A body in motion tends to stay in motion unless acted on by an outside force. The following dividend payers kept the dividend momentum coming, by raising distributions to shareholders. What is particularly interesting is the fact that most of them have raised distributions consistently for more than one or two decades each. This is essentially what successful dividend growth investing is all about – finding a dividend grower in the early stages that keeps paying increasing amounts of dividends each and every year for years to come.
The companies which raised distributions include:
McCormick & Company (MKC), which engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide, increased its quarterly dividend by 8.30% to 26 cents per share. McCormick & Company is a dividend achiever, which has increased its quarterly dividend in each of the past twenty three years. The stock currently yields 2.60%.
The York Water Company (YORW), which engages in impounding, purifying, and distributing drinking water in Pennsylvania, increased its quarterly dividend by 1.60% to 12.80 cents per share. This marked the thirteenth consecutive year that this dividend achiever has raised its distributions. The stock currently yields 3.40%.
Hormel Foods Corp. (HRL), which engages in the production and marketing of various meat and food products in the United States and internationally, increased its quarterly dividend by 15% to 21 cents per share. Hormel Foods Corp. is a dividend champion, which has increased its quarterly dividend in each of the past forty-four years. The stock currently yields 2.00%.
Becton, Dickinson and Company (BDX), a medical technology company, which develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products worldwide, increased its quarterly dividend by 12.10% to 37 cents per share. Becton, Dickinson and Company is a dividend aristocrat, which has increased its quarterly dividend in each of the past thirty-seven years. The stock currently yields 1.70%.
United Bankshares, Inc. (UBSI), which provides commercial and retail banking services and products, increased its quarterly dividend by 3.4% to 30 cents per share. This marked the 36th consecutive year of dividend increases to United shareholders. The stock currently yields 6.70%.
Roper Industries, Inc. (ROP), which engages in designing, manufacturing, and distributing energy systems and controls, scientific and industrial imaging products and software, industrial technology products, and radio frequency products and services, raised its quarterly dividend by 15% to 9.5 cents per share. This is the seventeenth consecutive year of dividend increases for this dividend achiever. The stock currently yields 0.60%.
Oritani Financial Corp. (ORIT), which provides banking services to individual and business customers in New Jersey, increased its quarterly dividend by 50% to 7.5 cents per share. The stock currently yields 2.30%.
RGC Resources, Inc. (RGCO), which operates as an energy services company, increased its quarterly dividend by 3% to 33 cents per share. RGC Resources, Inc. has increased its quarterly dividend in each of the past five years. The stock currently yields 4.70%.
This list is only a starting point in the process of weeding out companies in the pursuit of identifying promising candidates however. As the market has gone ahead of itself in recent months, a wise move might be to wait for weakness in the broad averages before initiating a position in any of the above names, after researching them thoroughly.
Full Disclosure: None
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- Why should companies pay out dividends?
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Friday, November 27, 2009
Monday, November 23, 2009
Twelve Recent Dividend Increasers
Twelve companies last week raised distributions. While this is positive news in comparison to the avalanche of dividend cuts that were occurring just a few months ago, it is important that investors dig deeper into the numbers before they find out the next big thing.
The initial screening criteria for investing whether recent dividend increases are worth your time should focus on fundamentals such as earnings per share growth and dividend payout ratio. Next investors should focus on number of years of consecutive dividend increases as well as adequate starting dividend yield.
The companies which rewarded investors with dividend raises include:
Sysco Corp. (SYY), which markets and distributes a range of food and related products primarily to the foodservice industry in the United States, increased its quarterly dividend by 4.2% to 25 cents per share. Sysco Corp. is a dividend champion, which has increased its quarterly dividend in each of the past 39 years. The stock currently yields 3.60%. (analysis)
Intel Corporation (INTC), which designs, manufactures, and sells integrated circuits for computing and communications industries worldwide increased its quarterly dividend by 12.5% to 15.75 cents per share. Intel Corporation has only raised dividends with some consistency since 2003. The stock currently yields 2.90%. Paul Otellini, the company’s president and CEO seemed especially bullish saying that "Intel's industry-leading product portfolio, outstanding execution and focus on the next wave of innovation and growth set the company up solidly for the future. With one of the highest dividend yields in the technology industry, the dividend increase is another sign of our confidence in business prospects going forward."
Lancaster Colony Corporation (LANC), which engages in the manufacture and marketing of consumer products in the United States, increased its quarterly dividend by 5.3% to 30 cents per share. This marked the forty seventh consecutive annual dividend increase for this dividend champion. The stock currently yields 2.30%.
Brown-Forman (BF-B), which engages in the manufacture, bottling, import, export, and marketing of alcoholic beverage brands, increased its quarterly dividend by 8% to 14 cents per share. Brown-Forman is a dividend champion which has increased its quarterly dividend in each of the past twenty six years. The stock currently yields 2.30%.
NSTAR (NST), which engages in the distribution, transmission, and sale of energy in Massachusetts, increased its quarterly dividend by 6.7% to 40 cents per share. NSTAR has increased its quarterly dividend for 11 years in a row. The stock currently yields 4.70%.
Harsco Corporation (HSC), which provides industrial services and engineered products worldwide, increased its quarterly dividend by 2.5% to 20.5 cents per share. This marked the sixteenth consecutive year of annual dividend increases for this dividend achiever. The stock currently yields 2.50%.
PennantPark Investment Corporation (PNNT), which is a publicly listed business development firm specializing in direct and mezzanine investments in middle market companies, increased its quarterly dividend by 4.2% to 25 cents per share. PennantPark Investment Corporation has only been public since 2007 and thus does not have a long history of consistent dividend increases. The stock currently yields 11.80%.
Royal Gold, Inc. (RGLD), which acquires and operates precious metals royalties, increased its quarterly dividend by 13% to 9 cents per share. Royal Gold, Inc has increased its quarterly dividend since 2004. The stock currently yields only 0.60%.
Universal Health Services, Inc. (UHS), which owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers, increased its quarterly dividend to 10 cents per share. This is the first dividend increase for Universal Health Services, Inc. since the company started paying one in 2003. The stock currently yields 0.50%.
NIKE, Inc. (NKE), which designs, develops, and markets footwear, apparel, equipment, and accessory products worldwide, increased its quarterly dividend by 8% to 27 cents per share. NIKE, Inc. has increased its quarterly dividend in each of the past eight years. The stock currently yields 1.60%.
Bob Evans Farms, Inc. (BOBE), which owns and operates Bob Evans Restaurants and Mimi’s Cafes in the United States, increased its quarterly dividend by 12.5% to 18 cents per share. The stock currently yields 2.40%.
The Laclede Group, Inc. (LG), which natural gas service to approximately 630,000 residential, commercial, and industrial customers in metropolitan St. Louis and surrounding counties in eastern Missouri, increased its quarterly dividend from 38.5 to 39.5 cents per share. This is the sixth consecutive dividend increase for The Laclede Group, Inc. The stock currently yields 4.90%.
As dividend investors, the goal is to find the best dividend stocks available. This initial screen’s purpose is to weed out cyclical companies which could start out paying a very small dividend relative to earnings and increase it for a long period of time, while earnings are stagnant over the period.
Full Disclosure: Long SYY
Relevant Articles:
- Dividend Conspiracies
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The initial screening criteria for investing whether recent dividend increases are worth your time should focus on fundamentals such as earnings per share growth and dividend payout ratio. Next investors should focus on number of years of consecutive dividend increases as well as adequate starting dividend yield.
The companies which rewarded investors with dividend raises include:
Sysco Corp. (SYY), which markets and distributes a range of food and related products primarily to the foodservice industry in the United States, increased its quarterly dividend by 4.2% to 25 cents per share. Sysco Corp. is a dividend champion, which has increased its quarterly dividend in each of the past 39 years. The stock currently yields 3.60%. (analysis)
Intel Corporation (INTC), which designs, manufactures, and sells integrated circuits for computing and communications industries worldwide increased its quarterly dividend by 12.5% to 15.75 cents per share. Intel Corporation has only raised dividends with some consistency since 2003. The stock currently yields 2.90%. Paul Otellini, the company’s president and CEO seemed especially bullish saying that "Intel's industry-leading product portfolio, outstanding execution and focus on the next wave of innovation and growth set the company up solidly for the future. With one of the highest dividend yields in the technology industry, the dividend increase is another sign of our confidence in business prospects going forward."
Lancaster Colony Corporation (LANC), which engages in the manufacture and marketing of consumer products in the United States, increased its quarterly dividend by 5.3% to 30 cents per share. This marked the forty seventh consecutive annual dividend increase for this dividend champion. The stock currently yields 2.30%.
Brown-Forman (BF-B), which engages in the manufacture, bottling, import, export, and marketing of alcoholic beverage brands, increased its quarterly dividend by 8% to 14 cents per share. Brown-Forman is a dividend champion which has increased its quarterly dividend in each of the past twenty six years. The stock currently yields 2.30%.
