Sysco Corporation (SYY) Dividend Stock Analysis

Sysco Corporation, through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. The company has raised dividends for forty consecutive years, and is a dividend champion.

Over the past decade, this dividend stock has delivered a total return of 4.40% annually. The stock has been mostly flat over the past ten years.

Over the past decade, Sysco has managed to increase earnings per share by 9.50% annually. The company has bought back 1.50% of its shares outstanding on average over the past decade. Analysts project Sysco to earn $1.99 in FY 2011 followed by $2.15 in FY 2012.

The company has managed to raise annual dividends at a rate of 15.50% annually over the past decade. At 16%, dividends double every four and a half years. Since 1974 the company has managed to double its quarterly dividend payment every four years.

The company’s dividend payout ratio has steadily increased over the past decade. Right now the dividend is sustainable at payout ratio of just under 50%. 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 return on equity has remained steadily over 29% over the past decade, fueled by strong earnings growth. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Overall I find Sysco (SYY) to be attractively valued at a P/E of 14.20 and a yield of 3.50%. Given the adequately covered distribution, and the expectations for modest EPS growth going forward, I view the company as an attractive candidate for a dividend growth portfolio.

Full Disclosure: Long SYY

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Dividend Stocks for the next decade and beyond

Some of the best dividend stocks in the world are characterized by strong competitive advantages, which have allowed them to charge premium prices for their recognizable brands, which in turn have translated into rising profits. Most of those companies are also characterized by high returns on invested capital, which means that they generate more capital than they could successfully reinvest back into the business and still retain their high returns. As a result these companies manage to provide an ever increasing stream of dividend income to their long-term shareholders. While stock prices move higher during bubbles and lower during recessions, investors keep getting paid for holding their stocks. In fact, because dividends keep getting increased, some early investors in companies such as Abbott (ABT) have managed to generate mind-boggling yields on cost of their original investments. These early investors understood very well that a dividend payment should not come at the expense of growing the business and vice versa. While their stocks have typically been characterized by yields similar to those of the market, their dividend growth component has more than paid back for itself.

While dividend growth investing has been hugely successful for many investors, it is very important to understand that it could be profitable for future investors as well. The stocks which have had long histories of rising dividend payments are frequently found in such lists as the S&P Dividend Aristocrats or Mergents’ Dividend Achievers. These stocks are a strong example of newton’s law of physics that a body in motion keeps getting in moition.

The following six stocks have not only delivered consistent annual dividend increases to shareholders, but also above average capital gains over the past decade as well. The companies include:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 48 consecutive years. Over the past decade, the company has managed to increase dividends by 13.50% annually. Yield: 3.40% (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 38 consecutive years. Over the past decade, the company has managed to increase dividends by 9% annually. Yield: 3.40% (analysis)

McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 34 consecutive years. Over the past decade, the company has managed to increase dividends by 26.50% annually. Yield: 3.20% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company is one of the most respected dividend aristocrats, and has consistently increased dividends for 54 years ina row. Over the past decade, the company has managed to increase dividends by 10.70% annually. Yield: 3% (analysis)

Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. This dividend champion has increased distributions for 40 years in a row. Over the past decade, the company has managed to increase dividends by 17% annually. Yield: 3.40% (analysis)

Chevron Corporation (CVX) operates as an integrated energy company worldwide. This dividend achiever has consistently raised distributions for 23 years in a row. Over the past decade, the company has managed to increase dividends by 8.30% annually. Yield: 3.40% (analysis)

The companies mentioned above are just a few of the best dividend stocks that could be found today. In order to be successful in dividend investing, one has to not only pay the right price for the right company, but also build a diversified income portfolio.

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Eleven Dividend Machines Beating Inflation

One of the biggest challenges that investors face is the eroding power of inflation. The purchasing power of a dollar with a 3% annual inflation rate declines by 50% in 24 years. This is exactly why investors, who focus on current yield today, might not be able to sustain their lifestyles one or two decades into retirement. The perfect inflation hedge for these investors are dividend growth stocks. These stocks not only provide inflation adjusted stream income over time, but also provide investors with capital gains, which preserves the purchasing power of your principal. Below, I have highlighted eleven such stocks, which have consistently raised annual dividends for at least five years in a row, and which also announced dividend hikes last week:

V.F. Corporation (VFC), together with its subsidiaries, engages in the design, manufacture, and sourcing of branded apparel and related products for men, women, and children in the United States. The company’s board of directors approved a 5% increase in its quarterly dividend to 63 cents/share. This dividend aristocrat has consistently raised distributions for 38 consecutive years. Yield: 3% (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. The master limited partnership increased its quarterly distributions to $1.11/unit, which was a 5.70% increase over the 4Q 2009 distribution of $1.05/unit. This dividend achiever has consistently raised distributions for 15 years in a row. Yield: 6.30% (analysis)

