end of 1997 up until August 2008 this dividend growth stock has delivered an annual average total return of 9.40 % to its shareholders.

At the same time company has managed to deliver an 11.20% average annual increase in its EPS since 1998.

The ROE has decreased from the 19%-27% range to 14%-17% range over the past 10 years.

Annual dividend payments have increased over the past 10 years by an average of 14.90% annually, which is higher than the growth in EPS. A 15% growth in dividends translates into the dividend payment doubling almost every 5 years. If we look at historical data, going as far back as 1987, STT has indeed managed to double its dividend payment every five years on average. State Street is the only Dividend Aristocrat that has consistently managed to increase its quarterly dividends twice per year.

If we invested $100,000 in STT on December 31, 1997 we would have bought 3492 shares (Adjusted for a 2:1 stock split in May 2001). In March 1998 your quarterly dividend income would have been $209.52. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $937.20 by June 2008. For a period of 10 years, your quarterly dividend income would have increased by 300%. If you reinvested it though, your quarterly dividend income would have increased by 347%.

The dividend payout has slowly increased from upper teens to mid twenties over our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that STT is attractively valued with its low price/earnings multiple of 16 and low DPR even though the yield is below my 2% threshold. The historical dividend yield has not even gone close to 2% over the past ten years however. The strong dividend and earnings growth justify the lower current yield.

I believe that STT is a buy and could be accumulated on dips below $69 based off P/E and especially below $48 based off yield as it provides some dividend growth diversification potential for any income portfolio.

Disclosure: I do not own shares of STT

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Dow 370,000

In my previous article last week I tried to illustrate the point that one should start investing as soon as possible. This time I will try to prove that long-term investing and dividend reinvestment are important tools that would enable the shrewd dividend investor through good and bad times.

I recently stumbled upon a long-term chart of the Dow Jones industrial’s average which covers the period from 1920 to 2005. I have seen the long term chart of this stock market index multiple times before. The index rose from 107.23, which was the closing price for 1919 to over 11,000 by early August 2008. In a previous article I cited a research paper that showed that if dividend reinvestment was taken into consideration into the DJ index, its price would not stand at 11,000 but it would be several times over that.

Using just the value line annual dividends data for the 1920-2005 periods, as well as the final closing values for each year for the same period from DJ indexes I was able to perform the simple test of dividend reinvestment assuming a $107.23 initial investment on 12/31/1919 into a hypothetical index fund that tracks Dow Jones Industrials Average. In reality this period exceeds the usual person’s investing timeframe by two to three times, but nevertheless the results are truly amazing.

If your great grandfather bought the hypothetical Dow Jones index fund in 1919 for $107.23 and reinvested the dividends into more index fund shares, he would have seen his dividend income rise from $5.80 in 1920 to $8,715.12 by 2005.

Furthermore, the initial investment of $107.23 would have grown to a staggering $371,028.01. You could check the data from this spreadsheet below.

The results of this passive approach show that it pays to ignore the media and all their gloomy forecasts about “the end of the world” and just stick with your investment while methodically reinvesting your dividends.

Most people are told that it took twenty five years for the Dow Jones Industrials Average index to surpass its 1929 high after The Great Depression and the Second World War. This is not true – accounting for dividend reinvestment Dow Jones Industrials index was actually able to surpass its 1929 high about fifteen years later.

Another gloomy period for stocks was 1965 to 1982, when Dow was stuck in a range between 600 and 1050 points, while producing a mere 8% total return for a 17 year period. At the same time the annual dividends that Dow paid increased form $28.60 in 1965 to $54.10 in 1982. In addition to that, accounting for dividends, a $1000 investment in Dow would have been worth about $2334 by the end of 1982.

To summarize I believe that the best strategy is to ignore all the naysayer’s, talk about recession, depression and political instability and go long stocks for the long run.

Note: The table above has been updated to include data from 2006 - 2008. The original article included data from 1920 - 2005.

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My Dividend Growth Plan - Money Management

In my previous article I discussed my dividend growth plan in more detail, by focusing on my diversification criteria. Today I will be focusing on the money management part of my plan.

I believe that managing my money is an equally important part of my strategy, in addition to the stock selection and diversification. My money management plan involves owning equal dollar amounts in the 30-100 stocks that I own. However, I won’t be rebalancing by selling shares in companies which take a large amount of my portfolio, but I will be adding to positions that still fit my entry criteria and which are having a lower weight in my portfolio for one reason or another. Since I am still in the accumulation phase with my dividend portfolio, I will be forced to dollar cost average in my positions. This should minimize some of my risk, but it will most probably also decrease my returns at least in the first several years.

