Dividend Aristocrats List for 2010

The dividend aristocrats list includes companies which have increased dividends for over 25 years in a row. It is equally weighted and re-balanced once an year. Over the past 3,5 and 7 years the index of elite dividend stocks has managed to outperform the S&P 500 by 5%, 3.7% and 4.40% respectively.

The companies which were added to the index for 2010 include:

Brown-Forman Corporation (BF.B ) engages in the manufacture, bottling, import, export, and marketing of alcoholic beverage brands.

Cintas Corporation (CTAS) provides corporate identity uniforms and related business services in the United States and Canada. The company operates through four segments: Rental Uniforms and Ancillary Products; Uniform Direct Sales; First Aid, Safety, and Fire Protection Services; and Document Management Services.

I expected that these two companies could be good additions to the index in The New Dividend Aristocrats.

The companies which were removed from the index include:

Avery Dennison Corp (AVY) (analysis)

BB&T Corp (BBT) (analysis)

Gannett Co (GCI) (analysis)

General Electric (GE) (analysis)

Johnson Controls (JCI) (analysis)

Legg Mason (LM) (analysis)

M & T Bank (MTB) (analysis)

Pfizer (PFE) (analysis)

State Street (STT) (analysis)

US Bancorp (USB) (analysis)

In 2008 the dividend aristocrats’ index outperformed the S&P 500 by 15.50 percent. The dividend aristocrats lost 21.55% in 2008 versus the 37.00% loss for the S&P 500. So far in 2009 ( as of December 24) the S&P Dividend Aristocrats index is up 27.82%,, which is better than the 27.70% performance of S&P 500. Over the past 5 years the index has returned 3.81%, versus 0.71% for S&P 500.

Just because a company is on the list does not automatically make it a buy. Investors should make sure not to overpay for stocks, and should not overconcentrate in certain sectors. The complete list for 2010 could be found below:



To view the full list of Dividend Aristocrats in 2009, check out Standard and Poors website.

This article was included in the Carnival of Personal Finance #239 – Hot Money Trends of 2010 Edition

Full Disclosure: Long MTB

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Bristol-Myers Squibb, Two other companies raise dividends

The last two weeks of December are typically characterized by low trading volumes, a lot of market holidays and few news regarding dividend increases. Nevertheless when a company announces its intent to raise distributions, it generally sends a positive message to markets and shareholders, especially when a company is paying at least a decent dividend yield. Several companies announced dividend increases over the past week, including Bristol-Myers Squibb (BMY), which continued the positive momentum of dividend raises that Pfizer (PFE) started earlier in the month.

Bristol-Myers Squibb Company (BMS) engages in the discovery, development, licensing, manufacture, marketing, distribution, and sale of pharmaceuticals and nutritional products worldwide. It operates in two segments, Pharmaceuticals and Nutritionals. The pharmaceuticals giant increased its quarterly dividend by 3.2% to 32 cents per share. Bristol-Myers Squibb does not have a consistent history of dividend increases. The stock currently yields 5.00%.
“This dividend increase reflects our ongoing commitment to deliver shareholder value,” said James M. Cornelius, chairman and chief executive officer of Bristol-Myers Squibb. “We have made excellent progress in executing our strategy and we are confident in the strength of our BioPharma business. Our performance has helped put us in a strong cash position today and we expect solid cash flows to continue in the years ahead.”

The Ensign Group, Inc (ENSG), which provides nursing and rehabilitative care services in California, Arizona, Texas, Washington, Utah, Idaho, and Colorado, increased its quarterly dividend by 11% to 5 cents per share. This is the second consecutive dividend increase for the Ensign Group, Inc since the company went public in 2007. The stock currently yields 1.30%.

Franklin Resources, Inc. (BEN), which manages families of equity, fixed income, and balanced mutual funds for its clients, increased its quarterly dividend by 5% to 22 cents per share. The investment manager also declared a special dividend of $3/share. Franklin Resources, Inc. is a dividend champion, which has increased its quarterly dividend in each of the past twenty nine years. The stock currently yields 0.90%.

Full disclosure: None

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Capital gains for dividend investors

The market is efficient enough sometimes to discount events and experience moves even before important pieces of information are distributed to all market participants. How many times have we seen a large increase in prices on above average volume for companies on virtually no news, only to find out that the company is going to be acquired at a hefty premium several days later?

At the end of the day, dividend growth investors expect that a company that regularly increases dividends would also lead to a higher stock price. This would leave current yields little changed for many years.