Eaton Vance Corp. (EV), through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. The company’s board of directors approved a 12.5% increase in its quarterly dividend to 18 cents/share. This is the 30th consecutive annual dividend increase for this dividend champion. Yield: 2.40%

Stepan Company (SCL) engages in the production and sale of specialty and intermediate chemicals. The company’s board of directors increased the quarterly dividend 8.3% to 26 cents/share. This dividend champion has raised distributions for 43 years in a row. Yield: 1.60%

Shenandoah Telecommunications Company (SHEN), through its subsidiaries, provides regulated and unregulated telecommunications services to end-user customers and other communications providers in the southeastern United States. The company increased its annual dividend by 3% to 33 cents/share. This dividend achiever has raised distributions for 16 years in a row. Yield: 1.70%

Met-Pro Corporation (MPR) manufactures and sells product recovery and pollution control equipment for purification of air and liquids, fluid handling equipment for corrosive, abrasive and high temperature liquids, and filtration and purification products in the United States and internationally. The company increased the quarterly dividend by 10% from 6 cents/share to 6.60 cents/share. Met-Pro has consistently raised dividends every year since 2000. Yield: 2.40%

ONEOK, Inc. (OKE), a diversified energy company, operates as a natural gas distributor primarily in the United States. The company operates in three segments: ONEOK Partners, Distribution, and Energy Services. ONEOK increased its quarterly dividend by 4.40% to 48 cents/share. The company has raised dividends since 2002. Yield: 3.90%

ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. This master limited partnership raised its quarterly distributions to $1.13/unit. The company has consistently raised distributions since 2003. Yield: 5.80%

Magellan Midstream Partners, L.P. (MMP), together with its subsidiaries, engages in the transportation, storage, and distribution of refined petroleum products in the United States. This master limited partnership increased the its quarterly cash distribution to 74.5 cents/unit, which was a 4.90% increase over it 4Q 2009 distribution. The partnership has consistently raised distributions since 2001. Yield: 5.60%

Cass Information Systems, Inc. (CASS) provides payment and information processing services to manufacturing, distribution, and retail enterprises in the United States. The company raised its quarterly dividend by 14.30% to 16 cents/share. Cass Information Systems, Inc. has regularly raised dividends since 2002. Yield: 1.80%

Brown & Brown, Inc. (BRO), together with its subsidiaries, operates as a diversified insurance agency, wholesale brokerage, insurance programs, and service organization in the United States. The company raised its quarterly dividend by 3.20% to 8 cents/share. This dividend achiever has regularly raised distributions for 17 years in a row. Yield: 1.50%

This list should be just a starting point for dividend investors. Additional time for research should be dedicated to each stock in order to determine its valuation, sustainability and potential for growth in earnings and dividends as well as whether it fits in your particular diversified portfolio.

Full Disclosure: Long KMR

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Lockheed Martin Corporation (LMT) Dividend Stock Analysis

Lockheed Martin Corporation engages in the research, design, development, manufacture, integration, operation, and sustainment of advanced technology systems and products in the United States and internationally. The company has raised dividends for eight consecutive years, and is a potential dividend achiever. The latest dividend increase was in September, when the board of directors authorized a 19% dividend increase to 75 cents/share.

Over the past decade, this dividend stock has delivered a total return of 9.90% annually. The stock is still 40% off its all-time-highs reached in 2008.

Over the past decade, Lockheed Martin managed to increase earnings per share from a loss of $1.05 in 2000 to a profit of $7.78 in 2009. The company has bought back 1.50% of its shares outstanding on average over the past decade. The company has spent almost twice as much in cash on buybacks as opposed to dividends over the past few years. Analysts project Lockheed Martin to earn $7.40 in FY 2010 followed by $7.65 in FY 2011.

The company’s largest customer is the US Government, which accounted for 85% of Lockheed’s revenues. The large deficits that the government is running might limit future spending on the military. The possible ending of the conflicts in Iraq and Afghanistan could also potentially hurt defense budgets in the future, which could hurt sales at Lockheed. Another risk for the company is the government favoring other defense companies over Lockheed, which is the largest defense company in the world.

The company has managed to raise its annual dividend at a rate of 20.40% annually over the past decade. At 20%, dividends double every 3 and half years. The company actually cut dividends by 50% in the year 2000, but it had lost its status of a dividend achiever a few years before that. Currently, the company can afford to grow distributions given the low payout ratio. However without growth in earnings, the company’s future dividend growth will be limited.

