Gold versus Dividend Stocks

Investors typically make money when the assets they own increase in value and/or when the assets they own deliver dividend, interest or rental income. When combined, income and price returns results in the total returns equation. One asset that has generated positive total returns every year since 2000 is gold. Investors who bet on the yellow metal have generated 17.70% annual returns over that period. Right now the precious metal is hitting all-time highs, as many investors expect that the amount of monetary stimulus by the Federal Reserve would create massive inflation in the US. This speculative frenzy is catching up quickly, as investors bid up gold through one of the many vehicles available to dabble – gold etfs, gold futures, physical gold etc. For example, one of the largest ETF's in the US with over 50 billion in assets is SPDR Gold Shares (GLD), which allows investors to easily gain exposure to gold.

In reality however, there are very few reasons to own gold, besides the expectations that it would hit some magical high point because the imaginary printing press of the FED would create massive inflation. Gold is typically perceived as a store of value and as a sort of international currency. When discussing gold investment returns however, it is obvious that years of great returns are followed by years of poor returns. It is important not to make conclusions based off a limited number of data sets exactly for this reason. Investors who chase gold higher, touting its investment performance over the past decade, should not ignore the fact that investors who purchased gold 30 years ago would have made only a 75% return. An investment in Treasury Bills or Certificates of Deposit would have outperformed the yellow metal over the same time period. So much for gold being a store of value. However, if we extend the investment horizon to include the past 36 years, we would notice that gold produced very decent returns overall.

So besides the fact that prices might go higher because of the imaginary FED printing press, why would investors want to buy gold? It is not a store of value, as its purchasing power has has been known to decrease over some periods of time ( such as the past 30 years for example). Gold is a decent store of wealth to hold on to during wars, persecutions and other unpleasant situations. However, unlike oil, there is no real economic reason to own the metal. Every year companies mine gold, create gold bars and coins, which are then stored at vaults. In the words of famous investor Warren Buffett “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

In addition to that investors who own gold, end up paying up either for storage and insurance, or management fees if they invest through a gold ETF. Gold does not produce any income, which is ironic since it is touted as a stable currency. Every currency, stable or not could generate some sort of income return over a period of time, except gold. That’s why gold is particularly unfit for those who want to live off their assets. It is true that investors could sell a chunk of their gold each year in order to meet their expenses, but this would leave investors with a diminishing amount of gold. The rate of decrease of the amount of gold holdings in your portfolio would depend on the fluctuations in the commodity markets, which have been analyzed for centuries by market technicians, astrologists without any breakthrough as to where the prices will go next. To most dividend investors, owning gold doesn’t make much sense, since it is not an asset that produces income or generates any profit or economic/social gain to society.

Owning gold makes as much sense as stocking up on toothpaste and calling yourself a toothpaste investor. I would much rather own an asset that not only could generate potential capital gains for me but also pays me to hold it. Dividend stocks are one such asset. The best dividend stocks have strong competitive advantages, which allow the companies to pass any cost increases to consumers, which lets them increase profits over time. This leads to a higher dividend payment over time as well, which provides an inflation adjusted stream of income. In other words, investors in dividend stocks would not have to sell off their holdings, in order to meet expenses. They could just pick the right dividend stocks, create a diversified dividend machine, and live off dividends. Some of the best dividend stocks that I focus on are great inflation hedges, as their dividend and earnings have grown at or above the rate of inflation over time. They produce real goods or services, that provide value to their users, who are willing to pay the right price for quality. I do not recommend purchasing Tylenol or Gillette products as an investment. I would much rather own the companies that produce those everyday products, and profit along the way.

The companies I have in mind include:

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. This master limited partnership has managed to boost distributions for 15 consecutive years. Yield: 6.20% (analysis)

National Retail Properties, Inc. (NNN) is a publicly owned equity real estate investment trust. The firm acquires, owns, manages, and develops retail properties in the United States. It has managed to boost distributions for 21 years in a row. Yield: 6.10% (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 managed to raise dividends every year since it its spin off from Altria (MO) in 2008. Yield: 4% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. This dividend king has managed to increase dividends for 54 years in a row. The company keeps raising distributions like clockwork, as evidenced by the latest dividend hike of 9.50% in April 2010. Yield: 3.20% (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend aristocrat has managed to boost distributions for 48 years in a row. Yield: 3.70% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. This dividend aristocrat has increased dividends for 49 consecutive years. 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 raised dividends for 41 years in a row. Yield: 3.70% (analysis)

Full Disclosure: Long all companies mentioned above. I don't own any gold.

