TARP is bad for dividend investors

TARP allows the United States Department of the Treasury to purchase nonliquid, difficult to value assets from banks and other financial institutions. TARP also allow the Treasury to purchase whole loans and make direct equity investments in banks themselves. The targeted assets are securities backed by mortgages, sometimes described by the government, media, and others as “troubled” or “toxic” assets.
As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated, primarily to the Capital Purchase Program: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group.[
The eight financial companies that were the first to have received TARP funds include:

Bank of America (BAC) (analysis)
Bank of New York Mellon Corp
Citigroup (C )
Goldman Sachs (GS)
JPMorgan Chase (JPM)
Morgan Stanley (MS)
State Street (STT)
Wells Fargo (WFC)

There were 44 other institutions that received TARP money, including USB, CMA, Northern Trust, Suntrust Banks, KeyCorp, RF, BB&T and others. Check out my analysis of USBank or my analysis of BB&T.

There is some talk that a TARP funding to banks essentially marks the end of their dividends.

"Restrictions on Dividends:
For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior
Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.

Common dividends: The UST’s consent shall be required for any increase in common
dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties." Source TARP Capital Purchase Program

What really showed me that TARP program is serious, is a recent statement from State Street last week, which announced that it wasn’t going to raise its dividends in compliance with the restrictions on dividend rate increases generally imposed on all participants in the U.S. Treasury's TARP Capital Purchase Program.

Before that State Street (STT) was the only dividend aristocrat which had consistently increased its dividends twice per year for almost 27 years in a row.

Traditionally, financial shares were one of the best yielding stocks in the marketplace. It seems that TARP essentially is bad news for any dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for individual investors is to diversify across sectors, no matter how great the yields look.

Disclaimer:

Long STT

Relevant Articles:

- My Dividend Growth Plan - Diversification
- My Dividend Growth Plan - Money Management
- Why do I like Dividend Aristocrats?
- Bank of America (BAC) Dividend Analysis
- BB&T Corporation (BBT) Stock Dividend Analysis

Best High Yield Dividend Stocks for 2009

There is a stock picking competition between several US and Canadian bloggers to pick the best four stocks for 2009, which I was invited to participate in. The rules do not allow trading or selling of these picks, and requires a quarterly review of how the stocks selected have performed.

The stocks that I selected are representative of four high-yield sectors, where dividend investors typically shop for current income. Furthermore despite their high current yields, the dividend payments for the four stocks below seem sustainable.

Realty Income (O) a commercial retail real estate company yielding 7.30% . Realty Income is a dividend achiever which pays dividends monthly to its shareholders. If the credit market remains frozen in 2009 Realty Income could suffer if its vacancies increase or it can’t find more funds to keep expanding. If the financial situation normalizes however, real estate stocks in general will benefit from low interest rates.

Kinder Morgan Energy Partners (KMP) is a pipeline transportation and energy storage company in North America yielding 9%. This master limited partnership is a member of the dividend achievers index. The low energy prices could stimulate demand in 2009, which could positively affect pipeline businesses like Kinder Morgan.

Consolidated Edison (ED) provides electric, gas, and steam utility services in the United States yielding 6.10%. Even during tough economic conditions people keep paying their electric bill and keep heating their homes. Con Edison is a member of the dividend aristocrats index.

Phillip Morris International (PM) is an international tobacco company yielding 5.10%. The international tobacco market is a growth story, and unlike the US market is not facing as many issues in the short term as Altria (MO). Even during a recession, people continue smoking, as this product is very difficult to stop using.

With an average yield of 6.9% and the possibility for long-term dividend growth, these stocks should weather well any market conditions in 2009. In order to generate dividend income for the long run however, a more diversified portfolio consisting of at least 30 stocks should be constructed in order to withstand market forces. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today's post.

Disclaimer: At the time of this writing I owned shares of O, KMR, PM and ED.

Trade stocks for free through Zecco.com, the Free Trading Community. www.zecco.com

The other bloggers participating in the contest include:

Where Does My money Go

Four Pillars

ZachStocks

The Wild Investor

The Financial Blogger

Intelligent Speculator

My Trader's Journal

Million Dollar Journey

Relevant Articles:

- Trade stocks for free through Zecco.com, the Free Trading Community. www.zecco.com
- Kinder Morgan Energy Partners (KMP) Dividend Analysis
- Consolidated Edison (ED) Dividend Analysis
- Realty Income (O) Dividend Analisys
- My Dividend Growth Plan - Diversification
- Best Dividends Stocks for the Long Run

Dominion Resoures and Realty Income Increasing their payouts

Dominion (D), which provides electricity, natural gas, and related services to customers , announced that its Board has approved an 11% increase in its quarterly dividend from $0.46 to $0.47 per common share. Dominion Corporation has consistently increased its dividends since 2005. The stock currently yields 4.50%.

Realty Income (O), the monthly dividend real estate company dedicated to providing shareholders with dependable income, announced that its Board has approved an increase in its monthly dividend from $0.141125 to $0.14175 per common share. Realty Income is a dividend achiever which has increased its dividends several times per year since 1994. The stock currently yields 6.90%. You could check my analysis of the stock from this link. To date the Company has declared 462 consecutive common stock monthly dividends throughout its 39-year operating history and increased the dividend 52 times since Realty Income's listing on the New York Stock Exchange in 1994.