The company’s dividend payout ratio has remained below 40% since 2002. Right now the dividend is sustainable at payout ratio of 30%. 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 return on equity has steadily increased over the past decade, fueled by strong earnings growth. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Overall I find Lockheed Martin (LMT) to be attractively valued at a P/E of 8.80 and a yield of 4.30%. In comparison, rival Boeing (BA) trades at a P/E of 48 and yields 2.50%, while Northrop Grumman (NOC) trades at a P/E of 9 and yields 3.10%. Another defense contractor, Raytheon (RTN) trades at a P/E of 10.60 and yields 3.40%.

However it is still too early to consider adding Lockheed Martin to my dividend portfolio, particularly due to the ten year requirement for dividend growth that I have. I have no doubt that Lockheed would be able to join the dividend achievers in 2012, but its future would depend on whether it could boost earnings in the future.

Full Disclosure: None

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High Income Stocks for a Dividend Growth Portfolio

Most of my articles on dividend investing contain a fair bit of warning about the dangers of high dividend stocks. This has caused several readers to question whether I should include high yielding stocks in their portfolios or not. In this article I would try to explain the advantages and disadvantages of these securities, and let readers decide for themselves whether they suit their investment objectives.

First, I find stocks with above average yields helpful for retirees or future retirees who expect to start living off dividends up to the next 10 years. While dividend growth stocks are a great investment vehicle for the long run, it might take some time for them to start generating a sufficient yield on cost. For example it might take over a decade for a stock like Wal-Mart (WMT) with a current yield of 2% that raises dividends by 12% annually to reach a yield on cost of 8%. For the investor who needs to put food on the table for the next decade, Wal-Mart will likely be ignored due to its low yield in favor of a higher yielding stock such as Kinder Morgan Energy (KMP) or Royal Dutch Shell (RDS.B). A stock with a higher current yield which raises dividends minimally or not at all would provide the best yields for the next few years, provided that the company generates strong cash flows to support the distribution. If the investor simply chases high dividends without checking for their sustainability, they will be better off in cash and short –term maturities, rather than risk their principal on untested investments. If the distributions are sustainable, then the high dividend stock could be bought and held for current income.

Second, it is imperative to understand that a high dividend stock that doesn’t raise its distributions for a long period of time would result in lower inflation adjusted income over time. This is particularly concerning in the event that the investor spends their whole income, and doesn’t reinvest a portion of distributions. That’s why investors should hold only a portion of their income portfolio in high yielding stocks. They should invest the other portion in dividend growth stocks which offer consistent dividend increases. This dividend growth should be supported by a solid business model that generates sufficient cash flows to grow and maintain the business and also return excess cash to owners. The dividend growth component of the portfolio should be quietly working in the first decade or so in order to reach higher yields on cost. This is the component that will ensure that the income stream maintains its purchasing power for the whole retirement, no matter whether it last for one decade or half a century.

As a result, if you look at dividend yield from the viewpoint of your dividend portfolio, one could realize that individual company yields do not matter as much, as long as overall portfolio yield is enough to generate sufficient initial income stream. After that knowing that the addition of a 2% yielder that grows distributions at 15% annually won’t affect overall yield too much, the decision to add a stock like Becton Dickinson (BDX) or Family Dollar (FDO) is much easier that before.

The high dividend stocks which I currently own to supplement my current dividend income, until my future growers increase dividends enough include:

National Retail Properties, Inc. (NNN) is a publicly owned equity real estate investment trust. The company is a member of the dividend achievers index, and has raised distributions for 20 years in a row. The stock yields 5.70% ( analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company is a member of the dividend achievers index, and has raised distributions for 16 years in a row. The stock yields 5.00% ( analysis)

Royal Dutch Shell PLC (RDS.B)operates as an oil and gas company worldwide. The company explores for, and extracts crude oil and natural gas. The stock yields 5.40% ( analysis)

Kinder Morgan Energy Partners, L.P. (KMP)owns and manages energy transportation and storage assets in North America. The company is a member of the dividend achievers index, and has raised distributions for 14 years in a row. The stock yields 6.20% ( analysis)

Universal Health Realty Income Trust (UHT)operates as a real estate investment trust (REIT) in the United States. The company is a member of the dividend achievers index, and has raised distributions for 22 years in a row. The stock yields 6.80% ( analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company has consistently boosted distributions to stock holders since it was spun out of Altria Group (MO) in 2008. The stock yields 4.50% ( analysis)

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. This dividend champion has raised dividends for 43 consecutive years. The stock yields 6.20% (analysis)

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. This dividend aristocrat has raised distributions for 36 consecutive years. The stock yields 4.90% ( analysis)

Dominion Resources, Inc. (D), together with its subsidiaries, engages in producing and transporting energy in the United States. The stock yields 4.10%

At the end of the day, investors should determine what they are trying to accomplish with their dividend portfolios. The stocks mentioned above are just a piece of the puzzle and not the solution to building a dividend portfolio for the long run.

