40 Value Stocks that Graham Would Buy

Ben Graham, the father of Value Investing and teacher of Warren Buffett, was also a successful investor in 20th century. The four bread and butter strategies, employed by his firm, the Graham-Newman corporation between 1926 and 1956 included arbitrages, related hedges, liquidations and Net-Current-Asset or Bargain issues. Today I will provide a brief overview of the Bargain Issues strategy and provide some current stock picks.



The main goal with the bargain issues was to purchase shares in companies for less than two thirds of their asset values at prices that a private owner might pay at an acquisition. The fact that investors paid less than two thirds of the net working capital for the bargain stocks provided a margin of safety to those shareholders. Furthermore Graham-Newman strived to maintain a diversified portfolio of these Net Current Asset stocks, sometimes holding as much as one hundred of those issues which were worth considerably more than what they are selling for. Experience had taught Graham that few stocks are ultimately worth less than their net current assets minus the total liabilities.


Using this screen from GrahamInvestor.com site I came out with the following list of 40 bargain stocks ( You could also open the list from this link):



It’s interesting to note that there are two builders – Beazer Homes and Standard Pacific. It’s definitely suspect whether their inventories could be sold at the levels that they keep on their books. The rest of the issues include stocks with low trading volumes. Furthermore most of the stocks on the list are losing money. It would be interesting to see how these enterprises perform over the next two years.



Full Disclosure: None



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Arbitrage Opportunities – CEG and ROH

With the stock market declines that hedge fund and mutual fund redemptions as well as the deleveraging on Wall Street have caused, investors are definitely wondering whether they would ever be able to reach their financial goals. The increasing volatility of the markets has certain stocks trading at multi year lows, despite strong fundamentals, pushing yields to multi-year highs.

In this market turmoil, I believe that sticking to fundamentally sound strategies such as value investing or dividend growth investing is the way to escape the day to day volatility. I also believe that learning more about value investing is essential, as the market will present many once in a lifetime opportunities for investors.

One value investing strategy is merger arbitrage. In my previous post related to CEG merger, I outlined the basic idea behind this strategy. I still believe that CEG deal will close by the middle of 2009. At current prices and if the stock keeps its 8% current yield, enterprising investors could make about 18%.

Furthermore I have kept my eyes open for other arbitrage opportunities. Rohm and Haas (ROH) is another merger arbitrage play to consider. In July, Dow Chemical announced that it was considering acquiring ROH for $78/share in cash. You could check my analysis of ROH here.

On October 29 the shareholders of ROH approved the deal. Furthermore the Hass family, which owns over one third of Rohm-Haas, is a strong supporter of the deal, as it seeks to unload their position.

The merger is expected to close in early 2009, pending regulatory approvals, and the agreement provides that Rohm and Haas Company will retain its name and Philadelphia Headquarters.
An earlier article by Jimmy Lathrop listed some of the risks that could prevent this arbitrage opportunity to work out. The strongest reason in my opinion is this one:

1. There is a chance that the credit crisis could slow or scuttle the deal. Even though Warren Buffett arranged part of the financing to include sale of equity interests with Berkshire Hathaway (BRK.A) as well as the Kuwait Investment Authority, the main underwriters to pay the shareholders of Rohm and Haas Company will come through a loan provided by Citigroup (C), Morgan Stanley (MS) and Merrill Lynch (MER). To put things mildly, there is significant uncertainty as to whether one, two or all three of these banks who signed this agreement on July 10, 2008, will be a functioning entity on January 15, 2009.

I believe that ROH is a buy at these levels as long as the deal does not get derailed. Furthermore the stock is paying 41cents/quarter in dividends, which is a decent payment while you are waiting for the deal to close.

Full Disclosure: Long CEG and ROH

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Markets keep under reacting to dividend cuts

As part of my long term dividend strategy, I tend to buy and hold a portfolio of several dividend growth stocks. If a company keeps increasing their dividends or at least maintains it, I would keep holding the stock. If the company however decided to cut its payment for whatever reason, I lose confidence in the business model and immediately try to sell my position.

Some fellow bloggers do not agree with me on the issue of selling right after a dividend cuts. They believe that the market is efficient, and that negative dividend news is already priced into the stock when the cut is announced. Selling right after a dividend cut is a losing proposition since you are selling low and buying high.

There were several stocks that cut or suspended their dividend payments over the past week. Their performance after the dividend cuts reinforces my belief that companies that cut their dividends for whatever reasons admit that they do not have a firm grip on their business. As a long term dividend investor I want to buy stocks in companies which have the strong determination to overcome any cyclical downturns.

KeyCorp (KEY) announced on November 20 that it cut its dividend for the second time in 2008 to $0.0625/share. The stock lost over one fifth of its value at the close of the session on November 21st, compared to the opening price for the day. That’s also during a large one day surge for the markets.

The New York Times (NYT) announced on November 20 that it cut its dividend by 73.8% to $0.06/share. The stock lost over one seven percent of its value at the close of the session on November 21st, compared to the opening price for the day.

Whitney Holding Corporation (WTNY) declared a 35% reduction of its dividend to $.11 per share on November 19. The stock was slightly changed off the open and managed to increase by over three percent by the end of the week.

Eagle Materials Inc (EXP) announced on November 18 that it cut its dividend in half to $0.10/share. The stock lost 8% of its value at the close of the session on November 19th, compared to the opening price for the day.