When the market goes up, 80%-90% of all stocks follow its moves. When it goes down 70% of companies go lower in tandem with it. While dividend investors do care mostly about stability and growth of their dividend income, capital gains are important as well.

While dividends have produced about 40% of average annual returns each year over the past 8 decades, capital gains are important as well. If investors believe that the company’s performance over time would improve, they would bid up the stock price. While the dividend payment would have increased roughly at the same rate as the growth in stock prices, the current yield could be unchanged. This would leave many novice investors wondering why anyone would waste their time and effort purchasing a stock which yields 2% - 4%, when other companies offer much higher current dividend yields. What they fail to notice is that the yield on cost on the original investment several years ago is much higher than the current yield.

If markets believed that the dividend growth is sustainable, the stock price would correct itself and bring the yield to about market level. This brings in some capital gains, which further compounds the wealth of the dividend investor. If investors as a group do not expect that the company’s dividend growth is sustainable, they would simply leave the price unchanged or lower over a period of time.

Mr market might be telling you something about a company that successfully increases its dividends while the stock price is down or flat. Let’s look at Pfizer (PFE). The company used to boast a record of 41 consecutive annual dividend increases. The pharmaceuticals giant cut its dividend in 2009, ending this streak. Investors might have expected that Pfizer’s long term position of a dividend growth stock is in jeopardy, as the stock price dropped from 50 to 13, pushing the yield to 10%. At the end of the day investors not only suffered from the reduced dividend income after the cut, but also from capital losses over the past decade.

A similar situation occurred with General Electric (GE), which also had a long streak of dividend increases, until it also cut its distributions in February 2009. The company’s stock price has had a rough decade, falling from 60 to 6 before partially recovering to 16. In the meantime the company’s current yield increased several times to over 10%, until the company cut its distributions by more than 60%. It definitely pays to listen to the collective wisdom of stock prices most of the times, although not at all times.

Procter & Gamble (PG) in the 1970s tells us a completely different story. The company had already established itself as a solid dividend achiever and kept rewarding shareholders with annual raises, while the stock price appeared uninterested in the general improvement of the company’s finances.

At the end of the day it is important to purchase the best dividend stocks that would throw off a rising dividend income stream. It is also important however to not completely ignore capital gains as well.

This post was included in the The Carnival of Personal Finance #238 – 5 Tricks To Keep Your Resolutions For The Year Edition

Full Disclosure: Long PG

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AT&T Raises Distributions by 2.4%

Several companies raised distributions last week. I have included my take on most of them below:

AT&T (T), which is one of the top telecommunications companies in the US, increased its quarterly dividend by 2.40% to 42 cents per share. AT&T is a dividend champion, which has increased its quarterly dividend in each of the past twenty-six consecutive years. The stock currently yields 6.00%. (analysis)

“Our 26th consecutive annual dividend increase underscores the Board’s continued commitment to stockholders and confidence in our strong financial position,” said Randall Stephenson, AT&T chairman and chief executive officer." (AT&T press release)

This was the slowest dividend increase for the telecom company in 8 years. The reason could be because it has a very high payout ratio of 83%, which leaves little room for further dividend increases, without a substantial increase in earnings per share. I do own some AT&T stock, as part of my dividend grouping strategy.

Pfizer Inc. (PFE), which engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals worldwide, increased its quarterly dividend by 12.5% to 18 cents per share. The stock currently yields 3.90%. The company cut its dividend in early 2009 after announcing its intent to acquire rival Wyeth in a 68 billion deal. Although the dividend appears to be well covered today, the business model which had previously allowed Pfizer to raise dividends for 41 years appears to be broken. Over the past decade the company has acquired new drugs through acquiring rivals and not organically through R&D. Without solid underlying strength in fundamentals, which would propel future earnings growth, the possibility for a long-term sustained dividend growth is low.

Dominion Resources (D), which engages in the generation, transmission, and distribution of electricity. The company generates electricity through coal, nuclear, gas, and oil resources, increased its quarterly dividend by 4.60% to 45.75 cents per share. This is the seventh consecutive year in which Dominion Resources has raised its quarterly dividend. Dominion Resources (D) does look like an interesting utility company, with one of the lowest payout ratios in the industry plus some solid earnings and dividend growth. The only issue is that the company does not have a long history of raising distributions. The stock currently yields 4.50%.