NSTAR (NST), which engages in the distribution, transmission, and sale of energy in Massachusetts, increased its quarterly dividend by 6.7% to 40 cents per share. NSTAR has increased its quarterly dividend for 11 years in a row. The stock currently yields 4.70%.
Harsco Corporation (HSC), which provides industrial services and engineered products worldwide, increased its quarterly dividend by 2.5% to 20.5 cents per share. This marked the sixteenth consecutive year of annual dividend increases for this dividend achiever. The stock currently yields 2.50%.
PennantPark Investment Corporation (PNNT), which is a publicly listed business development firm specializing in direct and mezzanine investments in middle market companies, increased its quarterly dividend by 4.2% to 25 cents per share. PennantPark Investment Corporation has only been public since 2007 and thus does not have a long history of consistent dividend increases. The stock currently yields 11.80%.
Royal Gold, Inc. (RGLD), which acquires and operates precious metals royalties, increased its quarterly dividend by 13% to 9 cents per share. Royal Gold, Inc has increased its quarterly dividend since 2004. The stock currently yields only 0.60%.
Universal Health Services, Inc. (UHS), which owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers, increased its quarterly dividend to 10 cents per share. This is the first dividend increase for Universal Health Services, Inc. since the company started paying one in 2003. The stock currently yields 0.50%.
NIKE, Inc. (NKE), which designs, develops, and markets footwear, apparel, equipment, and accessory products worldwide, increased its quarterly dividend by 8% to 27 cents per share. NIKE, Inc. has increased its quarterly dividend in each of the past eight years. The stock currently yields 1.60%.
Bob Evans Farms, Inc. (BOBE), which owns and operates Bob Evans Restaurants and Mimi’s Cafes in the United States, increased its quarterly dividend by 12.5% to 18 cents per share. The stock currently yields 2.40%.
The Laclede Group, Inc. (LG), which natural gas service to approximately 630,000 residential, commercial, and industrial customers in metropolitan St. Louis and surrounding counties in eastern Missouri, increased its quarterly dividend from 38.5 to 39.5 cents per share. This is the sixth consecutive dividend increase for The Laclede Group, Inc. The stock currently yields 4.90%.
As dividend investors, the goal is to find the best dividend stocks available. This initial screen’s purpose is to weed out cyclical companies which could start out paying a very small dividend relative to earnings and increase it for a long period of time, while earnings are stagnant over the period.
Full Disclosure: Long SYY
Relevant Articles:
- Dividend Conspiracies
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Friday, November 20, 2009
Consolidated Edison (ED) Dividend Stock Analysis
Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. It provides electric service to approximately 3.3 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County, as well as provides steam service to office buildings, apartment houses, and hospitals in parts of Manhattan.
Consolidated Edison is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 35 consecutive years. For the past decade this dividend stock has delivered an annual average total return of 6.30 % to its shareholders.
At the same time the company has managed to deliver a 0.80% average annual increase in its EPS since 1999. For the next two years analysts expect EPS to increase to $3.11 and $3.30 respectively. The main problem for utility companies is that they are very capital intensive and are highly regulated. In order for utilities companies to increase rates, they have to seek regulatory approval. In addition to that investing in such projects such as the smart grid is subsidized through federal programs, although companies like Con Ed typically put in at least a portion of the needed amount.
The return on equity has declined slightly over the past decade, although it is at 10% currently.
Annual dividend payments have increased by an average of 1.00% annually over the past 10 years, which is higher than the growth in EPS. The company has increased the amount of the stock outstanding by an average of 2.6% per year over the past decade. Despite the slow dividend growth, the company might be a good pick for investors who are seeking current retirement income.
A 1% growth in dividends translates into the dividend payment doubling almost every 72 years. If we look at historical data, going as far back as 1975, we would see that Con Edison has actually managed to double its dividend payment every eleven years on average. The current dividend payment is double what it was in 1985 however.
Over the past decade the dividend payout ratio has ranged between a low of 57% and a high of 97%. Currently the dividend payout ratio is at 69.6%. While this would be high for a company like McDonald’s (MCD) or Procter & Gamble (PG), a payout ratio of 70% is not uncommon for utilities. Utilities typically pay out a large portion of their earnings as dividends, which explains their slow dividend growth and high dividend yields. Most utilities operate as natural monopolies, which guarantee almost no competition in their specific geographic areas. It would be very costly to run two separate electrical grids, and such investment could take many decades to pay off. Thus utilities tend to generate stable earnings and revenues in any economic conditions, as people keep using water, gas and electricity in their daily lives no matter what.
Disclosure: Long ED
Consolidated Edison is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 35 consecutive years. For the past decade this dividend stock has delivered an annual average total return of 6.30 % to its shareholders.
At the same time the company has managed to deliver a 0.80% average annual increase in its EPS since 1999. For the next two years analysts expect EPS to increase to $3.11 and $3.30 respectively. The main problem for utility companies is that they are very capital intensive and are highly regulated. In order for utilities companies to increase rates, they have to seek regulatory approval. In addition to that investing in such projects such as the smart grid is subsidized through federal programs, although companies like Con Ed typically put in at least a portion of the needed amount.
The return on equity has declined slightly over the past decade, although it is at 10% currently.
Annual dividend payments have increased by an average of 1.00% annually over the past 10 years, which is higher than the growth in EPS. The company has increased the amount of the stock outstanding by an average of 2.6% per year over the past decade. Despite the slow dividend growth, the company might be a good pick for investors who are seeking current retirement income.
A 1% growth in dividends translates into the dividend payment doubling almost every 72 years. If we look at historical data, going as far back as 1975, we would see that Con Edison has actually managed to double its dividend payment every eleven years on average. The current dividend payment is double what it was in 1985 however.
Over the past decade the dividend payout ratio has ranged between a low of 57% and a high of 97%. Currently the dividend payout ratio is at 69.6%. While this would be high for a company like McDonald’s (MCD) or Procter & Gamble (PG), a payout ratio of 70% is not uncommon for utilities. Utilities typically pay out a large portion of their earnings as dividends, which explains their slow dividend growth and high dividend yields. Most utilities operate as natural monopolies, which guarantee almost no competition in their specific geographic areas. It would be very costly to run two separate electrical grids, and such investment could take many decades to pay off. Thus utilities tend to generate stable earnings and revenues in any economic conditions, as people keep using water, gas and electricity in their daily lives no matter what.
I believe that Consolidated Edison is attractively valued with its low price/earnings multiple of 14, as well as an above average dividend yield at 5.60%. The high dividend payout should not be a concern because of the industry the company is in. Because of the slow dividend growth of the stock however, I would only invest in it for current income within the next decade. I do own ED mainly for diversification within the utility industry and for a current yield boost to my dividend income.
Disclosure: Long ED
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Wednesday, November 18, 2009
What are your dividend investing goals?
Great investors have goals and strategies are only the tools that help them accomplish their targets. My goal is to generate a rising stream of dividend income, which would allow me to leave the rat race and spend my time doing worthwhile things like education and charity and self-development.
By focusing on dividend growth, I am trying to pick the stocks, which have solid competitive advantages, whose revenues are relatively recession proof but could still grow earnings by innovation, acquisitions, and buybacks. Historical inflation rates have been around 3% for the US over the past one century. Thus, by focusing on companies, which have a long history of dividend increases of over 3%, I would create an inflation proof source of income.
In addition to that, if my stock picks raise dividends faster than the rate of inflation, I would be able to achieve very good yields on cost in the process. A company, which yields only 3% or 4%, might be scoffed at by yield chasing gurus, who wouldn’t even consider a stock unless it yields 8% or 10%. Those yield chasers might get the 10% yield now, but the cost of dividend cuts or no dividend increases makes chasing high yielding stocks a dangerous exercise with negative effects on wealth building.
At the same time a company that yields only 3% or 4% now, but grows its dividend payments at 12% annually, could generate a yield on cost of 6% to 8% in 6 years and yields on cost of 12% to 16% in 12 years. These companies exist in the market. It only takes an attentive dividend investor to uncover them. Examples of such companies are
Johnson & Johnson (JNJ) has regularly hiked dividends for 47 years in a row. The ten-year average dividend growth for the producer of Neutrogena, Tylenol and Remicade is an impressive 13.30% annually. (analysis)
Procter & Gamble (PG) has rewarded shareholders with dividend raises for 53 consecutive years. This consumer good juggernaut has managed to increase distributions at a rate of 10.70% annually over the past decade. (analysis)
Pepsi Co (PEP) has increased its dividends for 37 consecutive years. The producer of Pepsi Cola, Mountain Dew, Lays and Doritos has delivered a 12.80% average dividend growth annually over the past decade. (analysis)
McDonald’ s (MCD) has increased its dividends for 32 consecutive years. The worlds largest fast food chain has boosted dividends by an average of 27.30%/year over the past decade. (analysis)
I believe that even in 20 years people would still have a need to eat, drink, shower, shave and take pills. I would bet that even in 20 years people would still shop at McDonald’s – if not for their burgers then for the salads or whatever food sells the best.