The Board of Directors of Royal Caribbean Cruises Ltd. (RCL), decided to discontinue the company's common stock dividend, which is a move to enhance the company’s liquidity during this period of heightened economic and financial market volatility. This was one week after competitor Carnival Cruise also suspended their dividend payments. The stock proceeded to lose 30% of its value by the end of the week, following the announcement.

Navios Maritime Holdings (NM) announced on November 17 that it cut its dividend from 0.09 to $0.06/share. The stock lost around one third of its value by the end of the week, following the announcement.

Liberty Property Trust (LRY) announced Novwember 17 that its Board has approved a 23.4% reduction in its quarterly dividend from $0.62 to $0.475 per common share. The stock proceeded to lose over 29% by the end of the week.

AMB Property Corporation (AMB) suspended its Q408 dividend on November 17 as the company projects that it has already met its 2008 dividend distribution requirement. Together, these actions are expected to improve the company's cash position on a go-forward basis. These dividend changes will allow the company to retain $53 million of cash in Q408 and an additional $98 million over the course of 2009. Furthermore the board of directors announced that they expect to pay out $1.12/share in 2009 compared to the previous annual dividend rate of $2.08/share. The stock gained 15% off the open on the day of the announcement but further market weakness brought the loss for shareholders to over 13% for the week.

The average performance of all dividend cutters in the first day of the announcement was 9% loss on average, as measured from the opening price for the day. This is the third week in a row where dividend cutters get punished severely by the markets. It would be interesting to see whether performance of dividend cutters improves when the markets stabilize.

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Seven notable dividend increases

Last week the markets broke through yet another set of support levels to the lowest point in 11 years. Pundits, technical analysts and others kept getting more bearish on the markets and the economy. There were however several stocks which showed enough confidence in their financial situation that they decided to stick with their dividend payment plans. I view stocks that increase their dividends in this tough environment as defensive, recession proof corporations, who have survived many downturns, recessions and credit crisis. They view the current financial hiccup as only temporary in nature, which in turn shows the confidence in their business models.
The companies that increased their dividend payments to stockholders include:

Donaldson Company, Inc. (DCI) announced that its Board has approved a 5.00% increase in its quarterly dividend from $0.11 to $0.115 per common share. Donaldson Company is a dividend achiever which has increased its dividends for over thirteen years. The stock currently yields 1.80%.

Sysco Corporation (SYY) announced that its Board has approved a 9% increase in its quarterly dividend from $0.22 to $0.24 per common share. Sysco Corporation is a dividend champion which has increased its dividends for over thirty seven years. The stock currently yields 4.10%.

NIKE, Inc. (NKE) announced that its Board has approved a 9% increase in its quarterly dividend from $0.23 to $0.25 per common share. Nike has increased its dividends for seven years. The stock currently yields 2.10%.

The Laclede Group (LG), which was one of the original twelve components in the Dow Industrials Index, announced that its Board has approved a 2.6% increase in its quarterly dividend from $0.375 to $0.385 per common share. The Laclede Group has increased its dividends for over thirteen years. The stock currently yields 3.10%.

Roper Industries, Inc. (ROP) announced that its Board has approved a 13.80% increase in its quarterly dividend from $0.0725 to $0.0825 per common share. Roper Industries, Inc.is a dividend achiever which has increased its dividends for over ten consecutive years. The stock currently yields 0.90%.

NSTAR. (NST) announced that its Board has approved a 7.10% increase in its quarterly dividend to $1.50 per common share. NSTAR is a dividend achiever which has increased its dividends for over eleven consecutive years. The stock currently yields 4.50%.

SkyWest, Inc. (SKYW) announced that its Board has approved a 33% increase in its quarterly dividend to $0.04 per common share. This regional airline stock currently yields 1.40%.

Full Disclosure: Long SYY

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Why should companies pay out dividends?

In theory it makes sense for companies to reinvest all of their earnings straight back into the business, compounding the growth rate of the enterprise to achieve a higher asset base. If a company can put their earnings to good use, there is no reason for them to pay fat dividends.

In reality however the money is wasted away on failed acquisitions, taking on too much risk with new products. Companies that consistently not only pay but increase their dividends over time are more fiscally responsible than the companies that don't pay any dividends.

Companies that reward shareholders with dividends are showing confidence in their ability to generate growing earnings because they could afford to. Furthermore companies paying out dividends show shareholders those earnings are real and not manufactured by an army of CPA's.
As a small business owner myself, I enjoy getting cash back from my businesses on a regular schedule so that I could decide if I wanted to reinvest into the business by purchasing more shares or spend it on something else.

Last but not least most companies can only grow their ROE/ROA so much as they could be reaching the limits of their marketplace. The ROE would then incrementally start declining, making it worthwhile for these stocks to pay out dividends instead of spending the cash on acquisitions to buy competitors or start a division in a completely new sector in order to diversify. More often than not branching out into different industries does not work.

Microsoft has been a recent stock which has initiated and closely followed a dividend growth strategy over the past five years. Cisco Systems also recently announced that it was seriously considering paying a dividend to its stockholders.

According to Ned Davis Research, dividend paying stocks have also outperformed non dividend paying stocks over the past 35 years.























To summarize it is nice for companies to pay out some portion of earnings (up to mid 50%) back and then reinvest the rest in the business. Long term success comes from good balancing of the owners’, management and enterprise interests.