A very important money management issue is taxation. Most working Americans who work and invest in the stock market do so through and employee 401K plan or through an IRA plan, which are tax advantages accounts. These accounts have some limitation on the age at which you can start withdrawing money. Since I plan on retiring on my dividend portfolio earlier than most other people, I wouldn’t exclusively use these tax advantages accounts. I do believe however that they are important in terms of overall wealth building.

The price of not owning my dividend growth portfolio in a tax sheltered account that I will pay is that I will be taxed on my dividend income every year. If you plan on withdrawing your funds after the age of 59, you should definitely consider a 401K or an IRA account.

This concludes my series which cover my dividend growth plan.

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Year-to-Date changes in Dividend Aristocrats’ annual payments to shareholders

It’s been more than a year since the financial market crisis began. Over those twelve horrendous months financial stocks have been the worst sector to be invested in. Record losses, coupled with more expectations of write-offs coupled with dividend cuts that made headlines surprised many investors who logically went straight for the exits.

On Friday FNM reported more than 2.3 billion in losses for 2Q 2008. At the same time the struggling housing lender cut their dividends, following the dividend cuts of Freddie Mac. Based off these news some gurus will tell you that dividend investing was a fad to begin with and that the best stocks to own are AAPL and RIMM.

That’s very far from the truth. Out of the 60 dividend aristocrats, which are companies that have increased their dividend payments to shareholders for more than 25 consecutive years, more than 40 have announced changes in their annual dividend rates. And guess what; only three out of 40 have actually cut their dividends – KEY, FITB and RF. Two other companies, GCI and BAC have so far frozen their dividend payments.

You could view the announced changes in annual dividends so far this year, courtesy of Standard & Poors.

Based off the above mentioned list, I would say that dividend investors haven’t been affected that badly by the financial turmoil that’s been capturing the markets in recent months as the dividend income has increased by over 7% in over year if an investor held a single share in each of the above mentioned dividend aristocrats.
What’s better than having the ability to buy more shares at depressed prices while you get an increasing stream of dividend income? You get to reinvest your dividends at deflated prices and you could also dollar cost average by taking full advantage of the fear on Wall Street,

Full Disclosure: The author is long US stocks.

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National Retail Properties (NNN) Dividend Stock Analysis

National Retail Properties, Inc. is a publicly owned equity real estate investment trust. The firm acquires, owns, manages, and develops retail properties in the United States. It provides complete turn-key and built-to-suit development services including market analysis, site selection and acquisition, entitlements, permitting, and construction management. The firm also focuses on purchasing and financing net-leased retail properties.

The company is a dividend achiever as well as a component of the S&P 1500 index. It has been increasing its dividends for the past 18 consecutive years. From 1998 up until June 30 2008 this dividend growth stock has delivered an annual average total return of 9.60 % to its shareholders.

At the same time company has managed to deliver a 2.90% average annual increase in its FFO since 1998. FFO is a common measurement for a REIT. It is an alternative non-GAAP measure that is considered to be a good indicator of a company’s ability to pay dividends.

The ROE has been increasing from its 1998-2004 range of 7% -10% rising to almost 15% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 1.6% annually, which is lower than the growth in FFO. At 1.6% growth in dividends it would take you decades to double your dividend income.

If we invested $100,000 in NNN on
December 31, 1997 we would have bought 5596 shares. In January 1998 your monthly dividend check would have been for $1679. If you kept reinvesting the dividends though instead of spending them, your monthly dividend income would have risen to $4873 by August 2008. For a period of 10 years, your monthly dividend payment would have increased by 25 %. If you reinvested it though and took advantage of the monthly compounding effect, your quarterly dividend income would have increased by 190%.

The payout from funds from operations has remained at the 75% - 92% range for the majority of our study period. One of the reasons why I wasn’t enthusiastic about the stock was because of this high payout. Do not repeat the same mistake as me however – In order to maintain their tax status as a REIT for federal income tax purposes, they generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains), and are subject to income tax to the extent we distribute less than 100% of the REIT taxable income (including net capital gains). In addition to that, the fact that the company has managed to keep increasing its profits and dividends while keeping the payout form operations stable is a positive sign.