Full Disclosure: Long WMT, FDO, D, ED, MO, PM, NNN, O, KMP, UHT, RDS.B

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Six Notable Dividend Growth Stocks in the News

Every week, a growing number of companies raise distributions. Up until now I tended to include in my review all companies raising distributions for the given week. In order to be more efficient however, I am going to concentrate in my weekly reviews from now on, only on companies which have raised distributions for over five years in a row. This should eliminate focusing on companies which have not raised distributions for a sufficiently long period of time. If a company keeps growing distributions for at least five years, it would definitely be included and reviewed accordingly. If a company has raised distributions for at least a decade, it would be included in my list for further research and possible accumulation on dips.

The most notable companies which raised distributions last week include:

Enterprise Products Partners L.P. (EPD) provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the continental United States, Canada, and Gulf of Mexico. The company raised its quarterly distributions by 1.30% to 58.25 cents/unit. This master limited partnership is a member of the dividend achievers index and has raised distributions for eleven consecutive years. Yield: 5.60%

Enterprise GP Holdings L.P. (EPE), which is the general partner behind Enterprise Products Partners L.P. (EPD) and Energy Transfer Equity L.P. (ETE), also announced an increase in its quarterly distributions. The company raised distributions by 2.70% to 57.50 cents/unit. This master limited partnership has consistently raised distributions every quarter since 2005. Yield: 3.70%

Reynolds American Inc. (RAI), through its subsidiaries, manufactures and sells cigarette and other tobacco products in the United States. The company’s board of directors approved an 8.9% dividend increase from 45 to 49 cents/share. Reynolds American has consistently raised distributions since 2005. Yield: 3.20%

Healthcare Services Group, Inc. (HCSG), through its subsidiaries, provides housekeeping, laundry, linen, facility maintenance, and food services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States. The company raised its quarterly dividend from 23 cents/share to 23.25 cents/share. It has raised dividends every single quarter since 2003. Yield: 3.80%

Genesis Energy, L.P. (GEL), together with its subsidiaries, operates in the midstream segment of the oil and gas industry in the Gulf Coast area of the United States. The company announced a 3.30% increase in its quarterly distribution to 38.75 cents/unit. This master limited partnership has raised distributions since 2004. Yield: 6.20%

Omega Healthcare Investors, Inc. (OHI) operates as a real estate investment trust (REIT) in the United States. The company raised its quarterly distributions by one penny to 37 cents/share. This REIT has consistently raised dividends since 2004. Yield: 6.40%

Most of the companies listed above seem like they have the business model that would allow them to raise distributions over the next few years. I would place Enterprise Products Partners L.P. (EPD) on my list for further research, given the length of its dividend history and the fact that it is one of premier master limited partnerships in he US.

Full Disclosure: None

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Lowe’s Companies (LOW) Dividend Stock Analysis

Lowe's Companies, Inc., together with its subsidiaries, operates as a home improvement retailer in the United States and Canada. This dividend aristocrat has increased distributions for 48 consecutive years. The company was one of original dividend aristocrats that joined the elite dividend index in 1989.

Over the past decade, this dividend stock has delivered an annual total return of 6.90%.

At the same time earnings per share have increased only by 9.80% per year since 2001. Earnings per share have been weak since hitting $1.99 in 2007 as sales have stagnated and same store sales drifted lower. For 2010 analysts estimate an increase in EPS by 16.20% to $1.41. For FY 2011 analysts expect the company to earn $1.67/share, which would represent an increase of 18.40% in comparison with the results in FY 2010.


The company expects to open 40-45 new stores in FY 2010, which would increase it total sales floor by 2 to 3%, and also help it in increasing market share. Lowe’s has kept expanding even during the housing crisis as it opened 153 stores in 2007, 115 in 2008 and 62 in 2009.
While the housing market still appears to be soft, the bottom has likely been hit. This could depress sales at stores like Lowe’s and Home Depot in the near term. A strong demographic factor is the high level of homeownership in the US at 67%, coupled with aging of homes. In addition to that, people are much more likely to participate in do it yourself home renovation projects during a crisis, in order to try to increase the value of their home, to make it more marketable or just to make it a better place to live.

The home improvement market, which declined by 8.4% in 2009 is expected to increase by 4.70%/annually until 2014.

At its annual meeting Lowe's Companies, Inc. (LOW) Chairman and CEO Robert A. Niblock told shareholders the company is seeing consumers reordering priorities, being more pragmatic across all aspects of their lives and as a result, increasing their involvement in home improvement projects.

As the year progressed, Niblock said the company saw signs consumers were expanding their spending beyond repair and maintenance into more discretionary products and projects.
"Even in these uncertain economic times affinity for the home remains strong. The 'to-do' list is still on the refrigerator and includes most of the same projects as in the past," said Niblock. "We remain confident in spite of the economic environment, and we work to find the right balance between managing expenses and investing in our business to ensure we continue to deliver the excellent service consumers expect from Lowe's." (source: Lowe’s)

The annual dividend per share has increased by 27.70% on average since 2001. A 28% growth in dividends translates into dividends doubling every two and a half years. Since 1980 the company has managed to double its quarterly dividend every five years on average.