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10 by 10: A New Way to Look at Yield and Dividend Growth

By David Van Knapp
http://www.sensiblestocks.com/

David Van Knapp is the author of two books on stock investing. The first is Sensible Stock Investing: How to Pick, Value, and Manage Stocks, which has a 5-star reader rating on Amazon.com.
The second is The Top 40 Dividend Stocks for 2008: How (and Why) to Build a Cash Machine of Dividend Stocks. Over time, studies show that dividend stocks have the best total returns. To see a complete description of this e-book, or to learn more about Dave's Web site devoted to the success of the individual investor, please visit: http://www.SensibleStocks.com

Dividend investors often set minimum requirements for an “acceptable” initial dividend yield and/or dividend growth rate when they are considering buying a dividend stock.

Thus one investor might say, “I won’t invest in a dividend stock with a starting yield less than 3%.” Another might say, “I want a minimum 10% per year dividend increase.”

The goal, of course, is to purchase stocks whose yields and dividend growth rates are high enough to make them better bets than safer fixed-income investments like money market accounts, certificates of deposit, and bonds.

The dynamic that determines the goal of “high enough” is how a stock’s initial dividend yield and annual dividend growth rates interact over time. Obviously, a 6% initial yield will require a lower annual growth rate than a 2% initial yield to achieve a given return within a given time. By the same token, a 6% initial yield will get to a given return faster than a 2% initial yield for any given rate of growth.

Most dividend investors have a long-term holding period in mind when they buy dividend stocks. They are not looking to trade them often, but rather to hold them, allowing time for the dividends to increase and compound, until the stock itself becomes a money-generating machine irrespective of the stock’s price fluctuations.

Here is a useful way to look at this: Look for stocks that will achieve a 10% dividend return on your original investment within 10 years’ time. I call this the “10 by 10” approach.

The two 10’s are arbitrary, of course. You can put in any goals you like. I chose 10 and 10 because:
10% is a healthy rate of return, almost equal to the long-term total return of the stock market itself, which most studies show is between 10% and 11%. (Total return includes price appreciation as well as dividend return.)
10 years is a useful time frame for people of most ages. Young people, of course, have a much longer investment timeframe, but nevertheless may consider 10 years long enough to wait for the kind of return they are seeking. Older people—say in their 60’s and 70’s—still often think in terms of timeframes at least as long as 10 years, since just by having lived to their current age, their life expectancy usually is longer than 10 years from right now.
And, of course, 10 is a nice round number. It is easy to think in terms of 10% return and a 10-year timeframe to get a good grasp of the underlying principles.

So the question becomes simple: What initial yields, compounded at what rates of growth, achieve 10% return within 10 years?
The following table answers that question. It shows initial yields (across the top) and annual growth rates (down the side). Where any two values intersect, the table shows how many years it takes to achieve a 10% dividend return. Beneath the table are a few notes on calculation and interpretation.




















Notes:

- The table ignores the contribution of price increases. It shows only the rate of return based on increases in the dividend over time.

- The rates of dividend increase should be considered average annual rates. It is rare for a company to increase its dividend by the same percentage amount each year.

-The table does not include the accelerating effect of reinvesting the dividends, which would shorten the times shown. It just shows the increase in your yield from growth in the dividend itself.

- In calculating the table’s values, all years were rounded to the nearest year that a 10% return (from dividends alone) would be achieved. Thus all years appear as whole numbers.
Returns were also rounded, so the year that a return reached 9.6% was counted as the year it hit 10%.

- The “sweet spot” wherein the 10 by 10 goal is achievable has been shaded. So, for example, a 4% initial yield growing at 10% per year achieves the same result as a 5% initial yield growing at 7% per year: Both reach a 10% return (from the dividend alone) in about 10 years.

A few interesting conclusions jump out from this table. First, a 2% initial yield cannot reach the 10 by 10 goal at any rate of increase up to 15% per year. “You can’t get there from here.”

Second, the table demonstrates that the initial yield is somewhat more important than the rate of dividend growth. An additional 1% in the initial yield reduces the time it takes to reach 10% return by around 20% to 30% (say by two to three years in the heart of the table). For comparison, an additional 1% in the annual rate of dividend growth reduces that time less dramatically (one to two years in the heart of the table).

Third, an additional 1% rate in initial yield reduces by 2% to 4% the growth rate needed to reach 10% return in a given time. In the example cited earlier (see number 6 above), a jump in initial yield from 4% to 5% reduced the dividend growth rate needed to achieve 10% in 10 years by 3% per year.

This latter point is important. The faster you hit your 10% dividend return rate goal, the fewer years that your stock choice is subject to prediction risk—that is, the risk that you overestimated its rate of dividend growth. As all dividend investors know, their initial rate of return is fixed at the time of purchase, but the future rate of dividend growth is somewhat speculative. Also, the higher the rate of projected dividend growth, the lower the probability that it will actually be achieved. Getting to your goal in fewer years is generally better all around.

As stated earlier, investors with other goals may plug in different numbers besides the 10 and 10 that I selected. Maybe you want to achieve 12% dividend yield within 9 years, or 10% yield within 7 years. It is easy to modify the table to show the combinations of initial yield and dividend growth rate you need to achieve those goals. The underlying principles remain the same.

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Dividend Stocks in the news

Last week the markets continued their roller coaster ride, sending most investors accounts to new five year lows. On Thursday the S&P 500 broke through its October lows and reached its lowest level since 2003, before recovering the very same day.

There were still several stocks had some major dividend increases over the past week. Other stocks like General Electric (GE) didn’t deliver such exciting news but reaffirmed their current dividend rates to shareholders.

Automatic Data Processing (ADP), announced that its Board has approved a 13.00% increase in its quarterly dividend from $0.29 to $0.33 per common share. Automatic Data Processing is a dividend aristocrat which has increased its dividends for over thirty three years. Annual dividend payments have increased by an average of 15.20% annually over the past 10 years. The stock currently yields 3.60%.