Over time a portfolio of carefully selected dividend growth stocks could not only deliver a consistently increasing stream of dividend income which increases faster than inflation, but could also deliver outstanding total returns. Over the past fifteen, ten, five, three or one years, the dividend achievers index has outperformed the S&P 500. (source Mergent's)
The dividend achievers index consists of US stocks traded on NYSE, NASDAQ or AMEX, which have increased annual regular dividends for at least the past ten consecutive years. This index is a great shopping list for novice dividend investors. Even Peter Lynch, the famous manager of the Fidelity Magellan Fund, which outperformed the S&P 500 by a significant margin in the 1980’s, said : "The Dividend Achievers Handbook is one of my favorite bedside thrillers. Here's a simple way to succeed in Wall Street: Buy the stocks on Mergent's list and stick with them as long as they stay on the list"
As a dividend growth investor my primary objective is growth in dividend income without losing too much of my capital in the process. Capital appreciation is second of importance. I believe that if my portfolio generates enough dividend income for me, I would not have to rely on selling 4% of my portfolio at depressed prices in order to live off my investments.
Full disclosure: Long MCD, JNJ, PG and PEP
This post was featured on the Carnival of Personal Finance #234 – Weirdest Toy Crazes Edition
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Monday, November 16, 2009
Eight Companies Rewarding investors with higher payments
Most investors believe that successful dividend investing consists of identifying the highest yielding stocks in the market and then generating double digit returns on investment each year. The problem with this strategy it that it often overlooks the fact that such dividend yields are most often unsustainable in the long run. A much better strategy that could eventually produce double digit yield on cost to investors is dividend growth investing. Using this strategy a patient investor accumulates a diversified portfolio of stocks which have a long history of consistently growing dividends. The positive factor is that any investor can implement this strategy, especially now that brokerage commissions are almost zero.
As long as an investor is willing search for the best stocks that fit their criteria and do the work, focusing on dividend growth stocks should pay off in the long run. I identified the following dividend raisers for the past week.
Automatic Data Processing, Inc. (ADP), which provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers, increased its quarterly dividend by 3% to 34 cents per share. The increased cash dividend marks the 35th consecutive year in which this dividend aristocrat has raised its dividend. . The stock currently yields 3.10%. (analysis)
MDU Resources Group (MDU) operates in six segments: Electric, Natural Gas and Oil Production, Construction Services, Pipeline and Energy Services, Construction Materials and Contracting, and Other. The company increased its quarterly dividend by 1.60% to 15.75 cents per share. MDU Resources Group is a dividend achiever, which has raised distributions for 19 years in a row. The company also boasts 72 consecutive years of uninterrupted quarterly common stock dividend payments. The stock currently yields 2.80%.
Tennant Company (TNC), which engages in the design, manufacture, and marketing of cleaning solutions, increased its quarterly dividend by 6% to 14 cents per share. Tennant Companyis a dividend champion, which has raised distributions for 38 years in a row. The stock currently yields 1.90%.
Vodafone Group (VOD), which is engaged in providing service, such as voice, messaging, data and fixed line and others, increased its interim dividend by 3.5% to 2.66 pence per share. The final dividend for 2009 was 5.2 pence/share. Vodafone Group is an international dividend achiever, which has raised distributions for over one decade. The stock currently yields 5.80%.
DeVry Inc. (DV), which owns and operates DeVry University, Advanced Academics, Ross University, Chamberlain College of Nursing, and Becker Professional Review, increased its annual dividend by 25% to 20 cents per share. DeVry Inc. started paying dividends in 2006 and has been raising distributions consistently ever since. The stock currently yields only 0.30% however."The dividend increase and continuation of the share repurchase program reflect our strong financial position and outlook for the future," said Daniel Hamburger, DeVry’s president and chief executive officer. "We will continue to put our students first and invest in academic quality, which we believe leads to sustainable, long term growth and increased shareholder value.”
Span-America Medical Systems, Inc. (SPAN), which engages in the manufacture and distribution of various polyurethane foam products for the medical, consumer, and industrial markets in the United States and Canada, increased its quarterly dividend by 2.2% to 47 cents per share. Span-America Medical Systems doesn’t have a consistent history of raising distributions however. The stock currently yields 2.20%.
Baxter International Inc. (BAX), which develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions., increased its quarterly dividend by 12% to 29 cents per share. Baxter International Inc. has only started raising distributions since 2007. The stock currently yields 2.00%.
AmerisourceBergen Corporation (ABC), a pharmaceutical services company, offers drug distribution and related services to healthcare providers and pharmaceutical manufacturers in the United States, the United Kingdom, and Canada, increased its quarterly dividend by 33% to 8 cents per share. AmerisourceBergen Corporation has raised distributions since 2005. The stock currently yields only 1.00%.
Checking the weekly pulse of dividend growers is an important part of the dividend investor’s routine. It is generally a bullish sign when a company which has raised distributions for over 3 decades keeps raising them even through a recession. It also might help investors in identifying any future dividend growth stories, before they become mainstream holdings.
Full Disclosure: Long ADP
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Friday, November 13, 2009
Dividend Grouping for Dividend Income
Most dividend investors are influenced by the current yield when they enter a particular stock investment. Dividend growth investors are no different either. It is hard to blame either of these groups, as there is no point in a company that strongly raises its dividend payments, yet it might take up to two decades for the yield on cost to reach any meaningful level. Add in to that the fact that a double digit dividend growth could only be supported by a double digit earnings growth only for so long. If the dividend payout ratio was low at the beginning this could extend the strong dividend growth by a few years after earnings growth slows down to a more reasonable level.
Some of the best dividend growth stocks however would always spot a low current yield, coupled with strong dividend growth for many years to come. As some might typically yield 1% or 2 %, they would be completely ignored by most investors. The trick here is that a company that yields 2% today and raises its dividend by 12% every year would double your yield on cost in just 6 years. In most cases such companies stock prices also tend to follow the changes in the dividend payment, which could lead to strong capital gains over time. Thus, if the stock increased distributions by 12%, it is very likely that the stock price might increase by about 12% as well. This leaves the dividend yield unchanged at 2%, which doesn’t matter much for original investors, who purchased the stock 6 years earlier.
In my experience as a dividend investor I have always implemented a minimum yield criterion of between 2% to 3% when screening for dividend growth stocks. I implemented this control in order to protect myself in the event that the company I am heavily invested in stops raising distributions. That way I could at least receive some return on my investment until I try to unload my position above my breakeven price.
Looking back at the best dividend growth stories of Wal-Mart (WMT) and McDonald’s (MCD) however, my minimum criteria would have prevented me from getting aboard on these success stories. Other investors who are currently seeking high current income might also have missed out on these plays, which are delivering double-digit yields on cost for anyone who purchased Wal-Mart of McDonald’s in the 1980s.
I recently came out with a way to tweak my entry criteria of 3% minimum initial yield by grouping higher yielding and lower yielding investments with my purchase. At the end of the date, one could easily create a dividend portfolio which consists both of high yielders with slow to no dividend growth and low dividend yielders, which have the potential for strong dividend growth. If one manages to allocate the varying dividend components in their portfolio carefully, they would be able to achieve a target initial yield on cost for their stock holdings as a whole.
For example I recently added to my position in Wal-Mart Stores (WMT), which I consider of the best run companies in USA, with a strong position in the retail market and good opportunities for growth. The low current yield of 2.20% however was too low in comparison to the 3% entry criteria I apply for new and existing investments. I do believe however that the strong dividend growth would more than compensate for the low current yield, and I see the yield on cost on an investment in Wal-Mart today doubling to 4.5%-5% by the end of the next decade. That’s why I added the high dividend stock AT&T (T) to my portfolio. For every two shares of Wal-Mart (WMT) stock, I bought one share of AT&T (T). At the current prices this mix yields 3% right now.
I view AT&T (T) as a slow grower, which might end up cutting distributions sometime in the future due to its high payout and stagnant earnings in the highly competitive telecom market. The strong dividend growth at Wal-Mart (WMT) however should more than compensate for any potential dividend cuts at AT&T (T). If AT&T (T) cuts its dividends by 50% to 82cents/share, but Wal-Mart (WMT) managed to raise its distributions by 36%, my total dividend income would be unchanged. I believe that Wal-Mart (WMT) would be able to raise distributions by 36% over the next 3-4 years, assuming that it follows the most recent path of dividend growth.
Other stocks that I could use in dividend grouping for income could be high yielding triple net lease real estate investment trust Realty Income (O) or pipeline operator Kinder Morgan (KMP).