Full Disclosure: Long Realty Income (O)

Relevant Articles:

- Realty Income (O) Dividend Analisys
- Why do I like Dividend Achievers
- My Dividend Growth Plan - Diversification
- National Retail Properties (NNN) Dividend Stock Analysis.

Dividend Aristocrats in danger

There were several dividend aristocrats that recently announced no increase in their payments to shareholders.

Pfizer (PFE), which is one of the leading pharmaceutical companies in the world, announced no increase in its annual dividends for the first time in 41 years. In the past decade, the company was used to increasing its dividend payments to shareholders every December. It comes as no surprise to me that PFE is not raising its dividends. The company needs to increase its drug pipeline either through research or acquisitions as most of its drugs will be facing serious generic competition after they go off patent in 2011. Furthermore, the rising payout and stagnating earnings show danger to the dividend growth investor. In order to maintain its dividend aristocrat status, Pfizer has to increase its dividends by November 2009.

Another stock that announced no increase in its dividends was State Street (STT), which received 5 billion from the Treasury several months ago. The company broke a 27 year streak of two dividend increases per year. In order to maintain its dividend aristocrat status, State Street has to increase its dividends by the end of 2010. As a holder of STT, I am planning to be a seller at $51, which is my breakeven price as I fear that TARP might limit dividend payments for financial companies which received funds from the Treasury.

Progressive (PGR), which is a dividend aristocrat as well, announced that it won’t be paying a dividend in 2008, which terminates its status of a consistent dividend performer.

As a dividend growth investor an unchanged dividend is not necessarily bearish news. Most companies don’t raise their dividends every year, but still could achieve a decent dividend growth rate. If I could exit the position at least at breakeven however, I would most probably invest in companies which could support an increasing dividend payments even during cyclical downturns.

Relevant Articles:

- Why do I like Dividend Aristocrats?
- State Street Corporation (STT) Dividend Stock Analysis.

Dividend Stocks in the news

Last week saw even more notable dividend increases as companies from many sectors showed confidence not only in their ability to generate increasing profits, but also to share the wealth with their owners.

BB&T Corporation (BBT), which is a financial holding company, announced that its Board has approved a 2.20% increase in its quarterly dividend from $0.46 to $0.47 per common share. BB&T Corporation is a dividend aristocrat which has consistently increased its dividends for 38 consecutive years. The stock currently yields 6.30%. Check out my analysis of BBT from this link.

Eli Lilly (LLY), which engages in the discovery, development, manufacture, and sale of pharmaceutical products, announced that its Board has approved a 4.3% increase in its quarterly dividend from $0.47 to $0.49 per common share. Eli Lilly is a dividend aristocrat which has consistently increased for 42 consecutive years.. The stock currently yields 5.30%.

Waste Management, Inc. (WMI), which provides integrated waste services in the United States and internationally, announced that its Board has approved a 7.40% increase in its quarterly dividend from $0.27 to $0.29 per common share. Waste Management, Inc. has consistently increased its dividends since 2004. The stock currently yields 3.40%.

Boeing (BA), which engages in the design, development, manufacture, sale, and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide, announced that its Board has approved a 5% increase in its quarterly dividend from $0.40 to $0.42 per common share. Boeinghas consistently increased its dividends since 2004. The stock currently yields 4.10%.

None of the stocks that raised their dividends fit my entry criteria at this time. I would add LLY and BBT to my screen in case their payouts become more reasonable.

Relevant Articles:

- Why do I like Dividend Aristocrats?
- BB&T Corporation (BBT) Stock Dividend Analysis
- Why should companies pay out dividends?
- Is GE’s dividend safe?

What Dividend Growth Investing is all about?

Dividend Growth Investing is a strategy that allows investors to purchase dividend stocks that have a long history of increasing their dividend payments to shareholders. These stocks have sound business models which have withstood the test of many recessions. Most of the dividend growth stocks that I follow represent strong consumer brands like Coca Cola, Aflac or Procter and Gamble which people use on a daily basis. Recessions do affect these companies, but not to the degree that a car manufacturer is affected. As a result of this stability in sales and earnings, these stocks can afford to not only pay a stable dividend every quarter, but also share their prosperity with shareholders by consistently increasing the payments every year. Stocks that regularly increase their dividends tend to be more careful with the way the allocate their financial resources, because they realize that cutting or eliminating the dividends to shareholders would result in lost confidence in company’s management which could take years to recover from.

Dividend Growth Investing is also about consistency and getting a decent dividend growth and dividend yield. The balance between dividend growth and dividend yield is more important as opposed to focusing exclusively on yield. A dividend stock like Pepsi Cola (PEP) yields only 3.10%. However if the stock continues increasing its dividends by 11-12% over the next decade, your yield on cost would end up at over 12% in twelve years. As a dividend investor your main goal is to generate an income stream, which is increasing above the rates of inflation. In order to achieve that, you have to select sound dividend stocks, which represent strong brands and which could afford to pay you an increasing payment year after year.

For that reason I don’t believe in chasing high-yielding stocks. Most higher yielding stocks indicate a high chance that the dividends could be cut. Several high-yielding financial stocks like BAC, C and KEY provided very high dividend yields, which were never paid to shareholders, as the dividends were cut. Other stocks like oil tankers, and higher yielding Canadian royalty trusts which pay out very high dividends, can only afford to do that because their payments vary and are not as consistent. As a dividend investor you have already taken a considerable amount of risk by purchasing individual stocks. You want to minimize that risk by selecting stocks which could not only maintain but also increase your dividend income. You don’t want to guess whether you will be paid a large dividend next quarter or whether you won’t be paid anything at all.