The dividend payout ratio has increased dramatically over the past decade, with the largest increases occurring after 2007. Given the estimated increases in earnings per share over the next few years, the company could easily afford to further increase the dividend payout ratio, by distributing a higher dividend from earnings. 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 return on equity has experienced a dramatic drop since 2007, which was coincidental with the beginning of the housing crisis. As the economy rebounds, and sales and profitability increase, this indicator should return to its normal levels above 15%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently the company trades at a P/E of 16.60, yields 2% and has a dividend payout ratio of 31%. In comparison, Home Depot (HD) trades at a P/E of 17.10 and yields 3.20%. While Home Depot (HD) yields more, the company maintained its distributions flat for 3 whole years, while Lowe’s was increasing their distribution. As a result Home Depot (HD) lost its dividend achiever status in 2008. The stock trades at a yield which is lower than my minimum yield of 2.50%. The stock however has yielded above 2.50% only during 2008-2009 during the financial crisis. Nevertheless I would consider initiating a position in the stock on dips below $18.

Full Disclosure: None

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Why dividend investing beats US Treasuries today?

With yields on 10 year and 30 year US Treasuries reaching their lowest levels since 2008, investors are left with one less potential source of income in retirement. Currently, investors who purchase a $1000 bond that matures in 30 years are expected to receive an annual yield of $38. Investors who lock their money in a 10 year Treasury bond will receive $24. The reason for the low yields is low expected inflation for the near future, and the fear of a double dip recession which could even lead to deflation. The risk behind investing in treasuries today is that the low yields would not compensate investors even for a small inflation of 3% per year until maturity. In other words, the purchasing power of the interest income from an investment in fixed income will be much lower five, ten or thirty years from now. So how can investors manage to generate income from their nest eggs, which they have worked so hard and for so long to accumulate?

What investors need, is an instrument, or an asset class, that not only provides decent current yields, but also generates an income stream that meets or exceeds inflation over time. One such class is dividend paying stocks. Stocks in general have been mostly flat over the past decade, with the majority of returns coming from dividends. One of the reasons why stocks didn’t perform so well over the past decade is because they were grossly overvalued in 2000. Investors who want to generate income in retirement however should focus only on a select number of companies which have the following characteristics:

1) A history of consistent dividend increases. I prefer companies which have raised dividends for at least ten consecutive years.

2) An adequately covered dividend from earnings. I search for companies where annual earnings per share are at least twice the amount of annual dividends

3) A low price earnings ratio and at least some earnings growth. Overpaying for stocks could turn costly, and lead to low returns over time. I prefer stocks which have a P/E of less than 20.

4) A current yield of at least 2.50%. While some investors see this yield as “low”, they tend to forget that with regular dividend increases, the yield on cost would increase over time. By stacking companies with varying yield and dividend growth characteristics it is possible to create a portfolio yielding 4% where dividend increases match or exceed the rate of inflation.

There are only 300 or so stocks trading on US exchanges that have a history of growing their distributions for at least ten years. By applying a simple screen where P/E ratio is less than 20, the current yield is 2.50% or more and where the dividend is sustainable, investors could end up with a manageable list of stocks for further research.

A sample of seven dividend growth stocks which met these criteria include:

Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company is a dividend achiever, and has consistently raised its dividends for 23 years in a row. Annual dividend payments have increased by an average of 8.30% annually since 2000. Yield: 3.40% (analysis)

The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. Clorox has paid uninterrupted dividends on its common stock since it was spun out of Procter and Gamble (PG) in 1968 and increased payments to common shareholders every year for 32 years. The company is a member of the elite S&P Dividend Aristocrats Index.Annual dividends have increased by an average of 13% annually since 1999. Yield: 3.20% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. It franchises and operates McDonalds restaurants that offer various food items, soft drinks, coffee, and other beverages. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. Annual dividend payments have increased by an average of 28.20% annually since 2000. Yield: 3.20% (Analysis)

Medtronic, Inc. (MDT) develops, manufactures, and sells device-based medical therapies worldwide. The company operates in the following segments:Cardiac Rhythm Disease Management , Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control. This dividend champion has raised distributions for 33 years in a row. The annual dividend payment has increased by 17% per year since 2000. Yield: 2.70% (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia. The company is a member of the S&P Dividend Aristocrat index, after raising distributions for 38 years in a row. Annual dividend payments have increased by 13.60% on average since 2000. Yield: 2.90% (Analysis)

Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. SYSCO Corporation is a dividend champion as well as a component of the S&P 500 index. It has been increasing its dividends for the past 40 consecutive years. Annual dividend payments have increased by an average of 17% annually over the past 10 years. Yield: 3.50% (Analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company is a dividend achiever, and has been consistently increasing its dividends for 16 consecutive years. Annual dividends have increased by an average of 15.80% annually since 2000. Yield: 2.30% (analysis)

It is important to also hold a diversified portfolio of dividend stocks, in order to avoid concentration to particular segments, which could jeopardize dividend income in retirement. As a result holding at least 30 individual stocks representative of the ten industry groups of the S&P 500 makes sense.