Baxter International Inc. (BAX) announced that its Board has approved a 20.00% increase in its quarterly dividend from $0.2175 to $0.26 per common share.. The stock currently yields 1.70%.

Bob Evans Farms (BOBE) announced that its Board has approved a 16.00% increase in its quarterly dividend to $0.16 per common share. The stock currently yields 3.60%.

BorgWarner Inc. (BWA), a manufacturer and seller of engineered automotive systems and components primarily for power train applications worldwide, announced that its board has approved a 9.00% increase in its quarterly dividend from $0.11 to $0.12 per common share effective fourth quarter of 2008. BorgWarner has tripled its quarterly dividend payment since 2003. The stock currently yields 2.60%.

Massey Energy Company (MEE) announced that its Board has approved a 20.00% increase in its quarterly dividend from $0.05 to $0.06 per common share.. The stock currently yields 1.20%.

Cisco Systems (CSCO) CEO John Chambers communicated the intent that Cisco will eventually pay a dividend. He announced that the dividend will come before he leaves as Cisco's CEO. The evolution of the large cap former tech bellwether darlings of Wall Street from the 1990’s is astonishing. As stocks like INTC, MSFT and CSCO are no longer growing as rapidly as they used to and become mature companies, they start distributing larger portions of their net incomes to shareholders in terms of dividends. The more important question however is whether these companies will continue paying out rising dividends to shareholders after the dividend tax is repealed.

Full Disclosure: Long ADP

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Berkshire Hathaway Portfolio Changes for the quarter

The SEC just released an updated list of Berkshire Hathaway’s stock holdings as of 09/30/2008. The Oracle of Omaha, who is the main capital allocator for Berkshire added to the following positions:

Buffett decreased Berkshire Hathaway's stake in the following holdings:

It’s interesting to note that Buffett had filed a filing pursuant to a request for confidential treatment for his stake in Conoco Phillips. He certainly is aware of all the other copy cat investors who follow his every move, which explains the filing for confidential treatment of his COP stake.

Another interesting fact is that Buffett seems to act like a typical dividend growth investor by selling over half of his stake in Bank of America, which cut its dividend by 50% several weeks ago.

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Is negative dividend news good for the stock price?

Last week there were several companies that cut or suspended their dividend payments. As part of my studies to uncover market inefficiencies pertaining to dividend stocks I am measuring the performance of those dividend suspenders or cutters. As part of my sample I am measuring stocks which trade at least several hundred thousand shares per day. I am also measuring the decline or advance based off the opening price for the day on which the dividend cut or suspension was announced. This would be the price at which an ordinary dividend investor could have traded stocks after learning the news.

On November 10, American Capital Strategies (ACAS) announced that it was purchasing the remaining shares of European Capital held by investor. In addition to that this business development company announced that it will not pay any dividends for the remainder of 2008. ACAS stock opened at $9.81, and then surged to $10.58, before closing at $7.87, for a loss of 19.78% off the open.

LandAmerica Financial Group, Inc. (LFG) announced on November 10th that it continued to aggressively cut costs, suspended its quarterly dividend and had paused certain capital expenditures related to its Fusion initiatives, in order to preserve capital and address the declines in revenues. The stock opened higher after this news, but sellers quickly pushed the shares down 14% from the open.

Early on November 11th, KKR Financial Holdings LLC (KFN) suspended its dividend for the third quarter of 2008 citing unprecedented level of illiquidity in the global financial markets and the Company's determination that maintaining maximum flexibility through retaining capital. Investors rushed for the exits as the stock quickly fell 9.50% from the open.

Diana Shipping (DSX) declared a Q3 dividend of $0.95 per share on November 12, but suspended future dividends to position the company for market opportunities. The company also announced a $100 million dollar buyback. Despite the fact that the company did beat its third quarter earnings consensus, the stock fell twelve percent after the news of the dividend suspension hit the wires.

Prudential Financial (PRU) cut its 2008 annual dividend by 50% on November 12. The stock defied the odds however by finishing the day one percent above the opening price in the morning.

Euroseas (ESEA), which provides ocean-going transportation services worldwide, announced on Friday that it will cut the quarterly dividend to 20 cents/share. The stock closed 2% higher from the opening price.

Freeseas (FREE), which operates as an international drybulk shipping company, cut its quarterly dividend by 62.5% from $0.20 to $0.075 per common share on Friday. As a result its shares fell over 26% after the news.

There are two opposing viewpoints regarding dividend cutters or eliminators. The first group claims that companies that cut dividends are wise enough to conserve cash during difficult market conditions. A fellow blogger Ethan Bloch claimed that if an investor owns an interest in a business that they are committed for a long while and understand the business, it may not always be gospel to ditch the stock upon the announcement of a dividend cut or suspension.

The other viewpoint is that dividend cutters are not good for shareholders as they foretell more troubles ahead. If management has no other option but to cut the dividends, which in itself is a last resort of action and the board knows about those concerns, then the administration de facto admits that they have no control over the situation. Furthermore a dividend cut tells investors that executives are bearish on the business and believe that it won't bring in enough cash for the foreseeable future. With hindsight, selling stocks in the S&P 500 after a dividend cut in 2008 would have saved you a lot of money. This could have been a result of the weak market action overall of course.

This article appeared on 180th Carnival of Personal Finance

Disclosure: I have a position in ACAS


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Zecco Online Discount Stock Brokerage Review

Update: Starting in early march 2009, Zecco changed their stock trading fees. In order to get the 10 free trades/month investors must have at least a $25,000 balance in their brokerage account OR they must have executed at least 25 trades for the previous month. Otherwise the commission is still pretty low at $4.50/stock trade.