If you had to choose between a stock which is yielding 6% but not growing its dividend versus a stock yielding 3% but growing its dividend by 7% per year, which one would you choose? If you are looking for current income, you might choose the higher yielding stock. But over time the increase in dividends in the second stock would provide for a much higher yield on cost compared to the second stock.

This article originally appeared on www.TheDiv-Net.com

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Best Dividends Stocks for the Long Run

In his book, Stocks for the Long Run, Wharton Professor Jeremy Siegel proves that stocks have been the best performing investing for the past 200 years in the US. Equities outperformed other assets classes such as gold and fixed income. Typically, stock returns are derived from price appreciation and dividends. Dividend payments have historically accounted for 40% of the average annual stock market return. A lesser known fact is that reinvested dividends have provided for 97% of historical stock market returns.

During tough market conditions such as the 2008 bear market, investors realize the positive of getting a return on your investment even if prices are collapsing across the board. Add in dividend increases, and several years down the road the income off the initial investment could be producing sizeable returns. Generalizations like this are usually ignored by investors however, as it doesn’t really provide a clear plan for action.

In order to respond to this I have included the best dividend stock for the long run. They come from many sectors and industries, and represent growing as well as maturing industries. The portfolio is not a recommendation to buy or sell any stocks, as it reflects my specific financial risk tolerance. Always do your own research before initiating a position in any financial instrument.

Consumer Discretionary

FDO Family Dollar Stores (analysis)
MCD McDonald's Corp (analysis)
MHP McGraw-Hill Companies (analysis)
SHW Sherwin-Williams (analysis)
VFC VF Corp (analysis)

Consumer Staples

CLX Clorox Co (analysis)
KO Coca-Cola Co (analysis)
CL Colgate-Palmolive
KMB Kimberly-Clark (analysis)
PEP PepsiCo Inc (analysis)
PG Procter & Gamble (analysis)
SYY Sysco Corp (analysis)
WMT Wal-Mart Stores (analysis)
ADM Archer Daniels Midland (analysis )
HRL Hormel Foods Corp.

Energy

CVX Chevron Corp (analysis)
XOM Exxon Mobil (analysis)
BP British Petroleum (analysis)

Financials

AFL AFLAC Inc (analysis)
CINF Cincinnati Financial (analysis)
STT State Street Corp (analysis)
CBSH Commerce Bancshares (analysis)
CB Chubb Corp. (analysis)

Health Care

BDX Becton, Dickinson
JNJ Johnson & Johnson (analysis)
MDT Medtronic, Inc

Industrials

MMM 3M Co (analysis)
EMR Emerson Electric (analysis)
GWW Grainger (W.W.) (analysis)
ITW Illinois Tool Works (analysis)
TFX Teleflex Inc (analysis)
UTX United Technologies (analysis)
DOV Dover Corp. (analysis)

Information Technology

ADP Automatic Data Proc (analysis)

Materials

APD Air Products & Chem (analysis)
VAL Valspar Corp (analysis)
NUE Nucor Corp. (analysis)

Utilities

ATO Atmos Energy Corp
ED Consolidated Edison (analysis)
BKH Black Hills Corp.

Typically dividend investors are being told to hold stocks in certain sectors such as energy trusts, utilities and financials. I do believe however that concentrating ones portfolio only on certain sectors does increase your risk. Chasing current dividends yields is seldom the best plan for action. Overweighting certain sectors might also be a recipe for a financial disaster. Maintaining a balanced approach that focuses on dividend growth and yield, as well as the traditional tools like diversification and dollar cost averaging, could be the best strategy for the long run. Furthermore being flexible could also aid to your portfolio. Chances are that new sectors of the economy will emerge over the next few decades. Adding reasonably priced dividend achievers is one way to be involved in those stocks.

The dividend stocks for the long run portfolio is underweight in technology and telecommunications services, and overweight the Consumer Staples and Consumer discretionary sectors. It only contains one foreign based stock, BP. The average yield is 3.45%, whle the average five year dividend growth rate is 15.90%. If the long term dividend growth rate stays at 6% on average for the whole portfolio, the expected yield on cost will be around 7% in 12 years and 14% in a little over 2 decades. You could also check it from this link.

Full Disclosure: I have positions in ADM, ADP, AFL, APD, BP, CINF, CLX, ED, EMR, FDO, GWW, ITW, JNJ, KMB, KO, MCD, MHP, MMM, NUE, PEP, PG, SHW, STT, TFX, UTX, WMT,


Relevant Articles:

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- International Over Diversification

Nine notable dividend increases

Several large companies announced dividend increases over the past week. One of the most notable bullish calls came from the telecom sectors as AT&T (T) showed confidence in its business model by increasing its dividend payment to shareholders for the twenty fifth consecutive years. Despite the tough macroeconomic conditions AT&T (T) is still committed to raising its quarterly dividend. The board announced a 2.5% increase of the quarterly payment to to $0.41/share. The stock currently yields 5.70%. One thing that still concerns me with AT&T however is the high current dividend payout ratio. You could check my analysis of AT&T from this link.

BCE, the Canadian telecom company whose privatization agreement failed this month reinstated its quarterly dividend payment of 0.365/share and approved a 40 million share buyback. Based off the reinstated payment to shareholders, the company yields 8.60%, Based off the 2007 earnings per share, the dividend seems adequately covered.