Full Disclosure: Long T, KMR, MCD, O and WMT
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Some of the best dividend growth stocks however would always spot a low current yield, coupled with strong dividend growth for many years to come. As some might typically yield 1% or 2 %, they would be completely ignored by most investors. The trick here is that a company that yields 2% today and raises its dividend by 12% every year would double your yield on cost in just 6 years. In most cases such companies stock prices also tend to follow the changes in the dividend payment, which could lead to strong capital gains over time. Thus, if the stock increased distributions by 12%, it is very likely that the stock price might increase by about 12% as well. This leaves the dividend yield unchanged at 2%, which doesn’t matter much for original investors, who purchased the stock 6 years earlier.
In my experience as a dividend investor I have always implemented a minimum yield criterion of between 2% to 3% when screening for dividend growth stocks. I implemented this control in order to protect myself in the event that the company I am heavily invested in stops raising distributions. That way I could at least receive some return on my investment until I try to unload my position above my breakeven price.
Looking back at the best dividend growth stories of Wal-Mart (WMT) and McDonald’s (MCD) however, my minimum criteria would have prevented me from getting aboard on these success stories. Other investors who are currently seeking high current income might also have missed out on these plays, which are delivering double-digit yields on cost for anyone who purchased Wal-Mart of McDonald’s in the 1980s.
I recently came out with a way to tweak my entry criteria of 3% minimum initial yield by grouping higher yielding and lower yielding investments with my purchase. At the end of the date, one could easily create a dividend portfolio which consists both of high yielders with slow to no dividend growth and low dividend yielders, which have the potential for strong dividend growth. If one manages to allocate the varying dividend components in their portfolio carefully, they would be able to achieve a target initial yield on cost for their stock holdings as a whole.
For example I recently added to my position in Wal-Mart Stores (WMT), which I consider of the best run companies in USA, with a strong position in the retail market and good opportunities for growth. The low current yield of 2.20% however was too low in comparison to the 3% entry criteria I apply for new and existing investments. I do believe however that the strong dividend growth would more than compensate for the low current yield, and I see the yield on cost on an investment in Wal-Mart today doubling to 4.5%-5% by the end of the next decade. That’s why I added the high dividend stock AT&T (T) to my portfolio. For every two shares of Wal-Mart (WMT) stock, I bought one share of AT&T (T). At the current prices this mix yields 3% right now.
I view AT&T (T) as a slow grower, which might end up cutting distributions sometime in the future due to its high payout and stagnant earnings in the highly competitive telecom market. The strong dividend growth at Wal-Mart (WMT) however should more than compensate for any potential dividend cuts at AT&T (T). If AT&T (T) cuts its dividends by 50% to 82cents/share, but Wal-Mart (WMT) managed to raise its distributions by 36%, my total dividend income would be unchanged. I believe that Wal-Mart (WMT) would be able to raise distributions by 36% over the next 3-4 years, assuming that it follows the most recent path of dividend growth.
Other stocks that I could use in dividend grouping for income could be high yielding triple net lease real estate investment trust Realty Income (O) or pipeline operator Kinder Morgan (KMP).
Full Disclosure: Long T, KMR, MCD, O and WMT
- Six Dividend Stocks for current income
- Best Dividend Picks for 2009, 3Q update
- Emotionless Dividend Investing
- Dividends Stocks versus Fixed Income
Wednesday, November 11, 2009
Where are the original Dividend Aristocrats now?
The Dividend Aristocrats index measures the performance of S&P 500 index members that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. (Source: S&P)
Since its inception 20 years ago, the dividend aristocrat’s index has outperformed the S&P 500.
The number of components in the index has ranged between 26 in 1989 to 64 in 2001. I used this list as a primary tool for identifying companies with strong brands, which have raised distributions through both good and bad economic conditions. Check this post Historical changes of the S&P Dividend Aristocrats Index for reference.
Some investors believe that the reason why the index has outperformed the S&P 500 is because of new stocks that have later been added to the index. In a previous post I discussed how the list of original S&P 500 components in 1957 outperformed the index over the next 50 years.
It would be interesting to note what happened to the original Dividend Aristocrats. Here’s a list with 26 of them from 1989. Next to each symbol is a brief outline of the events over the past 20 years, associated with each stock.
American Home Products (AHP) became Wyeth (WYE) in 2002. The company was removed from the index in 2001 when it failed to increase dividends for 2 consecutive years in a row. The company began raising its distributions again in 2005. Currently it is in the process of being acquired by drug giant Pfizer (PFE). One dollar invested in AHP in 1989 would have turned out to $5.80 with dividends reinvested by June 2009. Yield on cost is 8.9%.
Fuse Maker AMP Inc (AMP) was acquired by Tyco in 1998.
Baxter International (BAX) was part of the index until 1997. The company spun off Allegiance Healthcare Corporation in 1996, issuing a certain amount of stock in the new company to existing shareholders. As a result its distributions fell slightly for the past three quarters of 1997 in comparison to the same period in 1996. One dollar invested in BAX in 1989 would have turned out to $8.03 with dividends reinvested. The yield on 1989 cost is 8.3%.
Colgate Palmolive (CL) was deleted in the index in 1990 for no apparent reason. According to yahoo finance the company increased its distributions in 1989. In addition to that the company’s own web page claims that it has increased payments to common shareholders every year for 46 years. One dollar invested in CL in 1989 would have turned out to $16.94 with dividends reinvested. The yield on cost is 27.70%. (analysis)
CSR was deleted from the index in 1998. I couldn’t find any additional information on this stock.
Dover (DOV), which recently announced its 54th consecutive annual dividend increase, is still part of the index. A dollar invested in DOV in 1989 would have turned out to $5.45 with dividends reinvested. The yield on cost is 11.6%. (analysis)
Emerson Electric (EMR) is still part of the index. The company has increased its dividends for 52 years in a row. One dollar invested in EMR in 1989 would have turned out to $8.17 with dividends reinvested. The yield on cost is 17.7%. (analysis)
FPL Group (FPL) was deleted from the index in 1995, after the Florida Utility cut its distributions by one third, ending a 48-year streak of dividend increases. The company resumed its policy of regular dividend increases in 1995. One dollar invested in FPL in 1989 would have turned out to $7.56 with dividends reinvested. The yield on cost is 10.4%.
Genuine Parts Co (GPC) was removed from the index in 2002. It is unclear as to why the company was booted out, since both yahoo finance and the company’s website show no interruptions to the dividend increases. The company’s most recent dividend increase marked 53rd consecutive years of increased dividends paid to our shareholders. A dollar invested in GPC in 1989 would have turned out to $5.20 with dividends reinvested. The yield on cost is 12%.
(HI) was acquired by HSBC in 2002. I couldn’t find any information about this component.
International Flavors and Fragrances (IFF) was removed from the index in 2001, after the company cut its dividends by 60% in 2000. While International Flavors and Fragrances started raising dividends in 2003, its current distribution rate is still lower than what it was in 2000. A dollar invested in IFF in 1989 would have turned out to $3.52 with dividends reinvested. The yield on cost is 6%.
Johnson & Johnson (JNJ), which recently announced its 47th consecutive annual dividend increase, is still part of the index. A dollar invested in JNJ in 1989 would have turned out to $10.84 with dividends reinvested. The yield on cost is 26.4%. (analysis)
Kellogg (K) was removed from the index in 2003 after the company failed to raise its quarterly dividend for 2.5 years in a row. Since 2005 the company has started to increase dividends once again. A dollar invested in K in 1989 would have turned out to $4.59 with dividends reinvested. The yield on cost is 8.9%.
Coca Cola (KO) is still a member of the dividend aristocrat’s index. The company has increased its dividends for 47 consecutive years. A dollar invested in KO in 1989 would have turned out to $7.15 with dividends reinvested. The yield on cost is 17%. (analysis)
(LDG) was booted out of the index in 1995. I couldn’t find any information about this component.
Lowe’s Companies (LOW) is still a component of the index after 20 years. The company has increased its dividends for 47 consecutive years. A dollar invested in MAS in 1989 would have turned out to $25.40 with dividends reinvested. The yield on cost is 39%.
Masco Corp (MAS) was booted out of the index in 1996. It is unclear as to why the company was booted out, since both yahoo finance and the company’s website show no interruptions to the dividend increases. A dollar invested in MAS in 1989 would have turned out to $1.31 with dividends reinvested. The yield on cost is 2.5% after the recent dividend cut; it went up to 7.7% in 2008.
3M (MMM) is one of seven original components still part of this elite dividend index. The company has consistently increased its dividends for 51 consecutive years.
A dollar invested in MMM in 1989 would have turned out to $5.33 with dividends reinvested. The yield on cost is 10.3%. (analysis)
NSI Company (NSI) was kicked out of the index in 1998. I couldn’t find any information about this component.
Procter & Gamble (PG) is one of the original 26 members still present in the index. The company has raised dividends for over 53 consecutive years. A dollar invested in PG in 1989 would have turned out to $9.05 with dividends reinvested. The yield on cost is 20%. (analysis)
Parker-Hannifin (PH) only stayed in the index for one year. The company failed to increase its dividend in 1989, which is why it was kicked out of the index in the first place. A dollar invested in PH in 1989 would have turned out to $11.13 with dividends reinvested. The yield on cost is 17%.