Relevant Articles:

- Best Dividend Stocks for 2011

- Dividend Aristocrats list for 2011

- Dividend Champions - The Best List for Dividend Investors

- Dividend Achievers Offer Income Growth and Capital Appreciation

This article was included in the Carnival of Personal Finance

Four Dividend Stocks In the News

Every week I review the list of consistent dividend raisers. I only review companies which have managed to increase distributions for more than 5 years in a row. This helps me identify potential candidates for research which might not be on the dividend achievers list yet. In order to be successful at dividend growth investing, one has always be on the lookout for hidden dividend gems.


The companies which announced dividend increases over the past week included:

W. P. Carey & Co. LLC, (WPC) together with its subsidiaries, provides long-term sale-leaseback and build-to-suit transactions for companies worldwide and manages a global investment portfolio. The company boosted its quarterly distribution from 51 to 51.2 cents/share. This dividend achiever has raised distributions for 14 consecutive years. Yield: 5.80%

Raven Industries, Inc. (RAVN), together with its subsidiaries, manufactures various products for industrial, agricultural, construction, and military/aerospace markets in the United States and internationally. It operates in four segments: Applied Technology, Engineered Films, Electronic Systems, and Aerostar International, Inc. (Aerostar). The company raised its quarterly dividend by 12.50% to 18 cents/share. This marked the 25th consecutive annual dividend increase for this dividend achiever. Yield: 1.30%

Raytheon Company (RTN) provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as mission support services in the United States and internationally. It operates in six segments: Integrated Defense Systems, Intelligence and Information Systems, Missile Systems, Network Centric Systems, Space and Airborne Systems, and Technical Services. The company raised its quarterly dividend by 14.70% to 43 cents/share. This marked the seventh consecutive annual dividend increase for the company. Yield : 3.40% American Greetings Corporation (AM), together with its subsidiaries, engages in the design, manufacture, and sale of greeting cards and other social expression products worldwide. The company raised its quarterly dividend by 7.30% to 15 cents/share. This marked the eight consecutive annual dividend increase for this company. Yield : 2.70%

W.P Carey & Co (WPC), Raytheon Company (RTN) and American Greetings (AM) look like interesting companies for further research, although they are not quite fitting my entry criteria at the moment.

Full Disclosure: None Relevant Articles:

- Avoid Dividend Cutters at All Costs
- The return of Financial Dividends
- Eight Dividend Growers In the News
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McGraw-Hill (MHP) Dividend Stock Analysis

The McGraw-Hill Companies, Inc. (MHP) provides various information services for the financial, education, and business information markets worldwide. It operates in four segments: Standard & Poor’s (S&P), McGraw-Hill Financial, McGraw-Hill Education (MHE), and McGraw-Hill Information & Media (I&M). The company is a dividend champion which has increased distributions for 38 years in a row. The most recent dividend increase was in January, when the Board of Directors approved a 6.40% increase to 25 cents/share. The major competitors of McGraw-Hill include Pearson (PSO), Moody’s (MCO) and Meredith Corp (MDP).

Over the past decade this dividend stock has delivered an annualized total return of 4.20% to its loyal shareholders.

The company has managed to deliver an impressive increase in EPS of 7.50% per year since 2001. Analysts expect McGraw-Hill to earn $2.86 per share in 2011 and $3.12 per share in 2012. This would be a nice increase from the $2.65/share the company earned in 2010. The company has managed to decrease the number of shares outstanding by 2.70% per year over the past decade through share buybacks, which has aided earnings growth.


The company’s high return on equity has doubled over the past decade to 40%. 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 11.90% per year since 2001, which is higher than the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling every 6 years. If we look at historical data, going as far back as 1989, we see that McGraw-Hill has actually managed to double its dividend every eleven years on average.