Zecco, the online stock brokerage has revolutionized online stock trading over the past two years with its ten free trades per month policy, no account minimums and the ever growing investment community that this broker has created on their site. Using Zecco’s community you could get in touch with thousands of investors, who are taking advantage of the free stock/ETF trading.

Since I make several trades a month as part of my process to build my dividend portfolio, the free trades that Zecco offers its brokerage customers really saves me some money.

The main reasons why people switch over to Zecco include:

1. Zecco offers 10 free stock trades/month if you open an account, and maintain a balance of $25,000 or execute at least 25 trades/month.
2. After you use the ten free trades per month you are charged only $4.50 for stock trades
3. The execution is instantaneous for market orders and there’s no slippage
4. There are no minimum balances to open and keep your brokerage account 5
. There are no monthly inactivity fees for brokerage accounts
6. You can trade stocks, ETFs, options, mutual funds
7. The account opening process is straightforward and there’s no paperwork involved – it’s all electronic
8. You get free real time quotes and charts with your Zecco account.
9. You can open a Traditional, Roth or Rollover IRA.
10. If you link your brokerage account to your checking/savings account your ACH transfers take 2 business days

The ten free stock trades per month are definitely worth opening an account at Zecco.

Dividend ETF’s for busy investors

In my blog, Dividend Growth Investor, I am always trying to find out the best dividend stocks which would provide me with a dividend income stream that would increase above the levels of inflation for many decades to come. If I didn’t have any time to go through all the hassle of picking individual dividend stocks however, I would have turned to dividend ETF’s.

I have stated several reasons why I don’t like investing in dividend etf’s in a previous article. If you want to own a portfolio of stocks which is ready to be purchased in a single ETF trade, and paying an annual fee is not an issue for you, then this article could be beneficial for you.

Most of my readers are aware that I am fascinated with the Dividend Aristocrats index, which is an equally weighted index which includes a select group of dividend stocks which have increased their dividends for over twenty five consecutive years. The bad news is that there isn’t an ETF that covers this index at the time. There is however an dividend ETF which covers the High-Yield Dividend Aristocrats index, which resembles the dividend aristocrats index closely in terms of performance and components.

The S&P High Yield Dividend Aristocrats ETF has an annual fee of 0.35%. The ETF currently yields 4.40%.

There are several other notable dividend ETF’s out there as well, which focus on rising dividend income:


PowerShares HighYield Dividend Achievers ETF (PEY) tracks the Mergent’s Highest Yielding Dividend Achievers Index. The total annual fee is 0.60%, while the index is currently yielding 5.69%.

The PowerShares Dividend Achievers ETF (PFM) tracks The Broad Dividend Achievers Index, which consists of companies that have increased their annual dividend for ten or more consecutive fiscal years. The annual fee is 0.60%, and the current yield is 2.72%.

The PowerShares International Dividend Achievers ETF (PID) tries to replicate The International Dividend Achievers Index which includes companies that have increased their annual dividend for five or more consecutive fiscal years. The annual management fee is 0.58% and the current yield is 4.91%.

iShares Dow Jones Select Dividend Index ETF(DVY) is the first dividend focused ETF, launched in 2003. This fund has a 0.40% annual expense ratio and currently yields 4.65%.

BlackRock Dividend Achievers Trust (BDV) has the highest management fee amongst all dividend ETF’s at 0.83% annually. The dividend yield is 9.90%. This fund is a prime example of the fact that higher management fees do not lead to superior investment performance after all. I should also add that this fund is more actively managed as the advisor tries to select a varying number of dividend achievers which spot the highest yields.

PowerShares High Growth Rate Dividend Achiever (PHJ) consists of the 100 United States stocks with the fastest growing dividends for the past 10 years. This ETF yields 2.70% and has an annual management fee of

Full Disclosure: Long S&P 500

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The future for US Auto Stocks

There have been some pretty negative news surrounding the big three US auto manufacturers this year. Recently GM and Ford reported continuing large losses, triggered by a decrease in the demand for cars nationwide. The demand for cars, which typically is highly cyclical in nature, is lower because of the low consumer confidence in the economy as well as the difficulty that car buyers have in obtaining credit financing to purchase new vehicles.

As a result of these events Detroit manufacturers’ stock prices have taken a large hit this year with GM losing 82% in 2008 while Ford stock lost only 70% during the same period of time. GM eliminated its dividend payment in July 2008 in order to boost its liquidity. The company has taken other measures to bolster its cash situation by selling off assets. Ford eliminated its dividend payments back in 2006. These two stocks should have been out of any dividend portfolio after the cuts, as every dividend investor knows that dividend cutters and eliminators have underperformed the stock market over the past 30 years on average.

The future of the US car companies is definitely getting bleaker every day. The executives of GM, Ford and Chrysler are in talks to get money from the US government in order to keep the industry afloat until the current downturn ends. This could be the only thing that could save several million jobs in the auto industry, since selling off assets might be difficult to achieve in the current tough credit environment.