Rubbermaid (RBD) was acquired by Newell to become Newell-Rubbermaid in 1999.
Torchmark (TMK) was booted out of the index in 1996. It is unclear as to why the company was booted out, since yahoo finance shows dividend increases in 1995 and 1996. A dollar invested in TMK in 1989 would have turned out to $5.64 with dividends reinvested. The yield on cost is 4.3%.
Texas Utilities Company (TXU) was a member of the index until 1994 it failed to increase its dividend for a second year in a row in 1994. The company consequently cut its distributions the next year and after a brief increase it cut them again in 2002. The dividend payments briefly returned to 1994 levels in 2005, before an investor group led by Kohlberg Kravis Roberts & Co., TPG and Goldman Sachs Capital Partners bought out the company.
(WIN) was a member of the index until it filed for chapter 11 bankruptcy in 1999.
Warner Lambert (WLA) was a component until Pfizer acquired it in 1999.
Seven of the original 26 components in the dividend aristocrat index are still part of it. The seven survivors have managed to outperform the index average over the past twenty years.
It seems that most of the companies that leave the index as a result of mergers and acquisitions. Sometimes companies take on too much debt in an acquisition, which proves costly over time, leading to freezing or cutting of the dividend payments. Blogger Yielder notes that:
“Regardless of whether a company has a long history of dividend growth, a large acquisition financed by debt is cause for alarm bells to go off. Excessive debt can choke the company especially if the new asset requires "fixing". Unless a company has a great deal of experience with acquisitions, a quick & successful integration can be a problem especially if the company being acquired involves new areas of expertise.”
- Historical changes of the S&P Dividend Aristocrats Index
- The ultimate passive investment strategy
- Dividend Portfolios – concentrate or diversify?
- Pfizer/Wyeth Merger Arbitrage Opportunity
Since its inception 20 years ago, the dividend aristocrat’s index has outperformed the S&P 500.
The number of components in the index has ranged between 26 in 1989 to 64 in 2001. I used this list as a primary tool for identifying companies with strong brands, which have raised distributions through both good and bad economic conditions. Check this post Historical changes of the S&P Dividend Aristocrats Index for reference.
Some investors believe that the reason why the index has outperformed the S&P 500 is because of new stocks that have later been added to the index. In a previous post I discussed how the list of original S&P 500 components in 1957 outperformed the index over the next 50 years.
It would be interesting to note what happened to the original Dividend Aristocrats. Here’s a list with 26 of them from 1989. Next to each symbol is a brief outline of the events over the past 20 years, associated with each stock.
American Home Products (AHP) became Wyeth (WYE) in 2002. The company was removed from the index in 2001 when it failed to increase dividends for 2 consecutive years in a row. The company began raising its distributions again in 2005. Currently it is in the process of being acquired by drug giant Pfizer (PFE). One dollar invested in AHP in 1989 would have turned out to $5.80 with dividends reinvested by June 2009. Yield on cost is 8.9%.
Fuse Maker AMP Inc (AMP) was acquired by Tyco in 1998.
Baxter International (BAX) was part of the index until 1997. The company spun off Allegiance Healthcare Corporation in 1996, issuing a certain amount of stock in the new company to existing shareholders. As a result its distributions fell slightly for the past three quarters of 1997 in comparison to the same period in 1996. One dollar invested in BAX in 1989 would have turned out to $8.03 with dividends reinvested. The yield on 1989 cost is 8.3%.
Colgate Palmolive (CL) was deleted in the index in 1990 for no apparent reason. According to yahoo finance the company increased its distributions in 1989. In addition to that the company’s own web page claims that it has increased payments to common shareholders every year for 46 years. One dollar invested in CL in 1989 would have turned out to $16.94 with dividends reinvested. The yield on cost is 27.70%. (analysis)
CSR was deleted from the index in 1998. I couldn’t find any additional information on this stock.
Dover (DOV), which recently announced its 54th consecutive annual dividend increase, is still part of the index. A dollar invested in DOV in 1989 would have turned out to $5.45 with dividends reinvested. The yield on cost is 11.6%. (analysis)
Emerson Electric (EMR) is still part of the index. The company has increased its dividends for 52 years in a row. One dollar invested in EMR in 1989 would have turned out to $8.17 with dividends reinvested. The yield on cost is 17.7%. (analysis)
FPL Group (FPL) was deleted from the index in 1995, after the Florida Utility cut its distributions by one third, ending a 48-year streak of dividend increases. The company resumed its policy of regular dividend increases in 1995. One dollar invested in FPL in 1989 would have turned out to $7.56 with dividends reinvested. The yield on cost is 10.4%.
Genuine Parts Co (GPC) was removed from the index in 2002. It is unclear as to why the company was booted out, since both yahoo finance and the company’s website show no interruptions to the dividend increases. The company’s most recent dividend increase marked 53rd consecutive years of increased dividends paid to our shareholders. A dollar invested in GPC in 1989 would have turned out to $5.20 with dividends reinvested. The yield on cost is 12%.
(HI) was acquired by HSBC in 2002. I couldn’t find any information about this component.
International Flavors and Fragrances (IFF) was removed from the index in 2001, after the company cut its dividends by 60% in 2000. While International Flavors and Fragrances started raising dividends in 2003, its current distribution rate is still lower than what it was in 2000. A dollar invested in IFF in 1989 would have turned out to $3.52 with dividends reinvested. The yield on cost is 6%.
Johnson & Johnson (JNJ), which recently announced its 47th consecutive annual dividend increase, is still part of the index. A dollar invested in JNJ in 1989 would have turned out to $10.84 with dividends reinvested. The yield on cost is 26.4%. (analysis)
Kellogg (K) was removed from the index in 2003 after the company failed to raise its quarterly dividend for 2.5 years in a row. Since 2005 the company has started to increase dividends once again. A dollar invested in K in 1989 would have turned out to $4.59 with dividends reinvested. The yield on cost is 8.9%.
Coca Cola (KO) is still a member of the dividend aristocrat’s index. The company has increased its dividends for 47 consecutive years. A dollar invested in KO in 1989 would have turned out to $7.15 with dividends reinvested. The yield on cost is 17%. (analysis)
(LDG) was booted out of the index in 1995. I couldn’t find any information about this component.
Lowe’s Companies (LOW) is still a component of the index after 20 years. The company has increased its dividends for 47 consecutive years. A dollar invested in MAS in 1989 would have turned out to $25.40 with dividends reinvested. The yield on cost is 39%.
Masco Corp (MAS) was booted out of the index in 1996. It is unclear as to why the company was booted out, since both yahoo finance and the company’s website show no interruptions to the dividend increases. A dollar invested in MAS in 1989 would have turned out to $1.31 with dividends reinvested. The yield on cost is 2.5% after the recent dividend cut; it went up to 7.7% in 2008.
3M (MMM) is one of seven original components still part of this elite dividend index. The company has consistently increased its dividends for 51 consecutive years.
A dollar invested in MMM in 1989 would have turned out to $5.33 with dividends reinvested. The yield on cost is 10.3%. (analysis)
NSI Company (NSI) was kicked out of the index in 1998. I couldn’t find any information about this component.
Procter & Gamble (PG) is one of the original 26 members still present in the index. The company has raised dividends for over 53 consecutive years. A dollar invested in PG in 1989 would have turned out to $9.05 with dividends reinvested. The yield on cost is 20%. (analysis)
Parker-Hannifin (PH) only stayed in the index for one year. The company failed to increase its dividend in 1989, which is why it was kicked out of the index in the first place. A dollar invested in PH in 1989 would have turned out to $11.13 with dividends reinvested. The yield on cost is 17%.
Rubbermaid (RBD) was acquired by Newell to become Newell-Rubbermaid in 1999.
Torchmark (TMK) was booted out of the index in 1996. It is unclear as to why the company was booted out, since yahoo finance shows dividend increases in 1995 and 1996. A dollar invested in TMK in 1989 would have turned out to $5.64 with dividends reinvested. The yield on cost is 4.3%.
Texas Utilities Company (TXU) was a member of the index until 1994 it failed to increase its dividend for a second year in a row in 1994. The company consequently cut its distributions the next year and after a brief increase it cut them again in 2002. The dividend payments briefly returned to 1994 levels in 2005, before an investor group led by Kohlberg Kravis Roberts & Co., TPG and Goldman Sachs Capital Partners bought out the company.
(WIN) was a member of the index until it filed for chapter 11 bankruptcy in 1999.
Warner Lambert (WLA) was a component until Pfizer acquired it in 1999.
Seven of the original 26 components in the dividend aristocrat index are still part of it. The seven survivors have managed to outperform the index average over the past twenty years.