Nucor Corporation (NUE), which is manufactures and distributes coatings, paints, and related products, announced that its Board has approved a 9.40% increase in its quarterly dividend to $0.35 per common share. Nucor Corporationis a dividend aristocrat which has increased its dividends for over thirty four years. The stock currently yields 3.20%. I am considering adding to my position there on dips below $35. You could check out my analysis of NUE here.

Franklin Resources (BEN), which is an investment management company, announced that its Board has approved a 5% increase in its quarterly dividend to $0.21 per common share. Franklin Resources is a dividend champion which has increased its dividends for over twenty seven years. The stock currently yields 1.30%.

Honeywell (HON), which is a diversified technology and manufacturing company, announced that its Board has approved a 5% increase in its quarterly dividend to $0.21 per common share. Honeywell has regularly increased its dividends since 2005. The stock currently yields 3.80%.

Edison International (EIX), which is engages in the supply of electric energy in California, announced that its Board has approved an increase in its quarterly dividend to $0.31 per common share. Edison International has cut its dividends twice for the past twenty years – in 1994 and in 2004. The stock currently yields 3.80%.

Harsco Corporation (HSC), which is provides industrial services and engineered products primarily to steel, construction, railways, and energy industries worldwide, announced that its Board has approved a 2.60% increase in its quarterly dividend to $0.20 per common share. Harsco Corporation is a dividend achiever which has increased its dividends for thirteen years. The stock currently yields 3.20%.

The Valspar Corporation (VAL), which is manufactures and distributes coatings, paints, and related products, announced that its Board has approved a 7.10% increase in its quarterly dividend to $0.15 per common share. Valspar Corporation is a dividend champion which has increased its dividends for over twenty seven years. The stock currently yields 3.40%. You could check my analysis of VAL from this link.

Progress Energy (PGN), which operates as an integrated energy company, announced that its Board has approved an increase in its quarterly dividend from $0.615 to $0.62 per common share. Progress Energy is a dividend achiever which has increased its dividends for over two decades years. The stock currently yields 6.30%.

DPL Inc. (DPL), which operates as a regional electric energy company in the United States, and related products, announced that its Board has approved a 3.60% increase in its quarterly dividend to $0.285 per share. DPL Inc. has regularly increased its dividends since 2004. The stock currently yields 5.20%.

Full Disclosure: I own shares of NUE

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- Nucor Corporation (NUE) Dividend Stock Analysis
- AT&T (T) Dividend Analysis
- Valspar Corporation (VAL) Dividend Analysis
- Is GE’s dividend safe?

International Over Diversification

Most investors are told that they should hold a diversified portfolio of stocks, bonds and real estate, each of which would have several subcategories for further diversification. Stock investors are typically encouraged to hold at least a certain portion of their share holdings in international shares, rather than stick with domestic only stocks. The rationale behind this idea is that not all economies follow the US economic cycle, which could possibly prevent investors from losing money if the US stock market crashes while international markets decline less or even increase. In fact, investors who had an allocation of foreign stocks over the past decade did outperform the US benchmarks, as international stocks rose more than their US peers.

This year however most global funds are down much more than the major US benchmarks. The reasons for this underperformance include the strong dollar in 2008 as well as falling prices worldwide after a five year bull market. It does feel as if an international exposure could be beneficial in the long run, its positive effects haven’t been felt so far in the credit crisis of 2008. Furthermore, most US investors who are purchasing domestic stocks, are most likely to own several large multinational behemoths which derive a large portion of their revenues from abroad.

In order to conduct my experiment, I selected the ten largest companies by market capitalization from the S&P 500 index. The ten largest S&P 500 stocks account for over 22% of the daily fluctuations in the index. So what is the portion of financial results that these large cap companies derive from abroad?

















It is interesting to note that few of the companies listed above broke down the contributions of their global operations in different formats. Some of these breakdowns focused on revenues, while others focused on net income or income from continuing operations. Adding to this is the fact that most of the companies close their books annually on different dates.

Despite the limitations of the data available for public use in relation to actual international operations in some cases, I think that on average the findings present an interesting way of looking into the issue of international over diversification. It seems to me that if the ten stocks with the highest weights in the S&P 500 index derive about 44% of their aggregate financial contributions from foreign operations then the overall contribution to financial performance would be similar for the index as a whole. Thus an investor, who is simply invested in an S&P 500 index fund, is also properly diversified internationally.

As a dividend investor, I have occasionally expressed concerns that I can’t find enough international dividend growers with a history of growing their dividend payments for over one decade. After conducting this experiment, I can see that most of the large cap multinational dividend stocks that I cover in this blog are good proxies for global market performance. Adding any further international stocks could increase my international exposure, without adding any further incremental benefits.

Full Disclosure: I own shares of GE, PG, JNJ and WMT

Relevant Links:

- International Dividend Achievers for diversification
- Attractively Valued International dividend stocks
- My Dividend Growth Plan - Diversification
- Why should companies pay out dividends?

Is GE’s dividend safe?

Last week General Electric reiterated for the second time that it will continue paying out a quarterly dividend of $0.31/share in 2009. GE is going thought a difficult transition, as it is trying to deleverage and decrease the profit contribution of its GE Capital unit from 50% to 40%. Furthermore the company is also trying to maintain its triple A rating and to keep its dividend safe.