Overall I think NNN is attractively valued at current prices. It is nice to have another asset class in your portfolio in order to achieve diversification.

Disclosure: I do not own shares of NNN

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Selected Dividend Increases in July

Several Dividend Aristocrats have increased or decreased their dividends in July. The companies are listed below.








Expected dividend increases in August

Based off historical information from this spreadsheet, I would expect that only DOV will increase its dividend in August.
These dividend aristocrats have increased their dividends during every month of February over the past 4 years. Upon a closer examination of the dividend growth stock behavior of the 60 dividend aristocrats, it seems that every month there is at least one company that raises its dividend. It’s nice to get a pay raise every month. The only company that has increased its dividend twice in one year is STT- State Street.

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My Dividend Growth Plan - Diversification

In my previous article I started discussing my dividend growth plan in more detail, by focusing on my stock selection criteria. Today I will be focusing on the diversification part of my plan.

Diversification is important, because it generally insures investors up to a certain point that they won’t lose all of their money at the same time. In general it is not a good idea to put all of your eggs in one basket. In terms of diversification, I am trying to own anywhere from 30 to 100 dividend paying stocks, which generate an ever increasing dividend income stream for me. The stocks should fit the criteria which I mentioned in the previous articles that I wrote. I will be trying to get a representative sample of as many sectors as possible; I will however try to own dividend stocks which are representative for the ten sectors that comprise the S&P 500 index. These sectors include Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecom and Utilities. Financials, Telecom and Utilities are stocks which traditionally have paid solid dividends. I will try to not be overly concentrated on specific sectors and instead try to be as equally weighted sector wise as possible.
Another important sector to look into is real-estate. Luckily there are plenty of REIT’s out there to satisfy the dividend investor’s appetite. I am also looking into getting some timber exposure, by purchasing shares in timber REIT’s like PCL, RYN, and POPE.

My portfolio will not be diversified without adding some foreign stock exposure. At this time this has been my weak point. It is difficult to find foreign companies which have increased their dividends consistently for more than 10 years. In addition, not all foreign dividend achievers are readily available to buy in the US. There are other taxation issues, which could potentially turn foreign stock investment into a complicated matter.

Another matter to look into is that most dividend paying stocks are established large cap corporations. Thus further diversifying into small and mid caps will be a tougher challenge.

Last but not least, a 20-25% exposure to fixed income could smooth the equity curve of my portfolio and reduce volatility. I wouldn’t start contributing to fixed income until I have ten years to retirement however. Even a modest exposure to bonds would have been helpful if you were invested in US stocks at the onset of the Great Depression or in Japanese stocks at the end of the 1980’s.

Next Week, I will discuss the last part of my dividend growth plan - Money Management.

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I got a 10% raise from CSL (Carlisle Companies)

I was checking my stocks when Street Insider reported this news yesterday:

Carlisle Companies Inc. (NYSE: CSL) today announced that its Board has approved a 10% increase in its quarterly dividend from $0.14 to $0.155 per common share, payable on September 1 to shareholders of record on August 15.

This marks the 32nd consecutive year of dividend increases for Carlisle shareholders.Carlisle Companies Incorporated engages in the manufacture and sale of construction materials in the United States and internationally.

That's a pretty nice raise to get - 10% just for identifying a solid company with a sound business model. You could check my analysis of CSL here.

Using the dividend tool that Dividend Investing Blog has on his blog, I was able to easily get the annual dividend payments for CSL.


A 7.60% average dividend growth over the past decade is not bad at all. In fact if CSL achieves a similar dividend growth over the next decade, the annual dividend payment per share will double.

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Realty Income (O) Dividend Analisys

Realty Income Corporation 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. As of December 31, 2007, it owned 2270 retail properties located in 49 states, covering approximately 18.5 million square feet of leasable space.

The company is a dividend achiever as well as a component of the S&P 1500 index. It has been increasing its dividends for the past 14 consecutive years. From 1998 up until June 30 2008 this dividend growth stock has delivered an annual average total return of 14.90 % to its shareholders.

At the same time company has managed to deliver a 5.50% average annual increase in its FFO since 1998. FFO is a common measurement for a REIT. It is an alternative non-GAAP measure that is considered to be a good indicator of a company’s ability to pay dividends.