Over the past decade the dividend payout ratio has remained below 40% for a majority of the time with the exception of a brief period in 2001. 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 McGraw-Hill is trading at 14.40 times earnings, yields 2.60% and has a sustainable dividend payout. The stock meets my entry criteria, and I will look forward to adding to my existing position in it.

Full Disclosure: Long MHP

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Avoid Dividend Cutters at All Costs

Companies cut dividends when they either expects that business would deteriorate to an extent where all cash might be needed to sustain the business or because they cannot afford to pay the dividend. When management expects losses that would drain cash in the near future, they are very likely to cut distributions. When dividends are cut, stock prices typically nosedive as the last investors who have held on hoping for better news leave the sinking ship. As a rule, I always sell when a company announces that it would be cutting dividends.

Over the past three years I have had four situations, where I have had to deal with dividend cutters and eliminators. In 2008 American Capital (ACAS) suspended its dividend payment. In 2009 General Electric (GE) and State Street (STT) also cut distributions, in the middle of the financial crisis. In 2010 oil giant British Petroleum (BP) suspended distributions, amidst pressure from the US Government to hold onto its cash in order to be able to pay for the oil spill it had created. In all but one of the situations, I would have been better off simply holding on, without selling.

The reason why I typically sell after a dividend cut is that as a group, companies that cut and eliminate dividends have underperformed the market since 1972 according to a study by Ned Davis Research.

Another reason why I sell is that with dividend cutters and eliminators you have the risk that the company might be on the brink of collapse. If your strategy was to buy companies after cutting dividends, you would probably realize a lot in gains when times are favorable, like in 2009. However, during severe bear markets, such as the one between 2007 and 2009 investors buying after a dividend cut might experience losses that could lead to total loss of principal. And once investors lose their capital, they are no longer in the game. If you had a 50% chance for an opportunity to make a 100% gain in one year, along with a 50% chance for an opportunity to lose 100% of your capital you should clearly stay away from this investment. The goal of successful dividend investing is not only generating a rising stream of income, but also ensuring that principal grows over time as well.

Investors who purchased General Electric (GE), State Street (STT) and BP after the cut were plain lucky. Investors who purchased Citigroup (C) , Bank of America (BAC) and American International Group (AIG) after the cut suffered severe losses. But those losses were nothing in comparison to investors who purchased Lehman Brothers, General Motors or Washington Mutual.

The moral of the story is that in order to be successful in investing, one needs to be able to find a strategy that offers some edge and some positive expectancy. It is also important to stick to that strategy and to only exit the position when a predetermined condition at the time of position initiation is triggered.

Full Disclosure: None

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The return of Financial Dividends

The financial crisis of 2007-2009 was particularly painful to investors with an allocation to dividend rich financials. Not only did share prices collapse, but the dividend payments were slashed or eliminated as many financial institutions received funds from TARP. The big news Friday was that the federal government gave its blessing to several large institutions to finally raise distributions to shareholders.

The institutions include US Bancorp (USB), Wells Fargo (WFC), JPMorgan Chase (JPM) and State Street (STT).

US Bancorp (USB) raised its quarterly distribution from 5 to 12.50 cents/share. This is still below the 42.50 cents/share payment that the bank was paying before the dividend cut. Yield: 1.80%

Wells Fargo (WFC) raised its quarterly dividend from 5 to 12 cents/share. The company paid 34 cents/share before joining the crowd of dividend cutters in March 2009. Yield: 1.50%

State Street (STT) raised its quarterly dividend from 1 to 18 cents/share. I sold my position in the stock right after the dividend cut in 2009. In retrospect I could have held on to it, but given the fact that most dividend cutters in 2007 and 2008 ended up going bankrupt this was not an unreasonable decision. Yield: 1.60%

JPMorgan Chase (JPM) raised its quarterly dividend from 5 to 25 cents/share. Back in February 2009 the company cut its dividend from 34 cents/share to 5 cents/share. Yield: 2.20%

The future of financial dividends is still unclear, as it would be largely dependent on the growth in earnings in the current environment. I would definitely wait to see where distributions go from here. I also require at least a decade of consistent dividend increases before initiating a position in a stock, which is why I would be looking elsewhere for financial dividends for the next few years.