Hatteras Financial Corp (HTS) invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by the United States Government agency, or by the United States Government-sponsored entity. The company announced its fourth consecutive distribution increase to $1.20/share. The new dividend is 4.3% higher than its Q3 dividend, and 20% higher than the distribution from this time last year. The stock currently yields 15.80%. While the yield might be tempting it is important to understand that the company makes money by borrowing money using short-term rates and then investing it in long-term government agency bonds, while earning a return in the process. This exposes the company to fluctuations in interest rates. If the FED starts raising rates in 2010, companies like HTS might be negatively affected in the process.

Waste Management, Inc. (WM), which offers collection, transfer, recycling, disposal, and waste-to-energy services, increased its quarterly dividend by 8.60% to 31.5 cents per share. This marks the sixth consecutive year that the Company has increased its quarterly dividend. The stock currently yields 3.50%.

Urstadt Biddle Properties Inc. (UBA), which is a real estate investment trust (REIT), that engages in the acquisition, ownership, and management of commercial real estate properties in the United States, increased its quarterly dividend from 24 to 24.25 cents per share. Urstadt Biddle Properties Inc. is a dividend achiever, which has increased its quarterly dividend for ten years. The stock currently yields 6.20%.

BCE Inc. (BCE), which provides a suite of communication services to residential and business customers in Canada, increased its quarterly dividend by 7% to 43.5 cents per share. This is BCE's third increase to the annual common share dividend since the termination of its proposed privatization agreement in December 2008. The stock currently yields 5.90%.

Moody's (MCO) provides credit ratings and related research, data, and analytical tools; quantitative credit risk measures, risk scoring software, and credit portfolio management solutions; and securities pricing software and valuation models principally in the United States and Europe. The company boosted its quarterly payment by 5% to 10.5 cents per share. This is the first dividend increase for Moody's since the company froze its distributions in 2008. The stock currently yields 1.60%.

General Mills (GIS), which engages in the manufacture and marketing of branded consumer foods worldwide, increased its quarterly dividend by 4.2% to 49 cents per share. General Mills has increased its quarterly dividend in each of the past six consecutive years. The stock currently yields 2.80%.

Full Disclosure: Long AT&T

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Stanley Works (SWK) Dividend Stock Analysis

The Stanley Works manufactures tools and engineered security solutions worldwide. The company, which has raised dividends for 42 consecutive years, is a member of the S&P Dividend Aristocrats index.

Since 1999 this dividend stock has delivered an average total return of 8.10% annually.

The company has managed to deliver a 6% average annual increase in its EPS between 1999 and 2008. Analysts expect Stanley Works to earn $2.42 share next year, followed by an increase to $3.06/share in the year after that. Back in November 2009, Stanley Works announced its intent to acquire Black & Decker (BDK) in an all stock deal subject to regulatory and shareholder approvals. The combined companies could realize significant synergies and enjoy a wider product base with little overlap between the two businesses. In addition to that the company is in the process of eliminating 10% of its staff, which could help offset weaker sales this year.

Return on Equity has fluctuated widely between 9% and 21% over the past decade. This indicator has spend of the time in the high teen’s however. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 4.20% annually since 1999, which is much slower than the growth in EPS. A 4 % growth in dividends translates into the dividend payment doubling every eighteen years. If we look at historical data, going as far back as 1968, Stanley Works has actually managed to double its dividend payment every ten years on average.

The dividend payout ratio has consistently remained below 50% over the past five years. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently the Stanley Works is overvalued at 22 times earnings, yields 2.70% and has an adequately covered distribution payment. Although the Black & Decker acquisition could be accretive to EPS, it could jeopardize the already weakened growth in distributions for Stanley Works such that the company freezes its payment for a few years. If it keeps raising distributions however I would look to enter a small position in Stanley Works (SWK) on dips below $44.

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Inflation Proof your income in retirement with Dividend Stocks

Build your own inflation proof source of income in retirement with dividend stocks

Investors who are worried about inflation but want to protect their principal are often told to invest in Treasury Inflation Protected Securities, which are indexed for inflation. In other words, investors yield and principal are indexed to the CPI and adjusted as the CPI rises over time. This sounds like the perfect deal of a lifetime, except for two caveats.

First, the yields on short and medium term and even longer term TIPs (TIP) have been very low as of recently, indicating that any income growth would be derived solely from inflation. Second, some investors are afraid that the CPI number does not account for the actual inflation. Even a small difference of 1% annually compounded over a long period of time would make a difference in your retirement budget. There is also the factor that the basket of goods and services, which are used to calculate it, is different than the basket of goods and services that an individual investor uses.
So how can investors create an inflation proof source of income in retirement?