Last but not least, while investing in dividend stocks would likely lead to a higher income stream in ten or thirty years, which would be much better than the fixed income from US Treasuries, dividend investing still has its risks. One of the biggest risks for dividend investors is that companies could cut or eliminate dividend payments. A diversified portfolio of stocks would soften the blow to total dividend income of course. However there have been times like during the Great Depression, when most companies cut dividends substantially. During those times investments in government bonds produced not only decent income, but also decent total returns as well. In addition to that, investors in Japan in the 1990’s were also faced with low yields on the long term government bonds. However this was a much wiser investment than buying Japanese stocks as represented by the Nikkei 225 index.

While dividend stocks would likely do much better than US Treasuries, investors should understand risks of dividend paying stocks before investing. This could provide them with the edge against investors who chase unsustainable yields and overpay for income streams.

Full Disclosure:

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Commerce Bancshares (CBSH) Dividend Stock Analysis

Commerce Bancshares, Inc. (CBSH)operates as the bank holding company for Commerce Bank, N.A. that provides various general banking services to individuals and businesses. It operates in three segments: Consumer, Commercial, and Wealth.

The company is a member of the dividend champions list, and has increased dividends for 42 years in a row. In addition to paying a cash dividend, this bank also pays a 5% stock dividend at the end of each year.

Over the past decade, this dividend stock has delivered an annual total return of 7.50% on average.

At the same time earnings per share have increased only by 1.70% since 2000. The EPS trend has been down since 2006. For 2010 and 2011 however analysts are expecting EPS to increase to $2.63 and $2.93. This would be much higher in comparison to FY 2009 EPS of $2.07. This regional bank is one of the financial institutions that didn’t cut dividends during the financial crisis. Over the past decade the company has also managed to decrease the average number of shares outstanding by 2.5% annually. The company generates 61% of its revenues from net interest income, 12% comes from Card Income, while service charges and wealth management account for 10% each.

The annual dividend per share has increase by 10.60% per year since 2000, which was higher than the growth in EPS. A 10% increase in dividends leads to dividend payment doubling every 7 years on average. Since 1986 the company has indeed managed to double its dividend payments every seven years on average.

The dividend payout ratio has doubled, mostly due to the fact that the company has shared a higher proportion of its earnings in the form of dividends and due to the downward trend in earnings since 2006.

Between 2006 and 2009, the return on equity has been decreasing sharply from 16% to less than 10%. This was in contrast to stability in the ROE between 14 and 16 over the preceding five years.

Overall I find Commerce Bancshares to be attractively valued at 15.50 times earnings, yield of 2.50% and having an adequately covered dividend. I would consider initiating a position in the stock on dips below $37.60.

Full Disclosure: None

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Genuine Parts (GPC) Dividend Stock Analysis

Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. The company operates in four segments: Automotive Parts Group, Industrial Parts Group, Office Products Group, and Electrical/Electronic Materials Group. This dividend king has increased distributions for 54 consecutive years.

Over the past decade, this dividend stock has delivered an annual total return of 11.40%.

At the same time earnings per share have increased only by 1.40% per year since 2000. For 2010 analysts expect an increase in EPS by 12.80% to $2.82. For FY 2011 analysts expect the company to earn $3.15/share, which would represent an increase of 11.70% in comparison with the results in FY 2010.
The growth in EPS was helped by stock buybacks, where the company repurchased about 1% of their outstanding stock each year over the past decade. The company’s near term prospects should be aided by sales growth, triggered by the expansion in the US economy. Margins should also be higher on cost cutting and higher volumes. Longer term the company could benefit from increased complexity of vehicles and the rising number of automobiles. The company seems to be very conservative in its finances and has a low level of debt coupled with strong cash flow from operations to fund future dividend increases.

Dividends per share increased by 4.20% on average since the year 2000. A 4% growth in dividends translates into dividend payments doubling every 18 years. Since 1987 the company has manage to double its quarterly dividend every eleven and a half years on average.

The dividend payout ratio has remained above 50% in six of the past ten 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.