With GE’s earnings expected to be around $0.50 in 4Q 2008, the earnings per share for 2008 in total comes out to $1.88-$1.90. If the dividend is maintained at $1.24, then the payout ratio will climb to its highest levels since 2005. The deleveraging factor of 6, is a result of the company lower outstanding commercial paper balance to $50 billion from $75billion. Furthermore GE now plans to issue about $45 billion in long-term debt next year, which is less than the $66 billion it has maturing. The company received $3billion in funding from Warren Buffett and $12.2 billion from sales of common stock.

Due to the decrease in leverage it seems that the new GE that will emerge after the financial crisis is over will be different. I doubt that the new GE will be able to grow its earnings in the double digits, assuming that its leverage is lower, which allows for less flexibility to fund projects that make profit for shareholders. Furthermore given the fact that the dividend costs about $13 billion annually, I see an increased chance of a dividend cut. Just because the company reaffirms that it won’t cut its dividends, doesn’t really mean that it won’t do it two months later. Citigroup(C) and Bank of America (BAC)were two noticeable companies, whose CEO’s claimed that their dividends were safe, only to reduce them several months after those statements.

If GE doesn’t cut its dividends keep holding shares of the company, without adding any new funds to the position would be a good move. If General Electric does cut its dividends however, the wise decision would be to allocate your funds in other opportunities.

Full Disclosure: Long GE

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- Analysis of General Electric
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Dividend Cuts could be spreading to commodities companies

There were several dividend cuts last week, including a notable one from a commodities company. A report from Deutsche Bank analysts predicted dividend cuts in several mining companies, including Alcoa (AA), Southern Copper (PCU), Cliffs Natural Resources (CLF) and Companhia Vale do Rio Doce (RIO), which further depressed investor sentiment, and sent basic materials stocks lower. The negative dividend news concerning the materials sectors shouldn’t really affect overall dividend sentiment, as the dividend payments that these companies pay are typically not as consistent and smooth in terms of size of payment, due to the cyclical nature of the commodities business. With metals prices dropping significantly off of their record highs over the past few months it is no surprise that Deutsche Bank is expecting dividend cuts in the above mentioned companies.

On December 3, Freeport-McMoRan Copper & Gold Inc. announced a reduction in its copper production and sales, capital spending and expenditures. Furthermore the company announced that it was suspending its dividends. The stock lost 9% from the day of the announcement until the end of the week.

The other three notable dividend cuts included property trusts

Ramco-Gershenson Properties Trust (RPT) announced on December 3rd a 50% dividend cut in its quarterly payment to shareholders to $0.2313/share. The stock lost only 3% by the end of the week on the negative news.

Medical Properties Trust, Inc. (MPW) announced on December 4th that its Board has approved a 25.9% reduction in its quarterly dividend from $0.27 to $0.20 per common share. The stock closed over 8% higher on the day.

Post Properties (PPS) announced on December 2nd that its Board has reduced the quarterly dividend rate on its common stock to $0.20 per share from $0.45/share. The company also announced a stock buyback program which would allow it to repurchase up to $200 million worth of its common and preferred stock until December 2010. Investors reacted positively to this news, sending the stock over 15% higher by the end of the week.

The most interesting story I am seeing evolve over the past couple of weeks is that sectors which have experienced the most in dividend cuts over the past year, are buckling conventional wisdom when it comes to dividend cuts and rally on the news. In terms of investor sentiment this could mark a significant shift from bearish to bullish expectations for many stock holders. Whether this will hold of course will remain to be seen. The best ways for dividend growth investors to exit positions which have cut or eliminated their payments is when the stocks are going higher as opposed to lower.

Full Disclosure: None

Dividends Keep Getting Raised despite bleak economic picture

Last week marked yet another rollercoaster performance in the stock market, as major indices clocked in yet another weekly loss. Markets rebounded from their lows on Monday as they were reassured by General Electric (GE) that it will maintain its dividend payment in 2009, which boosted the stock by over $2 in one day. Several more dividend stocks rewarded their patient shareholders with a raise in their quarterly payments. Dividends are normally paid out of earnings and are often used to measure a company’s financial condition. Only the companies that are experiencing significant increases in free cash flow will be in a position to provide a growing stream of dividend payments to their stockholders.

Enbridge Inc (ENB), which engages in the transportation and distribution of crude oil and natural gas, announced that its Board has approved a 12% increase in its quarterly dividend from $0.33 to $0.37 per common share. Enbridge is an international dividend achiever which has increased its dividends for over twelve years. The stock currently yields 3.60%.

Stryker (SYK), which operates as a medical technology company, announced that its Board has approved a 21% increase in its annual dividend from $0.33 to $0.40 per common share. Stryker has increased its dividends for almost seventeen years. The stock currently yields 1.10%.

Wisconsin Energy Corporation (WEC), which provides electricity and natural gas services in Wisconsin and Michigan, announced that its Board has approved a 25% increase in its quarterly dividend from $0.27 to $0.3375 per common share. Wisconsin Energy Corporation has increased its dividends for almost six years in a row. The stock currently yields 2.60%.

AXIS Capital Holdings Limited (AXS), which is a Bermuda-based global provider of specialty lines insurance, announced that its Board has approved an 8% increase in its quarterly dividend to $0.20 per common share. This would mark the fifth consecutive annual increase in AXIS Capital Holdings’ dividends. The stock currently yields 3.00%.