With GM and Ford stocks trading at multi-decade lows, it seems that investors could potentially make large gains once GM and F overcome the crisis and return to profitability. I see three scenarios for the future of car companies:

1. Car companies receive a loan guarantee from the US government, similar to the one received by Chrysler in the early 1980s. Millions of jobs will be saved; new energy and cost efficient models will be unveiled and after the economy recovers the auto manufacturers will make advance loan repayments and start paying out distributions to their shareholders. Furthermore, as long as the stock base isn’t diluted, long term investors could easily see large capital gains from current levels. Back in the late 1970’s Chrysler stock was trading at under $2 a share before the government loan guarantees. After the company turned around, the stock traded as high as $50 before the 1987 crash. No dividends paid for several years after the bailout. If this scenario were to occur owning stock would be a very good strategy.

2. The other scenario assumes that the US government entities does provide a bailout similar to FNM, FRE and AIG, where common and preferred stock ownership is diluted as the government takes majority stakes in the auto companies. This could lead to more losses for Ford and GM shareholders. The best strategy for this scenario would be to purchase GM and F debt at current levels.

3. A third scenario could occur if the government lets Ford and GM file for Chapter 11 reorganization. Shareholders will be completely wiped out, while bond holders would end up owning the companies after their interests are converted into equity into a newly formed corporate entity.

There could definitely be more scenarios involving a potential purchase of US assets by foreign auto manufacturers. The main point is that at this point owning GM or F stock is highly speculative, and should not be looked upon as an investment. In the meantime we could see short squeezes as short positions amount to 13% and 16% respectively of Ford and General Motors share float.
That being said if investors want to speculate on the auto industry, I believe that GM or Ford bonds could be the best vehicle for such operations. There are several retail bonds issued by GM, whose nominal value is $25. These bonds and notes are traded on the NYSE just like any other instrument. You could find more information in the table below (Source: GM Investor Relations Website):

Each of those bonds is trading currently at about 25% of face value.

Full Disclosure: None

ACAS Dividend News

American Capital Strategies announced that it will be acquiring all of the ordinary shares of European Capital held by other investors. European Capital shareholders will be getting about 1/3 of ACAS share in exchange for their stock. Furthermore ACAS announced that it won't pay any more dividends for the remainder of 2008.

This doesn't really come as a shock to me as ACAS stock price has been falling for several months after I considered it a must own dividend stock and bought some shares in this business development company. With the stock being off over 40% as of now I guess I should have sold at the open if I had seen the news earlier. Anyways I am planning on selling my ACAS position.

Disclosure: Long ACAS

Should you sell after a dividend cut?

In a recent report Standard and Poors predicted that dividend growth will slow in 2008 and probably become negative in 2009 as more industries are affected by the current economic slowdown. There were several dividend cuts and eliminations last week. Stocks that cut or eliminate their dividends tend to underperform the S&P 500 over time. It’s interesting to note that investors reacted differently about each occasion where a dividend cut or elimination occured.

Carnival Corp (CCL) announced on October 31 that it will suspend its dividend for 2009. The company announced that the dividend suspension would result in annualized cash savings of approximately $1.3 billion. The significant liquidity provided by the dividend suspension gives the company the flexibility to fund its 2009 capacity growth without the need to access credit markets. The stock proceeded to lose 15% of its value by the end of the week, following the announcement.

Genworth Financial (GNW) announced on November 6 that it will suspend its dividend and stock buyback. The stock lost over one third of its value at the close of the session on November 7th, compared to the opening price for the day.

The E.W. Scripps Company (SSP) suspended their dividends on November 7. The company CEO justified the decision - including headcount reductions, suspension of the dividend and other expense reductions – as one that will keep the company’s debt low and balance sheet healthy. The stock headed lower, losing 2% off the opening price for the day.

Strategic Hotels and Resorts (BEE) announced a dividend suspension on its common stock on November 5th. The stock lost over fourteen and a half percent over the next 2 trading days to close at $3.37 on November 7th.

Group 1 Automotive, Inc. (GPI) announced on November 5 that its Board has approved a 64% reduction in its quarterly dividend from $0.14 to $0.05 per common share. The stock finished lower at the day of the announcement, but quickly recovered and ended one percent higher than what it was trading for before the dividend cut.

KB Home (KBH) announced on November 5 that its Board has approved a 75% reduction in its quarterly dividend from $0.25 to $0.0625. As a result shares fell to $14.76, recording a loss of over 12.5% in just under two trading days.

CBL & Associates Properties, Inc. (CBL) announced on November 4 a 32.7% reduction in its quarterly dividend from $0.55 to $0.37 per common share. The stock was hit hard as a result of this announcement. CBL shares promptly lost over twenty three percent in three days.

DCT Industrial Trust's (DCT) Board of Directors declared 50% reduction in its quarterly distribution which was previously $0.16 on November 4. The stock didn’t lose a lot of ground as it fell about four percent in three trading days.

Typically dividend cutters or eliminators have performed worse than the stock market over the past 30 years. Furthermore, based off this information and the list of dividend cuts, it seems that dividend investors would have saved themselves from suffering further losses had they sold their stock right after the dividend cut or suspension announcement.

Full Disclosure: None

Six Dividend Stocks Increases in the news

I regularly check the wires for companies which are increasing dividends. That way I have another control which would enable me to find promising dividend growers to add to my watchlist for accumulation. This week there were several companies announcing healthy dividend raises to shareholders.

Emerson Electric (EMR),a diversified global technology company, announced that its Board has approved a 10.00% increase in its quarterly dividend from $0.30 to $0.33 per common share effective fourth quarter of 2008. Emerson Electric is a dividend aristocrat which has increased its dividends for over fifty one years. The stock currently yields 3.80%.

Aqua America, Inc. (WTR), a regulated utilities that provides water or wastewater services in the United States, announced that its Board has approved an 8.00% increase in its quarterly dividend to $0.135 per common share effective fourth quarter of 2008. Aqua America is a dividend achiever which has increased its dividends for over two decades. The stock currently yields 3.20%.