A very good solution is to create a diversified portfolio of at least 30 stocks, purchased over time. Try not to overpay for them, and make sure that they are in a market where earnings growth could be achieved. Without earnings growth, dividend growth is impossible to achieve for any sustainable period.

An investor whose main expense items are utilities, fast food, groceries, cigarettes and liquor as well as personal care items could build their own inflation proof source of income in retirement with the following dividend stocks:

Consolidated Edison, Inc.(ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. For example lets look at an investor whose monthly electric expense is about $100/month. They could purchase $20,000 worth of a basket of utilities stocks with long history of consistent dividend increases that yield 6%, in order to generate enough dividend income to never have to worry about this particular bill again. Con Edison is just one stock that could fit the characteristic. (analysis)

AT&T Inc. (T) operates as a communications holding company. Its subsidiaries and affiliates provide the AT&T brand services in the United States and internationally. What's better than having your landline or cellphone bill paid directly from your telecom company? If you spend $40/month on telecom services, you would need to invest approximately $8,000 in AT&T (T) stock. (analysis)

McDonald's Corporation (MCD), together with its subsidiaries, franchises and operates McDonald's restaurants in the food service industry worldwide. A $10,000 investment in McDonald's could provide enough income to purchase to purchase at least one big mac meal every week. (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. By purchasing enough Wal-Mart stock, dividend investors could receive sufficient income to pay at least a portion of their grocery expenses. (analysis)

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in the United States and internationally. By investing in Altria, investors could essentially pay for their tobacco expenses. (analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. Exposure to real estate would help investors hedge their rent expense. (analysis)

If you would like to have your consumer products "for free" you could invest in consumer prodcuts giants Johnson & Johnson (JNJ) and Procter & Gamble (PG). Johnson & Johnson engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Check my analysis of this dividend aristocrat. The Procter & Gamble Company on the other hand engages in the manufacture and sale of consumer goods worldwide. The company has raised dividends every year for over half a century. (analysis)

In order to generate enough to pay for your gas expenses, a dividend investor might consider investing in one of the oil majors such as Exxon Mobil (XOM) or Chevron Texaco (CVX). Thus this investor would have the dividends received from these companies essentially pay for his or her annual gas expenses.

This article should really get you thinking not only about generating sufficient inflation adjusted income stream in retirement, but also about cutting unnecessary costs to the bone. Most novice dividend investors believe that simply purchasing the highest yielding stocks would do the trick of generating a sufficient dividend income stream for the next 3-4 decades. If a company is already paying most of its earnings out as dividends, chances are its ability to reinvest in the growth of the business are extremely strained. Because of the low growth expectations the market could assign a high current yield to this stock. Thus, an investor relying on this dividend stock might realize that it has failed to keep up with inflation and that he would have to downgrade his lifestyle.

Full Disclosure: I have positions in all stocks mentioned above

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7 Dividend Raisers for the week

The financial crisis of 2007-2009 led to dividend cuts in many financial companies. Investors who were heavily concentrated in the financial sector suffered in the process. Other dividend investors who maintained a balanced income portfolio however saw their dividend income not only stabilize but also increase, as most prominent non-financial dividend stocks continued raising or maintaining distributions. For those investors who kept receiving dividend checks it seemed as if the financial crisis is something that did not affect them. Companies which raised distributions in the face of adversity in the overall economy show that they have sufficient liquidity to invest and grow their operations and also to share their results with stockholders.

Several companies raised distributions last week. Two of them include companies which had previously cut their distributions to shareholders:

Valspar Corporation (VAL), which manufactures and distributes coatings, paints, and related products primarily in the United States and internationally., increased its quarterly dividend by 6.70% to 16 cents per share. Valspar Corporation is a dividend champion, which has increased its quarterly dividend in each of the past twenty-nine consecutive years. The stock currently yields 2.20%. (analysis)

Erie Indemnity Company (ERIE), which provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange primarily in the Midwest, mid-Atlantic, and southeast regions of the United States, increased its quarterly dividend by 6.7% to 48 cents per share. Erie Indemnity Company is a dividend achiever, which has increased its quarterly dividend for almost twenty years in a row. The stock currently yields 4.80%.

Edison International (EIX), which engages in the supply of electric energy in central, coastal, and southern California, increased its quarterly dividend by 1.6% to 31.5 cents per share. Edison International has increased its quarterly dividend since 2005. If we expand our time horizon however, it seems that Edison International has cut dividends in 1994 and 2004. The stock currently yields 3.50%.