Ecolab Inc. (ECL), which is engaged in cleaning, sanitizing, food safety and infection prevention products and services, announced that its Board has approved an 8% increase in its quarterly dividend to $0.14 per common share. Ecolab Inc. is a dividend achiever which has increased its dividends for over two decades. The stock currently yields 1.50%.

OGE Energy Corp. (OGE), which operates as an energy and energy services provider, announced that its Board has approved a 3% increase in its quarterly dividend from $0.3475 to $0.355 per common share. This marks the third consecutive dividend increase for OGE Energy Corp. since 2005. The stock currently yields 6.00%.

Lincoln Electric Holdings (LECO), which engages in the manufacture and resale of welding and cutting products worldwide, announced that its Board has approved an 8% increase in its quarterly dividend from $0.25 to $0.27 per common share. This represents the seventh consecutive dividend increase for Lincoln Electric Holdings since 2002. The stock currently yields 2.40%.

Graco Inc. (GGG), which provides fluid handling solutions to manufacturing, processing, construction, and maintenance sectors, announced that its Board has approved a 3% increase in its quarterly dividend from $0.185 to $0.19 per common share. Graco Inc has increased its dividends for almost nine years. The stock currently yields 3.70%.

Universal Health Realty Income Trust (UHT), one of the few real estate investment trusts to actually increase its dividends, announced that its Board of Trustees has approved an increase in its quarterly dividend from $0.585 to $0.59 per common share. Universal Health Realty Income Trust is a dividend achiever which has increased its dividends for over two decades. The stock currently yields 7.80%.

Relevant Articles:

- International Dividend Achievers for diversification
- Why do I like Dividend Achievers
- Analysis of General Electric
- Dividend Portfolio Investing for monthly income

Dividends and The Great Depression

Many pundits are comparing the recent bear market declines in the major US indexes to the market action from the Great Depression. Some go as far as comparing the current market decline to the bursting of the Japanese stock and real estate bubbles in the early 1990s.

These comparisons are of course not fruitful as each bear market is different than the rest. The 1973-1974 bear market erased half the value of the Dow Industrials, but it took 2 years to do so. This two year decline was accompanied by an 18% increase in consumer prices.

The 1929-1932 bear market saw the Dow lose over 89% of its value from its September 1929 peak to its July 1932 low. During the length of this decline, consumer prices actually declined by 21 percent.

The 1987 crash was a brief 37% correction in the markets. Most participants were bearish on stocks, and predicted that this crash marked the start of another great depression. The market did bounce back however and proceeded to reach new highs by 1989.

Now we are being told that the 2008 bear market is destined to bring us to the next Great Depression, with stocks falling to further multi-decade lows. I do think however that stock prices should not matter a lot to long term investors at this moment.

Most technicians will probably mock me, by showing that had I used a particular indicator, I would have completely avoided the bear market decline by selling out everything in January 2008. Its funny how in this day and age of computers and widely available stock market data, people could create timing models that worked in the past, which would promise tremendous paper riches to anyone that follows the signals. Unfortunately however, the results from these signals were not revealed to us until the market reached its 11 year lows. Furthermore, most of these signals are prone to many whipsaw entries and exits, which result in small losses that coupled with commissions, could easily wipe out a sizeable amount of ones portfolio equity. In addition to that, markets never truly experience the same behaviors as it did in the over fitted data. Now there are some analysts that have called the current stock market top several months ago, but they don’t have a longer term track record behind them.

I believe that the main issue with the stock market declines is that investors hold stocks for the wrong reasons. One of the main reasons why investors held stocks for the majority of the 20th century was to collect stock dividends. It is true that markets could bounce up and down, and the speculative public will be ecstatic and then depressed about stock prices. But to the dividend investor, as long as he receives his dividends, the world is still a great place to be in. If you compared the annual dividend rates to the prices of major stock market indices, you would notice that dividends on aggregate experience less volatility than prices. If you are a retiree who lives off their portfolio, living off the dividends stream will expose you to less fluctuations in your investment income as compared to selling a portion of your portfolio each year for income.
During the 1920’s, annual dividends on the Dow Industrials ranged between 3.90 points in 1921 to 6 in 1927. In 1928 and 1929 annual dividends increased to 9.80 and 12.80 respectively. After that dividends did decrease to as low as 3.40 points in 1933. For those who bought all of their stocks in 1929 the decrease in dividend income would have been over 70%. In reality no one purchases their stocks in a lump sum. People usually use dollar cost averaging over a wide period of time in order to accumulate their nest egg. For those of our retirees whose last purchase occurred in 1927 the decrease in dividend income wasn’t as bad.

There is another issue about the portfolio of our Joe the Retiree- he wouldn’t have been 100% invested in the stock market. Even a small allocation to bonds of at least 25% would have smoothed out his/her income. However, if the whole country is in a shape like it were during the Great Depression, chances are most investment choices won’t make you a lot of money.
As I was doing my research on dividends during the great depression I found out that IBM, AT&T and Exxon kept their dividend payments stable. Others like Kellogg and Procter and Gamble didn’t maintain a stable payment.

An investor who was living off their portfolio in the 1973-1974 bear market would have seen their stock portfolios lose half of its value in a matter of two years. Their dividend income would have increased by 17%, which trailed inflation by about one percent. This time the bond portion would have been a drag on inflation adjusted income, despite the fact that it would have achieved better returns than stocks.