Teekay Offshore Partners L.P. (TOO) announced that its Board has approved a 12.50% increase in its quarterly dividend from $0.40 to $0.45 per common share. The stock currently yields 14.70%.

Royal Gold (RGLD), which engages in acquiring and managing precious metals royalties, announced that its Board has approved a 14.00% increase in its quarterly dividend from $0.07 to $0.08 per common share. Royal Gold could be an interesting way to invest in gold rather than purchasing the metal outright. The stock currently yields only 1.10% however.

Perrigo Company (PRGO) announced that its Board has approved a 10% increase in its quarterly dividend from $0.05 to $0.055 per common share. Perrigo has more than doubled its quarterly dividend since 2003. The stock currently yields only 0.60%.

Aaron Rents, Inc. (RNT) announced that its Board has approved a 6.30% increase in its quarterly dividend from $0.016 to $0.017 per common share. The stock currently yields only 0.30%.

I think that Aqua America looks like an interesting water play. CNBC’s High Net Worth mentioned that water is going to be the next oil during the current century as more people around the world demand clean water. I wille be researching WTR further down the road.

Full Disclosure: Long EMR

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Aflac (AFL) Dividend Stock Analysis

Aflac Incorporated, through its subsidiaries, engages in the marketing and sale of supplemental health and life insurance in the United States and Japan. It underwrites individually issued policies, and markets its policies through independent agents, as well as through independent corporate/individual agencies and affiliated corporate agencies.

Aflac is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 26 consecutive years. From the end of 1998 up until October 2008 this dividend growth stock has delivered an annual average total return of 8.30 % to its shareholders. This year however the stock is down almost 29%. The company recently announced a 16.7% increase in its dividends in 2009.

At the same time company has managed to deliver a 13.70% average annual increase in its EPS since 1998. 71% of earnings in 2007 came from Aflac's Japanese operations. This makes the company's US dollar denominated earnings especially vulnerable to the fluctuations in currency rates of the us dollar against the japanese yen.

The Return on Equity has been in a tight range between 12% and 19% over the past decade.

Annual dividend payments have increased by an average of 20.40 % annually over the past 10 years, which is much higher than the growth in EPS. A 20% growth in dividends translates into the dividend payment doubling almost every 4 years. If we look at historical data, going as far back as 1986, AFL has indeed managed to double its dividend payment almost every four years on average.

If we invested $100,000 in AFL on December 31, 1998 we would have bought 9249 shares (Adjusted for a 2:1 stock split in March 2001). In March 1999 your quarterly dividend income would have been $88. If you kept reinvesting the dividends however instead of spending them, your quarterly dividend income would have risen to $716 by September 2008. For a period of 10 years, your quarterly dividend income would have increased seven times. If you reinvested it however, your quarterly dividend income would have increased over eight times!

The dividend payout has slowly increased from 15% in the late 1990s to 23% in 2007. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

AFL currently trades at a low price/earnings multiple of 15 and at a low dividend payout ratio. The current dividend yield of 2.60% is below my increased minimum yield requirement by a tiny margin. I would consider initiating a position in AFL on dips below $37.30.

Full Disclosure: Long AFL

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Have we reached the bottom?

With the S&P 500 being down over 30% year to date investors are getting nervous about their sinking retirement accounts. Many are simply throwing the towel and converting a majority of their stock mutual funds into bond funds in order to prevent their investments fall further in case we experience the next great depression.
Still there are some brave souls out there who are either keeping their retirement contributions or even increasing them.
With the stock market charts drawing steep vertical declines for September and October, and the VIX reaching multi-decade highs many investors are wondering if we have reached a bottom. Fundamentals might be deteriorating in the near term; however that shouldn’t mean that the stock market should keep going lower. When the stock market hit its all time highs in early October 2007 almost everyone was bullish on stocks. Furthermore the financial crisis was still in its infancy as few investors had the vision to foretell the complete meltdown of the system including failures at Lehman, Bear Stearns, AIG or Fannie and Freddie. So what are the charts saying?

The market has been in a consolidation mode ever since it hit its lows for 2008 in October. The market is over 15 % above its lows for the year as of now. The major market indexes ignored the news about the contraction of the US economy in the third quarter and the slump in consumer spending by recording their biggest weekly advance since 1974. The rosy short term situation would definitely end on a decisive move below the year lows at $83.58.
During bear markets there usually are several bear market rallies which cause major market indexes to rise significantly off their recent bear market lows. Another feature of most bear markets is analysts trying to time to bottom at the expense of investors. I did try doing exactly the same in March as well. The thing is that as long as the market keeps making lower highs and lower lows, then the technical picture is bearish. If the market breaks the pattern of lower highs and lower lows, it could then start charting a bullish picture for equities.
Levels to watch on the upside include 105.53, which was a reaction high straight from October lows and is close to a 50% retracement of the last leg of the bear market from the August lows. Other levels to watch on the upside include 113.15 as well as the 120-124 area. I see the 120-124 area as the toughest to break out of as it previously marked 3 intermediate term bottoms in 2008.

Full Disclosure: Long S&P 500

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Worst Performing dividend stocks so far in 2008

In a previous post I outlined the 5 best performing year to date dividend aristocrats. The 5 worst performing dividend aristocrats so far in 2008 include:








Gannett Co. (GCI) has been hit hard this year as its profits have slipped due to the weakness in the advertising market. Furthermore there is evidence pointing that newspapers are losing readership to the free online news sites. GCI recently confirmed that they are maintaining their quarterly dividend unchanged, even though the stock currently yields 15%. I do believe that at current prices the dividend is adequately covered. That might not stop the company from cutting the payment in future quarters in an effort to conserve cash in this tough economy.