I have also highlighted consistent dividend raisers from other sectors which announced their intentions to boost distributions below:

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. The company raised its quarterly dividend by 18.40% to 58 cents/share. This marked the 29th consecutive annual dividend increase for this dividend aristocrat. The stock currently yields: 2.70% (analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The monthly dividend company raised its quarterly dividend to $0.1445625/share. This dividend achiever has consistently raised dividends since going public in 1994. The ten year annual dividend growth rate is 4.50%. Yield: 5% (analysis)

Williams-Sonoma, Inc. (WSM) operates as a specialty retailer of home products. It offers culinary and serving equipment, including cookware, cookbooks, cutlery, informal dinnerware, glassware, table linens, specialty foods, and cooking ingredients; and bridal and gift items under the Williams-Sonoma brand name. The company raised its quarterly dividend by 13.30% to 17 cents/share. Williams-Sonoma has raised distributions for six consecutive years. Yield: 1.70%

Xilinx, Inc. (XLNX) engages in the design, development, and marketing of programmable logic solutions. The company raised its quarterly dividend by 18.75% to 19 cents/share. Xilinx has raised distributions for eight years in a row. Yield: 2.40%

Air Products & Chemicals (APD) was out of my buy range before the dividend increase. After the generous distribution hike it fits my entry criteria nicely. I would look forward to adding to my position in the stock when I have the funds available. As far as Realty Income (O) is concerned, many investors have been disappointed with the anemic increases in distributions over the past 2 years. Luckily yield hungry investors have been bidding the stock price higher, which has increased total returns for earlier investors in this real estate investment trust. The main reason why I view Realty Income as a hold and not a buy is that the stock is not yielding as much as it used to and its dividend growth has been pretty much non-existent over the past 2 years. I would consider adding to my position in the stock on dips below $29 however.

Full Disclosure: Long APD and O

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Colgate-Palmolive (CL) Dividend Stock Analysis

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company is a dividend champion which has increased distributions for 48 years in a row. The most recent dividend increase was in February, when the Board of Directors approved a 9.40% increase to 58 cents/share. The major competitors of Colgate-Palmolive include Clorox (CLX), Procter & Gamble (PG), Church & Dwight (CHD) and Kimberly-Clark (KMB).

Over the past decade this dividend stock has delivered an annualized total return of 4.20% to its loyal shareholders.

The company has managed to deliver an impressive increase in EPS of 9.60% per year since 2001. Analysts expect Colgate-Palmolive to earn $5.06 per share in 2011 and $5.50 per share in 2012. This would be a nice increase from the $4.31/share the company earned in 2010. The company has managed to decrease the number of shares outstanding by 1.30% per year over the past decade through share buybacks, which has aided earnings growth.
Colgate generates over 60% of its sales from outside of the US. The growing emerging markets in Latin America and Asia and the rising middle class in these markets could present an excellent opportunity for the company. Latin America accounts for one third of sales, while Asia/Africa accounts for over one fifth of sales. The issue with overexposure to Latin America is that the continent has been prone to currency devaluations, which could impact profitability. Another issue could come from rising commodity costs, which could pressure margins and profitability despite expectations for rising volumes. Given the strong brand names of many of Colgate’s products however, the company could mitigate this by passing on cost increases to consumers as well as cost savings.

The company’s high return on equity has been on the decline since hitting a high of over 400% in the early 2000s. The company’s strong competitive advantages in the oral healthcare field plus the low capital requirements have enabled it to generate high returns on capital. This indicator is still impressive at 78.40%, but has been steadily decreasing, which means that new capital has been employed at progressively lower rates of return. 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 13% per year since 2001, which is higher than the growth in EPS.