It seems that most of the companies that leave the index as a result of mergers and acquisitions. Sometimes companies take on too much debt in an acquisition, which proves costly over time, leading to freezing or cutting of the dividend payments. Blogger Yielder notes that:
“Regardless of whether a company has a long history of dividend growth, a large acquisition financed by debt is cause for alarm bells to go off. Excessive debt can choke the company especially if the new asset requires "fixing". Unless a company has a great deal of experience with acquisitions, a quick & successful integration can be a problem especially if the company being acquired involves new areas of expertise.”
It would have been next to impossible to predict which ones were to remain the index back in 1989. It would be almost impossible to predict which ones would remain in the index 20 years from now as well. However, by diversifying your risk by spreading your bets to several stocks from as many market sectors as possible, investors would have a higher chance of finding the best dividend stocks, which would generate the most returns for them for the future.
Full Disclosure: Long PG, JNJ, MMM, EMR, KO
- Historical changes of the S&P Dividend Aristocrats Index
- The ultimate passive investment strategy
- Dividend Portfolios – concentrate or diversify?
- Pfizer/Wyeth Merger Arbitrage Opportunity
Monday, November 9, 2009
Four Dividend Raisers in the news
Many investors are being sold on the idea of generating income in retirement by solely focusing on fixed income securities. That way they would have a stable income pretty much for life and there is a high likelihood that the principle would be returned intact after the bond matures. The main problem with this strategy is that while the income would remain unchanged over time, its real purchasing power would decline. If however investors purchased a diversified list of dividend growth stocks, they would be able to generate enough income and also enjoy the growing stream of distributions over time. That way investors would not have to worry too much about inflation eroding the purchasing power of their passive income. By focusing on such lists as dividend aristocrats, dividend achievers and checking the list of dividend increases regularly, investors could find the right dividend picks for their portfolios.
The following companies announced dividend increases last week:
Universal Corporation (UVV), which operates as the leaf tobacco merchants and processors worldwide, increased its quarterly dividend by 2.2% to 47 cents per share. Universal Corporation is a dividend champion, which has raised distributions for 39 years in a row. In addition to that the company’s Board of Directors approved a program for the repurchase of up to $150 million of the company’s common stock, which represents approximately 3% of its outstanding shares issued at current prices.The stock currently yields 4.50%.
Kimco Realty Corporation (KIM), which engages in acquisitions, development, and management of real estate properties, increased its quarterly distributions to 16 cents per share. Kimco Realty Corporation cut its dividends in 2009 from 44 to 6 cents/share after 16 years of consistent increases. The stock currently yields 5.40% based off the new distribution amount.
Microchip Technology (MCHP), which develops and manufactures semiconductor products for
various embedded control applications, increased its quarterly dividend by a nominal amount from 33.9 to 34cents per share. Microchip Technology has raised distributions since 2002. Despite the appealing yield of 5.60% and the possibility for gaining diversification in the technology sector, the high payout ratio is a red flag at the moment.
Aaron's, Inc. (AAN) which operates operates as a specialty retailer of consumer electronics, computers, residential and office furniture, household appliances, and accessories, increased its quarterly dividend by 5.9% to 1.8 cents per share. Aaron's, Inc has only raised distributions since 2003. In addition to that the stock currently yields only 0.30%. With EPS of $1.58 in 2008, the company could definitely afford to set up its dividend payments to shareholders a notch.
Of all the stocks raising dividends last week, only Universal Corporation (UVV) looks like an interesting and attractively valued stock that I will consider for further research. Thus do not margin your way into the stock. One problem is that since I already have an allocation to tobacco stocks like Altria (MO) as well as Philip Morris International (PM) however, I do not want to be over allocated to tobacco stocks in general.
Full Disclosure: Long PM and MO
Relevant Articles:
- The case for dividend investing in retirement
- Dividends Stocks versus Fixed Income
- The Hyperinflation Scam
- Philip Morris International versus Altria
The following companies announced dividend increases last week:
Universal Corporation (UVV), which operates as the leaf tobacco merchants and processors worldwide, increased its quarterly dividend by 2.2% to 47 cents per share. Universal Corporation is a dividend champion, which has raised distributions for 39 years in a row. In addition to that the company’s Board of Directors approved a program for the repurchase of up to $150 million of the company’s common stock, which represents approximately 3% of its outstanding shares issued at current prices.The stock currently yields 4.50%.
Kimco Realty Corporation (KIM), which engages in acquisitions, development, and management of real estate properties, increased its quarterly distributions to 16 cents per share. Kimco Realty Corporation cut its dividends in 2009 from 44 to 6 cents/share after 16 years of consistent increases. The stock currently yields 5.40% based off the new distribution amount.
Microchip Technology (MCHP), which develops and manufactures semiconductor products for
various embedded control applications, increased its quarterly dividend by a nominal amount from 33.9 to 34cents per share. Microchip Technology has raised distributions since 2002. Despite the appealing yield of 5.60% and the possibility for gaining diversification in the technology sector, the high payout ratio is a red flag at the moment.
Aaron's, Inc. (AAN) which operates operates as a specialty retailer of consumer electronics, computers, residential and office furniture, household appliances, and accessories, increased its quarterly dividend by 5.9% to 1.8 cents per share. Aaron's, Inc has only raised distributions since 2003. In addition to that the stock currently yields only 0.30%. With EPS of $1.58 in 2008, the company could definitely afford to set up its dividend payments to shareholders a notch.
Of all the stocks raising dividends last week, only Universal Corporation (UVV) looks like an interesting and attractively valued stock that I will consider for further research. Thus do not margin your way into the stock. One problem is that since I already have an allocation to tobacco stocks like Altria (MO) as well as Philip Morris International (PM) however, I do not want to be over allocated to tobacco stocks in general.
Full Disclosure: Long PM and MO
Relevant Articles:
- The case for dividend investing in retirement
- Dividends Stocks versus Fixed Income
- The Hyperinflation Scam
- Philip Morris International versus Altria
Friday, November 6, 2009
Estimating future Dividend Growth
Estimating future dividend growth is difficult if not impossible. Companies which might have had a long history of consistent double digit increases might stop raising dividends and might even cut them. It is easy to predict whether or not a company’s dividend is sustainable in the short run, by evaluating EPS trends, dividend payout ratios and cash flows. It is difficult to forecast however whether the dividend won’t be cut several years down the road.
Financial companies such as Bank of America (BAC) and US Bancorp (USB) are two prime examples of this. After raising distributions for several decades, and always spotting above average dividend yields, the companies had to cut dividends amidst the global financial crisis of 2007-2009. The stocks were often priced attractively before 2006-2007, with adequately covered dividends, attractive valuations and very good current yields at the time. Fast forward two years and these former dividend darlings have cut their dividends sending retiree’s alternative incomes into a tailspin.
While it is somewhat easier to predict short term movements in dividends, based off the actions in recent years, astute dividend investors need to be aware of the warning signs of a potential dividend cut or freeze.
First, if a company stops producing earnings growth, then chances are that dividend growth would be limited.
Second, if the company has taken on too much debt, it might end up cutting dividends in order to free some cash flows to repay creditors and avoid going under. If the company is already spotting an unsustainable dividend payout ratio out of earnings, chances are that dividends are due for a cut.
Third, while sometimes companies fall on hard times, management could keep raising distributions. This could be due to management’s vision that this setback in company’s fortunes is temporary. In such cases it might be unwise to sell your position, as long as the dividend is at least maintained. If management keeps borrowing money however for over 2 years in a row in order to finance the dividend, this is a warning sign.
And last but not least, while a company might look as a great promising addition for your dividend portfolio, remember to diversify across sectors, yield/growth characteristics and even countries, in order to reduce your portfolio’s systemic risk. Investors who were heavily invested in the financial sector in 2007 and 2008 suffered huge drops in income; investors who held a more balanced mixture of stocks from a variety of industries suffered lower drops in dividend income.
I recently added to my positions in the following stocks, which have recently raised distributions, trade at attractive valuations and have a long history of dividend growth.
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company, which has rewarded shareholders with consistent dividend raises for 47 years, currently yields 3.20%. Using the ten year dividend growth rate for the company at 13.3%, yield on cost on an investment today would double almost every five and a half years on average. (analysis)
The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has raised distributions for 53 years in a row, and currently yields 3.10%. Using the ten year dividend growth rate for the company at 10.7%, yield on cost on an investment today would double almost every seven years on average. (analysis)
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has raised dividends for 33 consecutive years and currently yields 3.90%. Using the ten year dividend growth rate for the company at 27.4%, yield on cost on an investment today would double every two and a half years on average. (analysis)
Emerson Electric Co. (EMR), is a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. Emerson, which currently yields 3.40%, has raised distributions for 52 years in a row. Using the ten year dividend growth rate for the company at 6.3%, yield on cost on an investment today would double every eleven and a half years on average. (analysis)
PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. Pepsi has raised distributions for 37 years in a row, and currently yields 2.90%. I would consider adding to my position there on dips below $60. Using the ten year dividend growth rate for the company at 12.8%, yield on cost on an investment today would double every five and a half years on average. (analysis)
Full Disclosure: Long JNJ, PG, MCD, EMR and PEP
Relevant Articles:
- Should you sell after a dividend freeze?