DPL Inc. (DPL), which operates as a regional electric energy company in the United States., increased its quarterly dividend by 6.10% to 30.25 cents per share. DPL Inc. has regularly raised distributions since 2003. The stock currently yields 4.10%.

Brandywine Realty Trust (BDN), is a REIT which owns, develops and manages a primarily Class A, suburban and urban office portfolio aggregating 34.9 million square feet, including 25.6 million square feet which it owns on a consolidated basis. The company boosted its quarterly dividend by 50% to 15 cents per share. Brandywine Realty Trust is not a consistent dividend grower, as it cut its distributions from 44 to 10 cents earlier in 2009. The stock currently yields 3.90%.

Horace Mann Educators Corporation (HMN), which markets and underwrites personal lines of property and casualty insurance, retirement annuities, and life insurance in the United States, increased its quarterly dividend by 52% to 8 cents per share. Horace Mann Educators Corporation cut its distributions in 2008 from 10.5 cents to 5.3 cents/share. The stock currently yields 2.60%.

Western Union (WU), which provides money transfer and bill payment services worldwide, increased its quarterly dividend by 500% to 6 cents per share. In addition to that the company’s board of directors authorized a new $1 billion share repurchase authorization. The stock would yield a little over one percent after the boost.

Of the companies raising distributions last week, the two utilities look like an interesting addition for investors who might be looking for current income. Their distributions seem adequately covered, although their yields look a little low for utilities. In addition to that I require at least a decade of raising distributions, before I start analyzing companies fully. Erie Indemnity (ERIE) does not seem to have a well covered distribution, while Valspar Corporation (VAL) does have a well covered dividend despite the fact that it is a low yielder. The rest of the companies need a longer history of consistent distribution increases in order to raise interest of serious dividend growth investors.

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McCormick & Company (MKC) Dividend Stock Analysis

McCormick & Company, Incorporated, a specialty food company, engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. It operates in two segments, Consumer and Industrial. The company, which has raised dividends for 23 consecutive years, is a member of the Mergent’s dividend achievers index. Back in November McCormick & Company increased its quarterly dividend by 8.30% to 26 cents per share

Since 1999 this dividend growth stock has delivered an average total return of 10.70% annually.

The company has managed to deliver a 11.70% average annual increase in its EPS between 1999 and 2008. Analysts expect McCormick & Company to earn $2.33 share next year, followed by an increase to $2.51/share in the year after that. The company is in the middle of a cost restructuring program, where annual savings have reached almost 56 million in 2008. In addition to that the company is trying to grow through acquisitions, which add to its diverse portfolio of consumer and industrial brands.

Although the Return on Equity is high at 23.90%, it is below its highs in the early 2000s. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by an average of 11.10% annually since 1999, which is commensurate with the growth in EPS.

An 11 % growth in dividends translates into the dividend payment doubling every six and a half years. If we look at historical data, going as far back as 1990, McCormick & Company has actually managed to double its dividend payment every six years on average.

The dividend payout ratio has consistently remained below 50% over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently the McCormick & Company is attractively valued at 17.8 times earnings, yields 2.90% and has an adequately covered distribution payment. I would look to enter McCormick & Company (MKC) on dips below $34.

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When to break your rules

As a dividend growth investor, my strategy is picking the right stocks that provide a decent balance between dividend yield and distribution growth. Thus I have maintained a rigid requirement for a 3% initial yield before investing in a dividend growth company’s securities.
Most dividend investors look for yield when purchasing income securities. Most dividend growth investors purchase securities so that they could enjoy a rising stream of dividend payments over time. Thus, maintaining a proper balance could be a challenge that could make or break your portfolio.

I realize that using a strict yield criteria I could miss out on potential dividend growth stories such as Wal-Mart (WMT) for example. Wal-Mart has never yielded 3% since it went public in the 1970s. The 29.1% annual dividend growth since 1975 has been truly spectacular however. This means that Wal-Mart’s dividend has doubled every 2.5 years for 34 consecutive years. Wal-Mart has delivered a 23.40% dividend growth since 1985 and a 20.20% dividend growth since 1995. Check my analysis of Wal-Mart.