A 13% growth in distributions translates into the dividend payment doubling every 6 years. If we look at historical data, going as far back as 1979, we see that Colgate-Palmolive has actually managed to double its dividend every eight years on average.
Over the past decade the dividend payout ratio has remained at or below 50% for a majority of the time. 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 Colgate-Palmolive is trading at 18.10 times earnings, yields 3.00% and has a sustainable dividend payout. The stock meets my entry criteria, and I will look forward to adding to my existing position in it.

Full Disclosure: Long CL, PG, CLX, KMB

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Six Dividend Paying Sin Stocks to Consider

In the 1987 movie “ Wall Street”, Gordon Gekko becomes famous with his speech that “Greed is Good”. Moving along this statement I believe that sin is good too, especially if the industry is stable, recession resistant and the participants have strong brands that grow dividends.
Companies that raise dividends show confidence in their financial performance for the foreseeable future. When management expects lackluster performance, they are more likely to freeze or even cut distributions. For example, back in 1998-1999 when the future of the tobacco companies was uncertain, the Board of Directors of Altria (MO) maintained the dividend payment for 7 consecutive quarters. But after they realized that the company would be able to survive, they kept raising dividends and were able to maintain the annual growth in distributions uninterrupted.

I have highlighted several “sin stocks”, which not only have strong competitive advantages, but have also managed to consistently raise distributions for many years in a row:

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 increased dividends for 43 years in a row. The company is a dominant player in the US tobacco market, with a 50% market share in 2009. This mature market is in decline however, and as a result future growth in earnings per share could be difficult to materialize. They would likely come from efficiencies related to restructuring, such as the closure of its Cabarrus facility as well as the integration of smokeless tobacco company UST, which Altria acquired in 2008. Yield: 5.90% (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. The company has consistently raised distributions since Altria (MO) spun it off in 2008. The number of smokers is decreasing in Western Europe, although the price increases have been able to offset any declines in revenues. In addition to that, growth in emerging markets for the brand products the company is producing should boost profitability in the long run. Strategic acquisitions should also add to the bottom line, as would synergies and strategic cost efficiencies are realized over time. Yield: 4% (analysis)

Diageo plc (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine products. The company’s premium spirits brands have been popular with US consumers who traded up to these premium brands. The North American market accounts for 34% of the company’s sales, while emerging markets account for 33% of its sales. Emerging markets have been a bright spot, as the company has been able to achieve strong double digit growth there. The company competes based on brand loyalty and offering quality products. It’s a typical consumer play where it tries to boost organic sales while also acquiring premium brands in order to further boost its competitiveness. Cost restructurings and efficiencies are another part of Diageo’s strategy for future earnings growth as well.Diageo has raised distributions for over one decade. Yield: 3.20% (analysis)

Brown-Forman Corporation (BF-b) engages in the manufacture, bottling, import, export, and marketing of alcoholic beverages. Some of the company's top selling products include Jack Daniel’s Tennessee Whiskey and Finlandia. It is very intriguing how the company has been able to leverage the brand name of its top selling products by cutting costs to the bone and increasing efficiencies, while at the same time expanding sales internationally. This had translated into growth in earnings per share, which also fueled a 9.20% average annual growth in dividends over the past decade. This dividend aristocrat has raised distributions for 27 years in a row. Yield: 1.80% (analysis)

Given the fact that so many Americans are obese these days, some might also say that companies such as soft-drinks manufacturer Coca Cola (KO) and fast-food restaurant chain McDonald’s (MCD) are sin stocks too.

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. This dividend aristocrat has rewarded investors with higher dividends for 49 consecutive years. Coca-Cola has managed to increase annual distributions by 10% per year over the past decade. Yield: 2.90% (analysis)

McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. It franchises and operates McDonald's restaurants that offer various food items, soft drinks, coffee, and other beverages. This dividend aristocrat has rewarded investors with higher dividends for 34 consecutive years. McDonald's has managed to increase annual distributions by 26.50% per year over the past decade. Yield: 3.20% (analysis)

Overall these sin stocks have done very well for their shareholders over the past. They have strong brand recognition, a product that consumers crave, and the pricing power to charge more each year and expand sales

Full Disclosure: Long all stocks mentioned above

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Two Income Stocks Raising Dividends, two more expected to raise them in March