The return on equity has remained above 16% with the exception of 2001. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently the company trades at a P/E of 16, yields 3.80% and has a dividend payout ratio of 60%. Given the low growth in dividends and earnings over the past decade, I would have to require a higher current yield and a lower dividend payout ratio before initiating a position in the stock. I would initiate a small position in the stock provided that it trades below $41, and the payout ratio is lower than 60%.

Full Disclosure: None

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Dividend investing timeframes- what's your holding period?

One of the most common issues that dividend investors face is the holding period for their dividend stocks. It seems that dividend investors are divided in two camps on the issue. One of the camps believes in active allocation of capital, where positions are continually adjusted depending on company performance, market performance or relative portfolio weights, to name a few reasons. In an era where it is possible to buy and sell dividend stocks within nanoseconds, holding on for more than a few years seems like eternity to some. The other camp is focused on the long-term holding of dividend stocks. The second camp believes in buy and hold investing, an arcane strategy, which is termed obsolete during bear markets, but is widely praised during bull markets. So what should the holding period of an enterprising dividend investor be?

Smart dividend investors should be able to synthesize the best features of both camps on the subject of buy and hold, in order to determine their optimum holding period. Extreme views such as buy and hold forever or buy and sell for five nanoseconds/years should be avoided. Investors should therefore hold stocks for as long as it makes business sense for them to hold on.
In most cases, it takes time for a position to work in your favor. This is particularly true for dividend growth stocks, where low current yields coupled with strong dividend growth result in substantial yields on cost after several years of patience. Investors who focus on stocks like Procter & Gamble (PG), McDonald’s (MCD) or Johnson & Johnson (JNJ) despite their current yields, could generate sufficient dividend income streams over time. Thus, as long as these companies continue to perform well, by enjoying earnings growth to fuel dividend increases, they should be held and added to on any temporary price weakness. While investors should expect to hold on to their shares theoretically forever, in reality they might have to sell positions if things change. If circumstances do change however, and any of these stocks deteriorates to the extent of cutting dividends, then it should be sold, even if held for less than a few years.

When investors purchase dividend stocks, they should expect to hold on to them forever. As a result, investors should assess the viability of their dividend income stream sources, in order to ensure that they are not focusing on chasing hot ideas today, which might cost them in the future. Many investors chase high yield stocks for current income these days, particularly because in the current low interest environment it is extremely difficult to live off interest. The dangers to this strategy are two- fold. The first danger is that without an understanding of the business, investors might purchase an income producing asset which doesn’t deliver sustainable distributions. Canadian royalty trusts such as Pengrowth (PGH) and Penn West (PWE)are examples of this idea. Most Canroys always seem to deliver high current yields, despite cutting dividend payments to the bone. This is because their stock prices have gone down over the past few years, right after Canada announced that it would be phasing out the structure in 2006. Investors who were short-sighted to only chase high yields for current income without understanding why such high yields were being paid in the first place, should have been better off purchasing long term treasury bonds instead.

The other issue with high yielding stocks such as MLPs, REITs or Utilities, is that when interest rates start rising again they could get out of favor with investors. When interest rates increase, investors would demand higher yields from the above mentioned types of stocks, which would push their prices down. In addition to that, since most of these types of companies grow exclusively by selling more shares ( units) or through additional debt offerings, their cost of capital would be increasing. This might even put current distributions at risk of a cut.

This being said, higher yielding stocks could have a place in your portfolio in order to generate current income until your dividend growth stocks generate high yields on cost.

The types of stocks which should be held forever, until proven otherwise, in a diversified dividend portfolio include:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. JNJ has been consistently increasing its dividend for 48 consecutive years. Annual dividend payments have increased by an average of 13.40% annually since 2000.(analysis)

McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. Annual dividend payments have increased by an average of 28.20% annually since 2000. (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. Abbott Laboratories has increased dividends for 38 years in a row. The company has managed to increase its annual dividend by 8.60% on average over the past decade. (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has rewarded shareholders with dividend increases for 47 consecutive years. Annual dividends have increased by 11.80% on average over the past decade. (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. Wal-Mart Stores has consistently increased dividends every year for 36 years. Annual dividends have increased by an average of 18.30 % per annum since 2000. (analysis)

To summarize, my holding period is forever, unless some unseen factor causes me to sell. After the sale I would typically try to allocate the cash to a new or existing position in the same sector, while keeping the income loss to a minimum. What is your holding period?

Full Disclosure: Long JNJ, MCD, ABT, PG, CL and WMT

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Top Dividend Stocks for 2010, 3Q Update

The third quarter of 2010 was characterized by a rebound in global equity markets, which lead to rising stock prices. Income hungry investors are starting to realize that certain safe-havens such as US Treasury bonds do not look as attractive as dividend stocks. This has pushed many dividend stocks higher, particularly the ones with sustainable and growing distributions.