- Yield on Cost Matters
- The Dividend Edge
- Dividend Investing vs Trading
Financial companies such as Bank of America (BAC) and US Bancorp (USB) are two prime examples of this. After raising distributions for several decades, and always spotting above average dividend yields, the companies had to cut dividends amidst the global financial crisis of 2007-2009. The stocks were often priced attractively before 2006-2007, with adequately covered dividends, attractive valuations and very good current yields at the time. Fast forward two years and these former dividend darlings have cut their dividends sending retiree’s alternative incomes into a tailspin.
While it is somewhat easier to predict short term movements in dividends, based off the actions in recent years, astute dividend investors need to be aware of the warning signs of a potential dividend cut or freeze.
First, if a company stops producing earnings growth, then chances are that dividend growth would be limited.
Second, if the company has taken on too much debt, it might end up cutting dividends in order to free some cash flows to repay creditors and avoid going under. If the company is already spotting an unsustainable dividend payout ratio out of earnings, chances are that dividends are due for a cut.
Third, while sometimes companies fall on hard times, management could keep raising distributions. This could be due to management’s vision that this setback in company’s fortunes is temporary. In such cases it might be unwise to sell your position, as long as the dividend is at least maintained. If management keeps borrowing money however for over 2 years in a row in order to finance the dividend, this is a warning sign.
And last but not least, while a company might look as a great promising addition for your dividend portfolio, remember to diversify across sectors, yield/growth characteristics and even countries, in order to reduce your portfolio’s systemic risk. Investors who were heavily invested in the financial sector in 2007 and 2008 suffered huge drops in income; investors who held a more balanced mixture of stocks from a variety of industries suffered lower drops in dividend income.
I recently added to my positions in the following stocks, which have recently raised distributions, trade at attractive valuations and have a long history of dividend growth.
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company, which has rewarded shareholders with consistent dividend raises for 47 years, currently yields 3.20%. Using the ten year dividend growth rate for the company at 13.3%, yield on cost on an investment today would double almost every five and a half years on average. (analysis)
The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has raised distributions for 53 years in a row, and currently yields 3.10%. Using the ten year dividend growth rate for the company at 10.7%, yield on cost on an investment today would double almost every seven years on average. (analysis)
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has raised dividends for 33 consecutive years and currently yields 3.90%. Using the ten year dividend growth rate for the company at 27.4%, yield on cost on an investment today would double every two and a half years on average. (analysis)
Emerson Electric Co. (EMR), is a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. Emerson, which currently yields 3.40%, has raised distributions for 52 years in a row. Using the ten year dividend growth rate for the company at 6.3%, yield on cost on an investment today would double every eleven and a half years on average. (analysis)
PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. Pepsi has raised distributions for 37 years in a row, and currently yields 2.90%. I would consider adding to my position there on dips below $60. Using the ten year dividend growth rate for the company at 12.8%, yield on cost on an investment today would double every five and a half years on average. (analysis)
Full Disclosure: Long JNJ, PG, MCD, EMR and PEP
Relevant Articles:
- Should you sell after a dividend freeze?
- Yield on Cost Matters
- The Dividend Edge
- Dividend Investing vs Trading
Wednesday, November 4, 2009
The Dividend Investment Journey
Most investors have specific goals in mind they pick a certain strategy to utilize. They then get to pick strategies that could help them achieve those goals. The end result from this exercise is that too often investors end up bailing out on strategies at the worst possible times. The reason for that is that they weren’t prepared for the rocky rides that would ultimately lead them to reach their goals later.
Some investors are comfortable utilizing strategies that deliver small positive results to them in a consistent manner. Dividend investing is one such strategy, where investors are frequently rewarded for holding a portfolio of the best dividend stocks, by receiving dividends. Selling covered calls is another example of a strategy where investors are rewarded frequently with small gains.
Other investors however are more comfortable to shoot for the big payout coupled with a lot of small losses. The big payout could erase any small losses previously incurred. Purchasing out of the money call or put options, which is what Nassim Taleb does, or purchasing speculative biotech stocks hoping for a positive FDA announcement are two examples of such approaches.
It is important to understand your strategy very well in order to make sure that it fits your investor profile. Dividend investing is a pretty slow and sometimes boring process of selecting companies that have raised distributions for a define set of years, provided that they are trading at attractive valuations. It involves a little bit of work when dollar cost averaging at regular intervals, rebalancing portfolio weightings and reinvesting dividends selectively. Other than that however it is nothing “exciting” to talk about in the first few years of employing this strategy. Only after a few years later however, as the stream of dividend income becomes larger and exceeds what you could be making at a part time job, does the enterprising dividend investor begin to see a material effect of employing this strategy.
In the meantime the boredom could play mind tricks on dividend investors, which are constantly bombarded with news about the stock market and the economy. Sometimes the information overload could generate intense urge for meaningless action, which would be disastrous to investment returns over time.
For example, some investors consider yields on cost of 10% as a pretty good thing. The way that most novice investors deal in attaining this goal however is by purchasing companies yielding 10% or more, without checking the fundamentals and sustainability behind this dividend payment. Back in the summer of 2008 Bank of America (BAC) was yielding over 10% on several occasions. Investors hoped that the dividend won’t get cut and that a rise in the stock price would bring the yield back to normal levels. Little did they know that the company would cut dividends twice in 6 months and end up yielding less than 0.25%.
The strategy that has worked best for many dividend growth investors is to purchase stocks in strong brand names such as Procter & Gamble (PG), Johnson & Johnson (JNJ), Wal-Mart (WMT) and Pepsi Co (PEP). Such stocks have the ability to generate strong earnings growth, which then trickles back to increased dividend payments. Some investors still ignore such investments however, since they have dividend yields of 3% - 4%. What these investors fail to see is that if these companies could grow their distributions at least at a rate of 7% annually, they would end up doubling their distributions every decade. A 4% yielder with sustainable dividend payout ratio today would likely generate an 8% yield on cost after ten years.
The followin dividend aristocrats are good starting positions for many dividend investors:
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has increased distributions for 47 years in a row. (analysis)
PepsiCo, Inc.(PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. This dividend aristocrat has increased distributions for 37 consecutive years. (analysis)
The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. This dividend aristocrat has increased distributions for over 53 consecutive years. (analysis)
Wal-Mart Stores, Inc. (WMT) operates the largest chain of retail stores in various formats worldwide. This dividend aristocrat has consistently increased distributions for 35 years. (analysis)
At the end of the day, what truly matters is that you reach your financial goals, not when you started investing or how fast you were going. There truly aren’t any short cuts to investing other than the fact that slow and steady always wins the race, while the hare would most likely spend most of their time catching up.
Full Disclosure: Long JNJ, PEP, PG and WMT
Relevant Articles:
- What Dividend Growth Investing is all about?
- 10 by 10: A New Way to Look at Yield and Dividend Growth
- Why do I like Dividend Aristocrats?
- Dollar Cost Averaging
Some investors are comfortable utilizing strategies that deliver small positive results to them in a consistent manner. Dividend investing is one such strategy, where investors are frequently rewarded for holding a portfolio of the best dividend stocks, by receiving dividends. Selling covered calls is another example of a strategy where investors are rewarded frequently with small gains.
Other investors however are more comfortable to shoot for the big payout coupled with a lot of small losses. The big payout could erase any small losses previously incurred. Purchasing out of the money call or put options, which is what Nassim Taleb does, or purchasing speculative biotech stocks hoping for a positive FDA announcement are two examples of such approaches.
It is important to understand your strategy very well in order to make sure that it fits your investor profile. Dividend investing is a pretty slow and sometimes boring process of selecting companies that have raised distributions for a define set of years, provided that they are trading at attractive valuations. It involves a little bit of work when dollar cost averaging at regular intervals, rebalancing portfolio weightings and reinvesting dividends selectively. Other than that however it is nothing “exciting” to talk about in the first few years of employing this strategy. Only after a few years later however, as the stream of dividend income becomes larger and exceeds what you could be making at a part time job, does the enterprising dividend investor begin to see a material effect of employing this strategy.
In the meantime the boredom could play mind tricks on dividend investors, which are constantly bombarded with news about the stock market and the economy. Sometimes the information overload could generate intense urge for meaningless action, which would be disastrous to investment returns over time.
For example, some investors consider yields on cost of 10% as a pretty good thing. The way that most novice investors deal in attaining this goal however is by purchasing companies yielding 10% or more, without checking the fundamentals and sustainability behind this dividend payment. Back in the summer of 2008 Bank of America (BAC) was yielding over 10% on several occasions. Investors hoped that the dividend won’t get cut and that a rise in the stock price would bring the yield back to normal levels. Little did they know that the company would cut dividends twice in 6 months and end up yielding less than 0.25%.