My rationale behind selecting a minimum yield is to provide me with an adequate margin of safety should the stock stop raising dividends and should the stock price fall or remain flat for a large period of time. In the case of Wal-Mart, the stock has been trading in a range over the past decade. Back in 1999 the stock fluctuated between $70.25 and $38.68 and closed at $69.12. The stock wasn’t yielding much back then – about 0.30%. Even if the dividend were doubling every 2.5 years, it would take a retiree almost 13 years in order to reach a yield on cost of 10%. At the current dividend rate, the stock is actually yielding 1.60% on cost, assuming that you purchased it on the last day of 1999. The actual dividend growth over the past decade comes down to 20.80% per annum, which translates into the dividend payment actually doubling every three and a half years.

Now the down side to my having a strict initial yield requirement for entry is that I would miss out on some huge gains, which could lead to early financial freedom. If one had purchased Wal-Mart stock at the end of 1984, the tenth year in a row in which it increased its dividends, their entry price would have been $1.18 (adjusted for five stock splits) and their initial yield would have been only 0.55% at the time. Fast-forward 25 years and the yield on cost comes out to almost 100%.

Many dividend growth investors tend to project past dividend growth rates into infinity, which seems unsustainable to me. If a company with $1 billion in profits enjoyed a 15% annual growth forever, it would double its net income almost every five years. In reality, as the companies grow larger they would find less opportunities that could sustainably earn them higher incremental returns on investment. For example, with a company like McDonald’s (MCD) people could only eat so much burgers and fries. After a company hits a plateau, EPS growth could largely be sustained by increasing efficiencies, raising prices, repurchasing shares or buying other competitors.

This analysis is not meant to be used as a weapon against Wal-Mart or McDonald’s, which are fine companies. It just goes to show that once shouldn’t solely rely on past data in their investment decisions. Furthermore, projecting past data into the future, without adding a what if analysis of your common sense could prove costly in the long run. In addition, purchasing stocks solely for the dividend growth is as dangerous as chasing high yielding stocks blindly.

As far as my strategy is concerned, I am considering lowering the entry yield criteria to 2% for stocks, which appear to have a sustainable above average dividend growth ahead of them. My target allocation for such stocks would be half of what I would normally allocate to such dividend growth champions such as Johnson & Johnson (JNJ) or Procter & Gamble (PG) however.

Full Disclosure: Long JNJ, MCD, PG and WMT

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8 Dividend Achievers Strike Back

It was only a few months ago that many experts declared dividend investing dead, after almost all financial companies in the US cut or eliminated their distributions to shareholders. In recent months there has been a slow but steady trend of many companies showing their confidence in the economic rebound by raising distributions. Over the past week several dividend payers announced that their boards of directors have approved increases in cash dividends they send out to their stockholders quarterly. Especially bullish was the fact that most of the companies were established dividend payers with long histories of consistent dividend increases.

The companies which raised distributions are listed below:

Nucor Corporation (NUE), engages in the manufacture and sale of steel and steel products in North America, increased its quarterly dividend by 2.9% to 36 cents per share. Nucor Corporation is a dividend achiever, which has increased its quarterly dividend for thirty-six years in a row. The stock currently yields 3.20%. (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) announced its preliminary projections for next year, stating that it expects KMP to declare cash distributions of $4.40 per unit for 2010, a 4.8 percent increase over its 2009 budget target of $4.20 per unit. Kinder Morgan Energy Partners, L.P. (NYSE: KMP) is a leading pipeline transportation and energy storage company in North America. KMP owns an interest in or operates more than 28,000 miles of pipelines and 170 terminals. The company is a dividend achiever, which has increased its quarterly dividend for thirteen years in a row. The stock currently yields 7.40%. (analysis)

Enbridge Inc. (ENB), which engages in the transportation and distribution of crude oil and natural gas primarily in Canada and the United States, increased its quarterly dividend by 15% to 42.5 cents per share. Enbridge Inc. is an international dividend achiever, which has increased its quarterly dividend in each of the past fifteen years. The stock currently yields 3.20%.

New Jersey Resources (NJR), which provides retail and wholesale energy services in two segments, Natural Gas Distribution and Energy Services, increased its quarterly dividend by 9.7% to 34 cents per share. New Jersey Resources is a dividend achiever, which has increased its dividend in each of the last twelve years and has paid quarterly dividends since 1952. The stock currently yields 3.40%.

Universal Health Realty Income Trust (UHT), which is a real-estate investment trust which invests in health care and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings, increased its quarterly dividend from 59.5 cents to 60 cents per share. Universal Health Realty Income Trust is a dividend achiever, which has increased its quarterly dividend for twenty-two consecutive years. The stock currently yields 7.90%.