Back at the end of 2009 I selected four dividend stocks as part of a competition. The stocks that I selected were representative of the tobacco, real estate, master limited partnerships and utilities sectors. The main characteristic of these sectors was that they consist of stocks with above average yields. The higher yield not only softened investor losses during the second quarter of 2010, but also produced very good performance over the third quarter.

The stocks that I selected were not only attractively valued at the time, but also had sustainable and growing distributions. The companies include:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The monthly dividend company has paid rising dividends for 16 years in a row. Right now this dividend achiever yields 5.10% ( analysis)

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. The second largest master limited partnership in the US has raised distributions for 14 years in a row. This dividend achiever yields 6.40% (analysis)

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. The New York based utility company has raised dividends for 36 years in a row. This dividend aristocrat current yields 4.90% (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. This global tobacco powerhouse has raised dividends every year since it was spun out of parent Altria Group (MO) in 2008. It offers not only a high yield, and a sustainable dividend, but also solid dividend growth potential. Yield: 4.50% (analysis)

Some of the companies such as Realty Income and Con Edison look overstretched at the moment. The hunt for yield has pushed these companies to levels of relative yield not seen for a while. Furthermore, given the slow dividend growth that they have experienced, I do not find them worthy of adding new money to these positions. The price you pay today would affect your total returns in the future. As a result, investors putting in new money in stocks like Realty Income (O) and Con Edison (ED) might not generate the same level of total returns as investors who bought the stocks at the end of 2008 for example. This being said however, these stocks are still at least a hold, as their dividends appear to be safe. But if you are in a DRIP plan in one of those stocks, you might be better off allocating the dividends in something more attractively valued.

Overall the picks I selected outperformed the picks of the other bloggers in the competition for a second quarter in a row. Here’s the ranking:

Blogger Performance

Dividend Growth Investor +21.34%

The Wild Investor +8.35%

Zach Stocks +0.84%

My Traders Journal -1.31%

WheredoesallmyMoneygo -2.90%

Intelligent Speculator -7.86%

Million Dollar Journey -10.46%

The Financial Blogger -15.24%

Four Pillars -27.07%

While I own all of the stocks mentioned above, this stock picking competition is not representative of how investors should invest money. I believe that in order to be successful at dividend investing, one has to build a diversified portfolio of stocks, representative of as many sectors as possible. I would also add geographic diversification as a plus, as well as the need to build positions slowly over time, by dollar cost averaging.

Full Disclosure: Long ED,PM, KMR, O

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Nucor Corporation (NUE) Dividend Stock Analysis

Nucor Corporation, together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. The company operates through three segments: Steel Mills, Steel Products, and Raw Materials. This dividend champion has managed to increase distributions for 37 years in a row. At the company's latest dividend increase in December 2009, the dividend was increased by 2.90%.

Over the past decade this dividend stock has delivered a 17.60% annual return on average to its shareholders. This is after a 50% drop off its all-time-highs achieved in 2008.

The company reported a loss of $0.94/share for FY 2009, which reflected a 50% drop in revenues and was lower than the $5.98/share reported in FY 2008. For FY 2010 analysts expect Nucor to earn $1.10/share, followed by a steep jump to $3.30/share in FY 2011.
The company’s business model is highly cyclical and thus dependent on the economic situation at the moment. Characteristic of cyclical industries is that P/E ratios are lowest when the economy is at its peak, since earnings per share are highest. On the other hand during recessions the P/E ratio is highest since earnings are depressed. Long term growth in earnings will be driven by expansion through acquisitions, which would result in greater pricing power, as well as industry consolidations and stronger cost controls in relation to materials expense. The US steel industry has been in a consolidation mode over the past decade, which could help companies in mantaining pricing power.

The company has managed to increase its quarterly dividends at a pace of 28.30% per year. Obviously this strong dividend growth reflected the strong earnings growth, fueled by the increasing demand and prices for commodities up until the global financial crisis of 2007-2009. The company paid a special dividend between 2005 and 2008 as well.

The dividend payout ratio follows the volatility in earnings. Currently the payout looks unsustainable based off FY 2010 actual and expected earnings. Based off FY 2011 earnings however it does looks sustainable and also leaves some room for a small increase this year.

The return on equity also seems to follow the erratic pattern in earnings. It was low between 2000 and 2003, after which it stayed above 28% until 2009. Whether the increased economic activity worldwide leads to an increase in return on equity for Nucor remains to be seen.

Currently the company is trading at a forward P/E of 28.70, yields 3.80% and doesn’t seem to have a well covered distribution. However, based on estimates for FY 2011 earnings the company trades at a P/E of 12.10 and has an adequately covered dividend with some room to grow the distribution. The company’s financial position is a little bit more volatile in comparison with other dividend champions, but it should provide decent exposure to basic materials sector for dividend portfolios. I would add to my underweight position in this risky stock on dips.

Full Disclosure: Long NUE

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