The ROE has been decreasing from its 2001 highs around 13% to about 9% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 5.1% annually, which is slightly lower than the growth in FFO. A 5% growth in dividends translates into the dividend payment doubling almost every 14 years. If we look at historical data, going as far back as 1994, O will have managed to double its 1994 monthly dividend payment of $0.0775/share by 2009.

Realty Income is one of the few companies which make monthly dividend payments to shareholders. The company is so proud of its ability to raise dividends several times per year, that it calls itself the Monthly Dividend Company.

If we invested $100,000 in O on December 31, 1997 we would have bought 9465 shares (adjusted for a 2:1 split in 2005). In January 1998 your monthly dividend check would have been for $757. If you kept reinvesting the dividends though instead of spending them, your monthly dividend income would have risen to $2774 by June 2008. For a period of 10 years, your monthly dividend payment would have increased by 72 %. If you reinvested it though and took advantage of the monthly compounding effect, your quarterly dividend income would have increased by 266%.

The payout from funds from operations has remained at the 80%-87% range for the majority of our study period. One of the reasons why I wasn’t enthusiastic about the stock in february was because of this high payout. Do not repeat the same mistake as me however – In order to maintain their tax status as a REIT for federal income tax purposes, they generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains), and are subject to income tax to the extent we distribute less than 100% of the REIT taxable income (including net capital gains). In addition to that, the fact that the company has managed to keep increasing its profits and dividends while keeping the payout form operations stable is a positive sign.

One potential risk for the company is if it is unable to meet its financing needs from debt markets. I believe that we have seen most of the bad news in the financial markets. Since O managed to do just fine during the financial crisis that started last summer, I believe that it should do well in the future as well.

Another potential risk could be that the softening economy could have an adverse effect on some retailers and restaurants, which occupy O’s buildings. The vacancy ratio is about 96.8% as of July 28 2008, versus 98.6% as of June 30, 2007.

Overall I think that Realty Income (O) is another dividend stock that should be in every long term dividend investor’s portfolio. It is nice to have another asset class in your portfolio in order to achieve diversification.

Disclosure: I own shares of O

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How much money do you really need to achieve financial independence?

I am constantly being asked by people about the amount of money they have to invest in order to achieve a stable dividend income stream. I am primarily discussing low current dividend, higher dividend growth stocks in my blog, which have the potential for at least market average stock price appreciation.

So how much money do you need to invest, in order to generate the amount of dividend income that will set you free from the 9 to 5 job? Well, a good starting point would be first to track analyze your expenses for the past twelve months.Unless you live in Canada, you might have to purchase your own health insurance, which might have been previously subsidized by your employer.

Another additional expense that you might want to consider will be your hobby, assuming that you will retire and do what you really like to do. Some people might like to spend their time fishing, while others might like traveling. Try brainstorming with your spouse about any additional expenses that you might think about, and then add them to your income requirements.Assuming that you won’t be working a full-time job anymore, you will need to subtract from your income requirements the amount of money that you currently spend on transportation to your job, as well as other work related activities like buying suits, restaurant meals, professional dues, courses etc. You should also subtract the amount of money you are currently saving for retirement through a 401K, IRA or in a simple savings/brokerage account. I would also recommend that it would be a good idea to cut back on certain fixed and recurring expenses such as your mortgage payment or student loans before you retire. And last but not least, the taxes that you will be paying on your dividend income will be much lower than the income taxes that you are currently paying.

After you have determined exactly how much you really need to live comfortably in retirement now comes the fun part – investing in the right dividend stocks for you.Let’s say to you have determined that you need $20,000/year in retirement before taxes. You have identified several diversified income producing portfolios yielding from 1% to 10%. So how much do you need to save? It all depends based off the dividend yield (I am assuming that the dividend growth will at least equal inflation, so that inflation would not decrease your standard of living).

Yield Amount to invest
1% $2,000,000.00
2% $1,000,000.00
4% $ 500,000.00
6% $ 333,333.33
8% $ 250,000.00
10% $ 200,000.00

Based off these calculations you would need to save and invest anywhere from $200,000 to $2,000,000. It is easy to find stocks which yield 2%-4%. Getting to stocks that pay 6% and even 8% consistently, who also increase their dividend payments is getting even harder. Finding enough high-yielding stocks in order to construct a stable dividend income producing portfolio, whose income increases each year in order to compensate for inflation, is a pretty difficult task in today’s environment. You might get there however, by buying strong dividend growers whose yield is at least equal to the yield on the S&P 500.

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