Although I do not believe that there is a perfect investment strategy, I think that creating a diversified dividend growth portfolio is the way to beat any bear market. Dividends have a lower annual volatility than stock prices and they tend to increase more than the rise in consumer prices over time, which creates an ideal inflation adjusted source of income. Furthermore, at least a small 25% allocation to fixed income would be helpful to retirees in smoothing their income and stock equity. I am ending this post with a quote from Warren Buffett, which seems very relevant to the subject of long-term investing for dividend income:

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

Full Disclosure: I own shares of PG

This article was first posted on The Div-Net one week ago. It also appeared on Carnival of Personal Finance #182 - Don’t Go Broke Over The Holidays Edition.

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Dividend Portfolio Investing for monthly income

After you have selected the dividend growth stocks that fit your selection criteria, it is time to research their payment dates. Most dividend investors try to create a monthly dividend income stream when creating their dividend portfolios. The problem with this strategy is that most stocks send the checks to their stockholders quarterly as opposed to monthly. In order to create a monthly income stream an investor has to limit their portfolio only to stocks which pay a dividend every month, or try to include stocks which pay quarterly dividends whose payment schedules do not overlap.

Another issue that our investor could experience is properly weighting the stocks in his/her portfolio. I am a firm believer in starting out with an equal weighted portfolio, since this strategy doesn’t favor an individual stocks or group of stocks by initiating an above average sized position there. This would distort the levels of dividend income that the investor would receive every month, unless of course stocks that have similar yield and growth characteristics are selected, which is very unlikely.

The dividend investor could achieve a smooth initial monthly income stream by overweighting lower yielding stocks and underweighting higher yielding ones.

Add to this the fact that dividend growth investors need to create a portfolio with at least 30 stocks in order to reduce systemic risk and the things start looking even more complicated. Yet another issue is sector diversification – investors who were overexposed to financials in 2008 experienced a lot of dividend cuts, which set them several years back from reaching their dividend income goals.

Let’s apply the principles that we learned about in a sample portfolio consisting of 3 stocks, which have different payment schedules. The stocks are ADP, JNJ and PG. ADP pays dividends every January, April, July, and October. PG pays dividends in February, May, August and November, while JNJ pays dividends in March, June, September and December. You could check my analysis of ADP, JNJ, and PG here, here and here.

If we start out with $30,000 divided equally between the three stocks, and purchased everything at the closing prices for 2007 we would have:

224.57 Shares of ADP
136.20 Shares of PG
149.93 Shares of JNJ

Our Dividend Income by month in 2008 assuming an equal weighting would be:

The initial yield and the dividend income are not big initially. This sample dividend growth portfolio however could increase your dividend income over time.

Full Disclosure: I own shares of JNJ, PG and ADP

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Are Dividend Investors betting that the worst is over?

Last week was pretty weak in terms of major dividend cuts. The one notable sector where many high yield stocks were located, the tankers, keeps the wires busy with negative dividend news.
Frontline (FRO) declared a dividend payment of $0.50/share for the quarter, significantly down from the prior quarter’s payment of $3/share. This is the lowest dividend payment since March 2003. The current yield is still pretty decent at 6.77%. Investors didn’t like the dividend cut, sending the stock 10.50% lower on Friday.

Pulte Homes (PHM) announced on November 24 that it will discontinue its dividend payments for 2009 citing that this action is in line with the Company's objective of conserving cash as it continues to navigate through a very difficult business environment. The market liked the news, sending the stock over 21% higher by the end of the week.

CapLease, Inc.(LSE) announced November 26 that ts Board intends to reduce the Company's annual dividend beginning in 2009 in order to retain cash flow to further reduce leverage through accretive debt repurchases, strengthen the balance sheet and enhance long-term stockholder value. Investors pushed the stock down 8% on the day of the announcement. LSE did manage to bounce back however by 17% from its lows. The company projects that it will be paying out a quarterly dividend of 0.05/share in 2009 versus the current payment of 0.20/share.

Despite the negative dividend news, which are typically bearish for stocks, investors seem to be ignoring the cuts, and focusing on what’s next. Typically when investors stop paying attention to negative dividend news, it’s time to load up and enjoy the start of a new bull market.

Full Disclosure: None

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Dividend Capture Strategy – The illusion of getting something for nothing

Dividend Capture strategies are gaining popularity among speculators who don’t want to be too exposed to market risk, while also being able to pocket the dividends. My reader Ammar Husami asked me about my opinion on the subject. The dividend capture strategy is very different in comparison to my dividend growth strategy. Before we go any further, there are four important dividend dates that investors need to understand well.

Dividend Declaration Date – This is the date on which dividends are declared by the board of directors.

Ex-Dividend Date – The Ex-dividend date is usually two days before the record date. This is the first day that the stock trades without the right to receive a dividend. On this day the price of the stock will be reduced by the amount of the dividend. The reduction comes from the price of the last trade in the previous session. If you purchase a stock on the ex-dividend date, you won’t receive a dividend until it is declared for the next time period. In order to be able to get the dividend, you will have to purchase the stock before the ex-dividend date.

Record Date - Shareholders who are not registered as of this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date.

Payment Date – This is the date on which the dividends are deposited directly in your investment account or sent in the mail.
The most important date of all is the ex-dividend date. If you purchase a stock one day before the ex-dividend date and sell it on the ex-dividend date, you will be entitled to receive the dividends.