Several companies raised distributions over the past week. There were only two companies however which not only announced increases in distributions, but also have boosted dividends for over 5 years in a row. Dividend Growth Investors, who seek consistency in dividend increases could take a note on this companies for further research:

Piedmont Natural Gas Company, Inc. (PNY), is an energy services company, that distributes natural gas to residential, commercial, industrial, and power generation customers in portions of North Carolina, South Carolina, and Tennessee. This dividend champion raised its quarterly distributions by 3.60% to 29 cents/share. This marked the 33rd consecutive annual dividend increase for Piedmont. The company offers a 5% drip discount to investors who enroll in its drip plan and elect to automatically reinvest dividends. Yield: 3.90% (analysis)

Equity LifeStyle Properties, Inc. (ELS) is a publicly owned real estate investment trust (REIT). The firm engages in the ownership and operation of lifestyle oriented properties. The company raised its quarterly distributions by 25% to 37.50 cents/share. This marked the seventh consecutive annual dividend increase for this REIT. Yield: 2.60%

Two other companies which I expect to see increasing dividends in March include PepsiCo (PEP) and Air Products and Chemicals (APD), based off their pattern of historical dividend increases.

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. PepsiCo has managed to boost distributions for 38 years in a row. Over the past decade the company has managed to increase dividends by 13% per year. (analysis)

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. Air Products and Chemicals has managed to raise dividends for 28 years in a row. Over the past decade the company has managed to raise dividends by 10% per year. (analysis)

Currently, Piedmont Natural Gas (PNY) looks attractively valued. I would initiate a position in the company when it yields above 4% when funds are available. Equity LifeStyle Properties (ELS) has a very low yield, especially given the fact that as a REIT it has to distribute almost all of its income to shareholders. At $1.50/share in annual distributions, the payout is well covered from 2010’s FFO of $4/share. There is room for growth in distributions, however there might be better opportunities in the REIT sector.

Full Disclosure: Long APD and PEP

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Coca-Cola (KO) Dividend Stock Analysis

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company is a member of the dividend aristocrat index and has increased distributions for 49 years in a row. The most recent dividend increase was in February, when the Board of Directors approved a 6.80% increase to 47 cents/share. The major competitors of Coca-Cola include PepsiCo (PEP), Nestle (NSRGY), Unilever (UL) and Dr Pepper Snapple Group (DPS).

Over the past decade this dividend stock has delivered an annualized total return of 3.30% to its loyal shareholders. One of the largest shareholders in the company is Warren Buffett’s Berkshire Hathaway (BRK.B).

The company has managed to deliver an impressive increase in EPS of 9% per year since 2001. Analysts expect Coca Cola to earn $3.88 per share in 2011 and $4.27 per share in 2012. This would be a nice increase from the $3.49/share the company earned in 2010. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time, as well as increases in volumes in emerging markets such as China. Coca-Cola is targeting 3%-4% growth in annual revenue and 6%-8% growth in annual operating income.

The acquisition of Vitaminwater in 2007 has increased growth in the company’s non-soda business, which is where Coke lags behind PepsiCo (PEP). The acquisition of CCE’s North American bottling business, should bring in sufficient cost savings for the company’s North American supply chain, which would result in increase in cash flows. The deal is expected to deliver approximately $350 million dollars in cost savings over the first four years of implementation. In addition to that, it will bring more control over North American operations, deliver more flexibility in the company’s strategy implementation and reduce conflicts over the product mix with bottlers.

The company’s high return on equity has been on the rise since hitting a bottom at 27.50% in 2008. 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 10.40% per year since 2001, which is higher than the growth in EPS.

A 10% growth in distributions translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1967, we see that Coca Cola has actually managed to double its dividend every seven years on average.

Over the past decade the dividend payout ratio has remained at or above 50% for a majority of the time. 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 Coca Cola is trading at 18.40 times earnings, yields 2.90% and has a sustainable dividend payout. The stock meets my entry criteria, and I will look forward to adding to my existing position in it.