Lincoln Electric Holdings, Inc. (LECO), which manufactures and resells welding and cutting products worldwide, increased its quarterly dividend by 3.7% to 28 cents per share. Lincoln Electric Holdings, Inc. is a dividend achiever, which has increased its quarterly dividend for over fourteen years. The stock currently yields 2.00%.

Graco Inc. (GGG), which supplies technology and expertise for the management of fluids in both industrial and commercial applications, increased its quarterly dividend by 5% to 20 cents per share. Graco Inc. is a potential addition for the dividend achiever’s list, as it has increased its quarterly dividend in each of the past nine years. The stock currently yields 2.60%.

Ecolab Inc. (ECL), which develops and markets products and services for the hospitality, foodservice, healthcare, and light industrial markets in the United States and internationally, increased its quarterly dividend by 11% to 15.5 cents per share. Ecolab Inc. is a dividend achiever, which has increased its quarterly dividend in each of the past eighteen years. The stock currently yields 1.20%.

Comcast Corporation (CMCSA), which provides cable services in the United States, increased its quarterly dividend by 40% to 9.45 cents per share. Additionally, Comcast announced its intent to complete its $3.6 billion share repurchase authorization over the next 36 months. This is the second dividend increase for the cable giant, since it started paying dividends in 2008. The stock currently yields 2.30%.

OGE Energy Corp. (OGE), which operates as an energy and energy services provider offering physical delivery and related services for electricity and natural gas primarily in the south central United States, increased its quarterly dividend by 8% to 14 cents per share. This is the fourth annual dividend increase OGE Energy Corp since 2007. The stock currently yields 4.00%.

Cameco Corporation (CCJ), which operates as a nuclear energy company, increased its annual dividend by 17% to 28 cents per share. The stock currently yields 0.70%.

Hillenbrand, Inc. (HI), which manufactures, distributes, and sells funeral service products to licensed funeral directors operating licensed funeral homes, increased its quarterly dividend by 1.35% to 18.75 cents per share. This is the second consecutive dividend increase for Hillenbrand, Inc.. The stock currently yields 3.90%.

The Toro Company (TTC), which designs, manufactures, and markets turf maintenance equipment and precision irrigation systems to help customers worldwide care for golf courses, sports fields, public green spaces, commercial and residential properties, and agricultural fields, increased its quarterly dividend by 8% to 14 cents per share. The stock currently yields 1.50%.

An important prerequisite of dividend investing is selecting only the stocks which have solid underlying fundamentals which could support a growing distribution over time. In addition to that investors should try not to overpay for equities and should also diversify their holdings in order to protect their dividend income in the event of dividend cuts. That’s why further research of a promising dividend stock is a must, before adding it to your income portfolio.

Full disclosure: Long KMR and NUE

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Kinder Morgan Energy Partners (KMP) Dividend Stock Analysis

Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets in North America. Kinder Morgan is a dividend achiever as well as a component of the S&P 500 index. It has increased distributions for the past 13 years. For the past decade this dividend growth stock has delivered annualized total returns of 17.40 % to its shareholders.

At the same time company has managed to deliver an 14.20% average annual increase in its cash flow per unit since 1999.

The returns on assets have been very stable between 7% and 8% with the exception of 2007.


Annual distributions have increased by 12.10% on average over the past 10 years.
A 12% growth in distributions translates into the dividend payment doubling almost every six years. If we look at historical data, going as far back as 1993, we would see that Kinder Morgan has actually managed to double its dividend payment every five years on average.
The company has several projects worth $6 billion in its pipeline, which should add to incremental distributable cash flow per unit over the next few years.

Over the past decade the distribution payout ratio has been rather stable between 50% and 60%. For this company I used the ratio of current cash flow/unit to the annual distribution/unit. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The main risks for Kinder Morgan include increase in interest rates, which would increase the company’s borrowing costs to finance future projects and make its units less attractive to investors seeking its fat yield. Another risk could include adverse change in the legal structure of master limited partnerships, similar to what has happened to Canadian Royalty trusts. Thus investors should be careful not to have an overweight exposure to Kinder Morgan and Master Limited Partnerships in their portfolios. In addition to that as a mature MLP, the company distributes 50% of incremental cash flows to the general partner, which is higher in comparison to other pipeline operators.