Let’s view an example of this strategy. Below you could find a sample press release from General Electric (GE):

"August 22, 2008 9:15 AM EDT The Board of Directors of General Electric Company (NYSE: GE) authorized a regular quarterly dividend of $0.31 per outstanding share of the Company's common stock. The dividend is payable October 27, 2008 to shareowners of record at the close of business on September 22, 2008. The ex-dividend date is September 18, 2008.GE is a diversified global infrastructure, finance and media company that is built to meet essential world needs."

The declaration date is August 22, as this is when the press release went out. The record date is September 22, while the ex-dividend date is September 18. The dividend was paid on October 27, to all shareholders who owned GE stock at the close of business on September 17, 2008.

The dividend capture strategy claims that if you purchased the stock on the 17th of September and held it until the 18th; you would be eligible to receive the dividend. The problem with this strategy is that it assumes that markets are not efficient. Dividend Capture does seem appealing to investors who believe that they could get something for nothing, which in an efficient market is almost impossible as all news are immediately priced into the stock. In addition to that even if the trader does receive the dividend payment, there is no guarantee that the stock price won’t fall by more than the amount of the dividend declared.

The issue of taxes also comes to mind when determining whether to do the dividend capture or simply enjoy a simple buy and hold dividend strategy. If you simply owned GE shares and received a dividend from them every quarter, then the highest that you would get taxed at is 15%. In order for you to be eligible for the 15% tax on dividends when you do the dividend capture strategy, you have to hold the stock for at least 61 days. Furthermore, if you sell a stock after holding it for less than one year you will pay short-term capital gains taxes which could be up to 35% for the highest income brackets.

If we go back to the example with GE, the stock closed at 23.39 on Sep 17th. If you sold it on the close on Sep 18 at 24.79 you would have not only made a nice gain and be eligible to receive the dividend, but also would have avoided the volatility in the stock price.

The main issue is that traders with a short-term mindset who are trying to take advantage of the capture strategy could be exposing themselves to market fluctuations. This strategy could be profitable during bull markets as stock prices in general increase which would help the speculators in unloading their position at a profit; during bear markets when the volatility is very high, the risk of catching a big wave down is much higher.

As always, do your own research before trying any strategy that promises free lunch. In the meantime, I have selected several stocks to watch during their ex-dividend days in order to see if there’s any advantage that a dividend investor could achieve by knowing about the strategy of capturing dividends. The following stocks will be trading ex-dividend on December 3:

Bank of America, BAC, dividend amount $0.32, dividend yield 9.96%
Kimberly-Clark, KMB, dividend amount $.58, dividend yield 4.22%
Merck, MRK, dividend amount $0.38, dividend yield 6.12%
Mattel, MAT, dividend amount $0.75, dividend yield 5.96%
Pepsi Cola, PEP, dividend amount $0.425, dividend yield 3.17%
Pepsi Bottling , PBG, dividend amount $0.17, dividend yield 4.40%

Full Disclosure: I own shares of KMB, PEP, GE

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Six Promising Dividend Increases in the News

Last week S&P 500 had its largest weekly increase since 1974. Most investors are wondering if the bottom is in after the broad US index average bounced off its 11 year lows it had reached a week earlier. It was a week where Bloomberg reported stock dividends disappearing at the fastest rate since 1950s. According to the article the recession and global credit crunch are reducing profits for the fifth straight quarter and leaving less spare cash for quarterly payments to shareholders.

Not all companies are conserving cash however; there were several dividend increases which reiterate my opinion that the dividend cuts might not spread to the non-financial sector.

South Jersey Industries (SJI), an energy services holding company for utility and non-regulated businesses, announced that its Board has approved a 10% increase in its quarterly dividend to $0.2975 per common share. An increase of this size represents a strong statement by SJI's board and management regarding the current health and future prospects of the company. South Jersey Industries is a dividend achiever which has increased its dividends for over ten years. The stock currently yields 3.10%.

United Bankshares, Inc. (UBSI), announced that its Board has approved a 3% increase in its quarterly dividend $0.29 per common share. United Bankshares is a dividend champion which has increased its dividends for over thirty five years. The stock currently yields 3.40%.

Hormel Foods Corporation (HRL), which is engaged in the production and marketing of meat and food products, announced that its Board has approved an increase in its quarterly dividend from $0.74 to $0.76 per common share. Hormel Foods Corporation is a dividend champion which has increased its dividends for over forty-three years. The stock currently yields 2.80%.

Becton, Dickinson and Company (BDX), a medical technology company, announced that its Board has approved a 15.80% increase in its quarterly dividend from $0.285 to $0.33 per common share. Becton, Dickinson and Company is a dividend aristocrat which has increased its dividends for over thirty-six years. The stock currently yields 2.10%.

McCormick & Company (MKC),a diversified global technology company, announced that its Board has approved a 9% increase in its quarterly dividend from $0.22 to $0.24 per common share. McCormick & Company is a dividend achiever which has increased its dividends for over fifteen consecutive years. The stock currently yields 3.20%.

The York Water Company's (YORW), which engages in impounding, purifying, and distributing water, announced that its Board has approved a 4.10% increase in its quarterly dividend from $0.121 to $0.126 per common share. The York Water Company has increased its dividends for over twelve years. The company is the oldest investor owned utility in the USA, having paid dividends every year since 1816. The stock currently yields 4.50%.

Of all these stocks MKC, BDX, SJI, HRL look promising enough to add them to my watchlist for further analysis.

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