Full Disclosure: Long KO, PEP and NSRGY

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Warren Buffett – A Closet Dividend Investor

Warren Buffett’s latest annual letter to Berkshire Hathaway (BRK.B) shareholders was published on Feb 26. The major theme of this letter was how to value Berkshire Hathaway as a company. Given the diverse nature of the company’s operations, this is no small task. Another important item that the Oracle of Omaha discussed was the dividend stream that flows to Berkshire on a regular basis.

In a previous article I outlined several reasons why Buffett is a dividend investor. While his investment style in the 1950s – 1970s was simply to purchase stocks trading at a discount to their fair values, it evolved into purchasing entire businesses or equity stakes in them. The common characteristic of these businesses was that they had strong competitive advantages, high returns on equity and as a result were generating excess cash flows. Buffett then used these excess cashflows to invest in other businesses, thus further compounding his capital base. Another characteristic common for Buffett’s stock investments is that most of them pay a dividend as evidenced by the largest positions for Berkshire Hathaway (BRK.B).

In addition to that Berkshire is expected to earn fat dividends from its investments in preferred stocks in General Electric (GE) and Goldman Sachs (GS) as well.

For the foreign based shares listed above I converted the amount of shares Berkshire Held at Dec 31, 2010 to the respective number of ADRs traded on US exchanges. For any currency translations I used the exchange rate as of Dec 31 as well.

Of particular importance are Buffett’s investments in Coca-Cola (KO), Procter & Gamble (PG) and The Washington Post (WPO), which was not listed above.

Buffett’s cost basis in Coca-Cola (KO) is $1.3 billion. At the current distributions rate he is essentially generating a yield on cost of 29%. This means that every three years he gets his initial investment back in the form of dividends alone. The majority of his position in the company was initiated between 1988 and 1989. Check my analysis of Coca-Cola (KO).

In Buffett’s words “Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.”

Buffett’s cost basis in Procter & Gamble (PG) is $464 million. He is generating a yield on cost of over 31% for his shareholders on this investment. The original investment in 1989 was made in Gillette preferred stock, which was converted into common stock in 1991. In 2005 Procter & Gamble (PG) acquired Gillette, which is how Buffett ended up with Procter & Gamble (PG) stock in the process. Check my analysis of Procter & Gamble.

Buffett’s basis in Washington Post (WPO) is $6.15/share. With a current dividend of $9.40, Berkshire’s yield on cost is 153%. The Oracle of Omaha began acquiring stock in the prominent newspaper group in 1973.

The lesson to be learned from these investments is to purchase great businesses at fair prices. These businesses should have a strong competitive advantage, pricing power and generate excess returns without requiring a lot of capital to grow.

Full Disclosure: Long PG, KO, JNJ, KFT, WMT

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Dividend Stocks Showing Investors the money

Investors realize return on investment in the form of dividends, capital gains or a mix of both. Stocks that pay dividends typically deliver on average total long term returns that are characteristic of equities in general. The main characteristic that differentiates dividend paying stocks is that the dividend payment provides some stability in the total returns that investors are expected to receive in a given year. This lowers volatility and ensures that investors generate a relatively predictable return that could be used to fund retirement needs. Investors relying on dividends for their retirement income should also look at companies that regularly grow distributions, as a hedge against inflation.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company raised its quarterly dividends by 20.70% to 36.50 cents/share. This marked the 37th consecutive annual dividend increase for Wal-Mart. The ten year annual dividend growth rate is 17.80% for this dividend aristocrat. Yield: 2.80% (analysis)

Waste Management, Inc. (WM) provides integrated waste management services in North America. The company raised its quarterly dividends by 7.90% to 34 cents/share. This marked the Ninth consecutive annual dividend increase for the company. The five year annual dividend growth rate is 9.50% for this dividend stock. Yield: 3.70% (analysis)

WGL Holdings, Inc. (WGL) engages in the delivery and sale of natural gas, and provides energy-related products and services in the District of Columbia, Maryland, Virginia, and Delaware. The company raised its quarterly dividends by 2.60% to 38.75 cents/share. This marked the 35th consecutive annual dividend increase for the company. The ten year annual dividend growth rate is 2% for this dividend champion. Yield: 4%