SVU, which is a grocery retailer, is another weak dividend this year. The stock is yielding 5% right now. The problem for SVU is that it has been growing EPS and dividends at rates equal to the rate of inflation for several years now. Recessions are typically not good for stocks which don't have a solid differentiating factor relative to competition.

Archer Daniels Midland (ADM), has been hit hard by the drop in commodity prices. I think that ADM is attractively valued at this levels given strong historical growth rates. I also believe that the dividend is adequately covered.

FITB is a financial stock which has cut its dividend several months ago. I expect this stock to be removed from the dividend aristocrats’ index in December.

JCI which operates in three businesses: building efficiency, automotive experience and power solutions has also been hit hard this year. The main reason for that could be the slowing automobile market in the US as the automotive segment accounted for 63% of sales and 55% of JCI’s income in 2007. I would research this stock further as the current valuations seem attractive.

Full Disclosure: Long GCI and ADM

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5 Best Performing dividend stocks so far in 2008

The markets have been pretty bearish for investors this year as news about banks failures, the economic slowdown as well as the rise and fall in commodities prices have created havoc in the hearts of individual investors. In these volatile market conditions even a well diversified portfolio would have had a hard time making money as globalization in the financial markets lead to bear market declines in stocks wordwide including emerging markets as well as developed economies. There were only a few safer heavens including most treasury and higher grade corporate bonds. Another asset class that has outperformed the markets so far in 2008 is the dividend aristocrats’ index. Dividend Aristocrats are stocks which have increased their dividends for more than 25 consecutive years. These stocks represent companies which have survived the inflationary 1980s, the 1990’s and the new economy bubble. Chances are most will continue increasing their payments even during the current financial crisis.

The dividend stocks which helped the dividend aristocrats' index outperform S&P 500 in 2008 include:

Not surprisingly two of the stocks include discount retailers Family Dollar and Wal-Mart which typically profit during economic slowdowns as consumers prefer to go on one stop shopping trips at places believed to offer the best bargains for their buck.

Another two stocks which I am not at all surprised to see are Rohm & Haas and Anheuser-Busch. ROH is in the middle of being taken over by Dow Chemical while BUD is in the middle of an acquisition by Inbev. ROH shareholders recently approved the merger with Dow Chemical, which is expected to close in early 2009. The current prices at which ROH stock is trading relative to the $78/share in cash offered by Dow Chemical, represents a potential arbitrage opportunity.
The current stock price of Anheuser-Busch (BUD) also presents a potential arbitrage opportunity as its trading at deep discounts relative to the $70/share offer by Inbev. The offer is subject to shareholder approval on a meeting which will be held on November 12.

The company that definitely is surprising to see in the top 5 dividend performers is BB&T (BBT) which is a company that provides banking and trust services for small and mid-size businesses, public agencies, local governments, and individuals in the United States.

Overall I believe that the only stock that doesn't look promising to me at the moment could turn out to be BBT.

Full Disclosure: Long FDO and WMT

- The 20 Highest Yielding Dividend Aristocrats

- Dow Chemical (DOW) To Acquire Rohm and Haas (ROH)

- Anheuser-Busch (BUD) Deal Finalized

- FDO Dividend Analysis

- Wal-Mart Dividend Analysis

6 Dividend Stocks rewarding their shareholders with higher payouts

Last week was marked by more volatility which doesn’t seem to surprise anyone. Luckily this time the direction was up as the stock market had its best week since 1974, mainly fueled by the half a percentage point interest cut by the Federal Reserve as well the smaller than expected contraction in the GDP.

During those large swings up and down it is easy for investors to lose focus on the big picture and not sticking to their financial plan by converting all of their holdings to cash. Luckily there were several dividend companies that reminded their patient long-term holders that increasing dividend payments could help them out in increasing their total returns over time.

Vornado Realty (VNO) announced that its Board has approved a 5.60% increase in its quarterly dividend from $0.90 to $0.95 per common share. Vornado Realty is a dividend achiever having increased its dividends for over fifteen years. The stock currently yields 5.60%.

Home Properties (HME) announced that its Board has approved a 1.50% increase in its quarterly dividend from $0.66 to $0.67 per common share. Home Properties is a dividend achiever having increased its dividends for over one decade. The stock currently yields 7.20%.

Questar (STR) announced that its Board has approved a 2.00% increase in its quarterly dividend from $0.1225 to $0.1250 per common share. Questar is a dividend aristocrat having increased its dividends for 29 years. The stock currently yields 1.50%.

Williams Partners L.P. (WPZ) announced that its Board has approved a 15.00% increase in its quarterly distgributions from $0.55 paid in third quarter 2007 to $0.635 per unit. The partnership stock currently yields 12.10%.

Dominion Resources (D) management anticipates that in January it will recommend to the board of directors an annual dividend rate in 2009 of $1.75 per share, or a quarterly dividend rate of 43.75 cents per share. This represents nearly an 11 percent increase over the current annual dividend rate of $1.58 per share. This utility currently yields 4.40%.

The Hanover Insurance Group, Inc. (THG) announced that its Board has approved a 12.50% increase in its annual dividend from $0.40 to $0.45 per common share. The stock currently yields 1.30%.

This dividend increases list led me to put VNO and HME on my list for further research.

Full Disclosure: None