The strategy that has worked best for many dividend growth investors is to purchase stocks in strong brand names such as Procter & Gamble (PG), Johnson & Johnson (JNJ), Wal-Mart (WMT) and Pepsi Co (PEP). Such stocks have the ability to generate strong earnings growth, which then trickles back to increased dividend payments. Some investors still ignore such investments however, since they have dividend yields of 3% - 4%. What these investors fail to see is that if these companies could grow their distributions at least at a rate of 7% annually, they would end up doubling their distributions every decade. A 4% yielder with sustainable dividend payout ratio today would likely generate an 8% yield on cost after ten years.
The followin dividend aristocrats are good starting positions for many dividend investors:
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has increased distributions for 47 years in a row. (analysis)
PepsiCo, Inc.(PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. This dividend aristocrat has increased distributions for 37 consecutive years. (analysis)
The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. This dividend aristocrat has increased distributions for over 53 consecutive years. (analysis)
Wal-Mart Stores, Inc. (WMT) operates the largest chain of retail stores in various formats worldwide. This dividend aristocrat has consistently increased distributions for 35 years. (analysis)
At the end of the day, what truly matters is that you reach your financial goals, not when you started investing or how fast you were going. There truly aren’t any short cuts to investing other than the fact that slow and steady always wins the race, while the hare would most likely spend most of their time catching up.
Full Disclosure: Long JNJ, PEP, PG and WMT
Relevant Articles:
- What Dividend Growth Investing is all about?
- 10 by 10: A New Way to Look at Yield and Dividend Growth
- Why do I like Dividend Aristocrats?
- Dollar Cost Averaging
Monday, November 2, 2009
Nine stocks with increasing distributions
I typically try to summarize each week’s dividend increases in the news by outlining the company that raised distributions and whether it is an achiever or not. Just because I list a stock in an article however does not mean I am recommending it. Identifying the dividend raisers each week however helps me in finding out quality dividend stocks which either should be bought on dips or after they have raised distributions for at least a decade. Even if a list contains some interesting stock ideas however, this does not mean that one should blindly enter a position in such securities. Only after one understands whether such a stock could grow earnings into the future in order to support a growing dividend, should they start accumulating a position over time.
Questar Corp (STR), which engages in gas and oil exploration and production, midstream field services, energy marketing, interstate gas transportation, and retail gas distribution businesses, increased its quarterly dividend by 4% to 13 cents per share. Questar Corp is a dividend aristocrat, which has raised distributions for 30 consecutive years in a row. The stock currently yields only 1.30%.
Stryker Corporation (SYK), which operates as a medical technology company worldwide, has declared a cash transition dividend of $0.10 per share, payable December 16, 2009, to shareholders of record at the close of business on November 18, 2009. The transition dividend will increase the total dividends paid in 2009 to $0.50 per share, up 52% from the $0.33 per share paid in 2008. Subject to further action by the Company's Board of Directors, the Company anticipates the first quarterly dividend to be paid in January 2010 at a targeted quarterly rate of $0.15 per share. Stryker Corporation is a dividend achiever, which has raised distributions for 16 consecutive years in a row. The stock yields 1.30%, based off its new quarterly rate of 15 cents/share.
Middlesex Water Company (MSEX), which operates as a food company in North America and internationally, increased its quarterly dividend by 2.5% to 20.50 cents per share. Middlesex Water Company is a dividend champion, which has raised distributions for 36 consecutive years in a row. The stock currently yields 4.60%.
Inergy Holdings GP LLC (NRGP), the general partner of propane supplier Inergy LP, on Monday said it will increase its quarterly cash distribution 9 percent for the three-month period ended Sept. 30. The company will raise its distribution to 85 cents per limited partner unit, up from the previous quarter's distribution of 78 cents per limited partner unit. Separately, Inergy GP LLC (NRGY), managing general partner of Inergy LP, said its board of directors increased its quarterly cash distribution to 67.5 cents per limited partner unit for the quarter ended Sept. 30. This represents the 32nd consecutive quarterly increase and an approximate 6.3% increase over the distribution for the same quarter of the prior year. Inergy, L.P., with headquarters in Kansas City, Mo., is among the fastest growing master limited partnerships in the country. The company’s operations include the retail marketing, sale, and distribution of propane to residential, commercial, industrial, and agricultural customers. Inergy Holdings GP LLC (NRGP), currently yields 7% , while Inergy GP LLC (NRGY) yields 8.80%.
The following stocks announced their intent to raise distributions to shareholders:
Visa, Inc. (V) which operates retail electronic payments network worldwide increased its quarterly dividend by 19% to 12.50 cents per share. The stock currently yields 0.70%.
Strayer Education Inc. (STRA), which provides various academic programs in traditional classroom courses and online via the Internet, increased its annual dividend by 50% to $3 per share. Strayer Education Inc. has consistently raised distributions since 2005. The stock currently yields 0.90%.
SouthWest Water Company (SWWC), which provides water and wastewater related services principally in the United States, doubled its quarterly dividend to 5 cents per share. SouthWest Water Company is a dividend achiever. The weird part here is that the previous dividend of 2.5 cents/share was below the quarterly dividend of 6 cents/share paid in 2008. The stock currently yields 3.70%.
American Financial Group (AFG), which engages in property and casualty insurance business in the United States, increased its quarterly dividend by 5.8% to 13.75 cents per share. American Financial Group has consistently raised distributions only since 2006. The stock currently yields 2.10%.
Full Disclosure: None
Relevant Articles:
- Another aristocrat raising distributions
- Four Notable Dividend Increasers in the news
- The return of the financial dividends
- Best Dividend Picks for 2009, 3Q update
Questar Corp (STR), which engages in gas and oil exploration and production, midstream field services, energy marketing, interstate gas transportation, and retail gas distribution businesses, increased its quarterly dividend by 4% to 13 cents per share. Questar Corp is a dividend aristocrat, which has raised distributions for 30 consecutive years in a row. The stock currently yields only 1.30%.
Stryker Corporation (SYK), which operates as a medical technology company worldwide, has declared a cash transition dividend of $0.10 per share, payable December 16, 2009, to shareholders of record at the close of business on November 18, 2009. The transition dividend will increase the total dividends paid in 2009 to $0.50 per share, up 52% from the $0.33 per share paid in 2008. Subject to further action by the Company's Board of Directors, the Company anticipates the first quarterly dividend to be paid in January 2010 at a targeted quarterly rate of $0.15 per share. Stryker Corporation is a dividend achiever, which has raised distributions for 16 consecutive years in a row. The stock yields 1.30%, based off its new quarterly rate of 15 cents/share.
Middlesex Water Company (MSEX), which operates as a food company in North America and internationally, increased its quarterly dividend by 2.5% to 20.50 cents per share. Middlesex Water Company is a dividend champion, which has raised distributions for 36 consecutive years in a row. The stock currently yields 4.60%.
Inergy Holdings GP LLC (NRGP), the general partner of propane supplier Inergy LP, on Monday said it will increase its quarterly cash distribution 9 percent for the three-month period ended Sept. 30. The company will raise its distribution to 85 cents per limited partner unit, up from the previous quarter's distribution of 78 cents per limited partner unit. Separately, Inergy GP LLC (NRGY), managing general partner of Inergy LP, said its board of directors increased its quarterly cash distribution to 67.5 cents per limited partner unit for the quarter ended Sept. 30. This represents the 32nd consecutive quarterly increase and an approximate 6.3% increase over the distribution for the same quarter of the prior year. Inergy, L.P., with headquarters in Kansas City, Mo., is among the fastest growing master limited partnerships in the country. The company’s operations include the retail marketing, sale, and distribution of propane to residential, commercial, industrial, and agricultural customers. Inergy Holdings GP LLC (NRGP), currently yields 7% , while Inergy GP LLC (NRGY) yields 8.80%.
The following stocks announced their intent to raise distributions to shareholders:
Visa, Inc. (V) which operates retail electronic payments network worldwide increased its quarterly dividend by 19% to 12.50 cents per share. The stock currently yields 0.70%.
Strayer Education Inc. (STRA), which provides various academic programs in traditional classroom courses and online via the Internet, increased its annual dividend by 50% to $3 per share. Strayer Education Inc. has consistently raised distributions since 2005. The stock currently yields 0.90%.
SouthWest Water Company (SWWC), which provides water and wastewater related services principally in the United States, doubled its quarterly dividend to 5 cents per share. SouthWest Water Company is a dividend achiever. The weird part here is that the previous dividend of 2.5 cents/share was below the quarterly dividend of 6 cents/share paid in 2008. The stock currently yields 3.70%.
American Financial Group (AFG), which engages in property and casualty insurance business in the United States, increased its quarterly dividend by 5.8% to 13.75 cents per share. American Financial Group has consistently raised distributions only since 2006. The stock currently yields 2.10%.
Full Disclosure: None
Relevant Articles:
- Another aristocrat raising distributions
- Four Notable Dividend Increasers in the news
- The return of the financial dividends
- Best Dividend Picks for 2009, 3Q update