Overall I think that Kinder Morgan is an attractive option for investors seeking current income as well as for those seeking future distribution growth as well. The company currently yields 7.50% and recently announced that it expects to raise its annual distributions to $4.40/unit from this year’s $4.20/unit. The company does have enough distributable cash flow to cover its distributions, in addition to having a stable toll booth type income streams from its pipeline operations.

There is an easy way to invest in Kinder Morgan (KMP) if you do not want to worry about K-1 tax forms. If you choose KMR they would pay their distributions directly as additional shares, which is similar to automatic dividend reinvestment. If you choose to invest in KMP in an IRA, consider investing in KMR . KMR is a great vehicle for taxable accounts as well since their distributions are not taxable when received, and thus shareholders are not issued an annual 1099 tax form. You would pay taxes only when you sell your units.

Full Disclosure: Long Kinder Morgan Energy

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- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
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Top US Dividend Stocks to Accumulate Now

The stock market has been on a consistent bull run since it hit a low in March 2009. As stocks keep hitting new highs for the year however, buyout by the prospect of economic recovery, many value investors are getting nervous about valuations. The P/E ratio on the S&P 500 for example has risen to its highest levels in several years. In addition to that, many dividend stocks, which were once selling at very attractive valuations just a few months ago, are becoming expensive.

There are several ways that the market could correct itself. First, since the market is typically a strong indicator that predicts contractions and expansions in the economic cycle much better than most economists, the current upturn could be a forecaster of economic growth. This would lift earnings, decrease unemployment and bring valuations down to more reasonable levels, without causing any depression in stock market prices overall. If the market is ahead of itself however, it could stay flat for a period of time.

The second option is for the market to collapse and bring valuations to more reasonable levels. It seems that most investors and pundits believe that a severe decline in stock prices is in the cards over the next few months. Since few people seem to believe in the market rally however I strongly believe that it could easily continue.

The third option could be that the market doesn’t correct itself but keeps roaring higher, propelled by expectations of strong corporate earnings. When earnings rebound, stocks won’t look as expensive as they do today.

As a dividend investor I try to allocate some funds into purchasing several stocks every month. The main problem I have been having since July is that the same stocks are appearing on my buy screen for several months now. While it is always good to be able to purchase what you might consider the best dividend stocks in the world, history has definitely showed us that even the bluest of blue chips might not be bulletproof in the long run. It is concerning to add money to the same stocks each and every month, which could make a portfolio more concentrated and less diversified. Valuations are an important factor, which every dividend investor should implement as part of their entry criteria, in order to make sure that they don’t overpay for stocks. Overpaying for stocks could lead to substandard returns over time.

I screened the list of dividend aristocrats for dividend payout ratio of less than 50%, dividend yield of 3% and P/E of less than 20. I did relax the criteria a little bit to include stocks with ucrrent yields of 2.80% as well as those with payout ratios of up to 55%. The stocks which look promising right now include:

As a matter of fact, stocks could continue climbing the wall of worry far longer than anyone could stay sane. Disciplined dividend investors should stick to their strategies in the meantime and refuse to concentrate their portfolios or overpay for stocks. While keeping a portion of your portfolio in cash or fixed income might seem ludicrous given the low interest rates, it could provide some cushion to ones portfolio should the right stocks fall below the right entry prices.

If stocks were to keep going higher in a straight line and if Dow and S&P 500 reach all time highs in the process, by pushing valuations higher and higher, investors would probably be kicking themselves for “missing the boat”. As individual investors however, we are not rewarded based off short term performance, unlike mutual fund managers who have to be invested at all times. Thus, individual investors have an advantage over the pros right now since they could decide for themselves whether paying top dollar for adding to existing stock positions is worth it or not.

Back in 1990’s the stock market was in the midst of a strong bull run, which pushed valuations to stratospheric levels. Investors enjoyed double digit annual increases in stock prices and thus they didn’t care that rising prices pushed dividend yields to very low levels. Fast forward one decade and we are still where we were in the late 1990’s. Even strong blue chip dividend growers such as McDonald’s (MCD), Automatic Data Processing (ADP) and Pepsi Co (PEP) were yielding less than 2% each, which made them largely unsuitable for a dividend growth portfolio at the time.

In order to be successful, a dividend investor has to identify the right dividend growth stocks, establish positions at attractive valuations over time, reinvest dividends selectively and diversify across sectors, industries and continents. These sound strategies would ensure the long term survival of the individual investor even during the most adverse of conditions.

Full Disclosure: Long positions in all of the securities above

- Dividends Stocks versus Fixed Income

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- Dividend Portfolio Investing for monthly income