The Gap, Inc. (GPS) operates as a specialty retailing company. The company raised its quarterly dividends by 12.50% to 11.25 cents/share. This marked the eight consecutive annual dividend increase for the company. Yield: 2%

National Interstate Corporation (NATL) , through its subsidiaries, operates as a specialty property and casualty insurance company in the United States, the District of Columbia, and the Cayman Islands. The company raised its quarterly dividends by 12.50% to 9 cents/share. This marked the seventh consecutive annual dividend increase for the company. Yield: 1.80%

The Hanover Insurance Group, Inc. (THG) , through its subsidiaries, underwrites personal and commercial property, and casualty insurance coverage in the United States. The company raised its quarterly dividends by 10% to 27.50 cents/share. This marked the seventh consecutive annual dividend increase for the company. Yield: 2.40%

General Dynamics Corporation (GD) provides business aviation; combat vehicles, weapons systems, and munitions; shipbuilding design and construction; and information systems, technologies, and services worldwide. The company raised its quarterly dividends by 11.90% to 47 cents/share. This marked the twentieth consecutive annual dividend increase for the company. Yield: 2.50%

Telephone and Data Systems, Inc. (TDS), through its subsidiaries, provides wireless and wireline telecommunications services in the United States. The company raised its quarterly dividends by 4.40% to 11.75 cents/share. This marked the 37th consecutive annual dividend increase for the company. Yield: 1.40%

Canadian Natural Resources Limited (CNQ) engages in the exploration, development, and production of crude oil and natural gas. The company raised its quarterly dividend by 20% to 9 cents/share. This international dividend achiever has boosted distributions since the year 2000. The stock currently yields only 0.80%.

The positive news is that Wal-Mart (WMT) is fitting my entry criteria after the increased dividend. Over the past decade the largest retailer in the US has increased revenues and profits, while its stock price has remained stagnant. The reason is that investors were too optimistic about Wal-Mart’s prospects in 1999-2000 and it wasn’t until recent years that the stock has become attractively priced. I would consider adding to my position in the stock as funds become available.

Full Disclosure: Long WMT

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PPG Industries (PPG) Dividend Stock Analysis

PPG Industries, Inc. (PPG) manufactures and supplies protective and decorative coatings. The company is a dividend aristocrat which has increased distributions for 39 years in a row.
Over the past decade this dividend stock has delivered an annualized total return of 9.60% to its loyal shareholders.

The company has managed to deliver a negative average increase in EPS of 6.10% per year since 2000. Analysts expect PPG Industries to earn $5.04 per share in 2010 and $5.68 per share in 2011. This would be a nice increase from the $2.03/share the company earned in 2009. The company’s net income is exposed to the cyclical nature of the company’s business, as it shrinks during downturns but rebounds sharply during upturns.


Few cyclical companies can afford to raise dividends for as long as PPG Industries has done so. Companies that come to mind include Nucor (NUE) and RPM International (RPM). The main risk with cyclical companies is that the dividend is at risk depending on the length and depth of each recession. Future management could decide to cut dividends during the next recession, as the distributions would look unsustainable. However, if they expect an upturn within a year or two, chances are that the dividend would be at least maintained.

The company’s return on equity has closely followed the volatility in earnings per share over the past decade. One could easily pinpoint the periods of economic downturn, which is when the ROE decreased –2001-2002 and 2008-2009 recessions. 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 3.20% per year since 2000, which is substantially higher than the growth in EPS. Despite the cyclicality of earnings, the company has managed to not only maintain but raise dividends consistently, which is not a minor accomplishment.

A 3% growth in distributions translates into the dividend payment doubling every 24 years. If we look at historical data, going as far back as 1973, we see that PPG Industries has actually managed to double its dividend every nine years on average.

Over the past decade the dividend payout ratio has increased from 45% to 105%. Based on estimated FY 2010 EPS of $5 however, the dividend looks adequately covered. 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 PPG Industries is close to being overvalued at 19.40 times earnings, yields 2.40% and has a sustainable dividend payout based off forward earnings. The cyclical business model and the valuation relative to other dividend companies make this company a hold at current prices according to my entry criteria.

Full Disclosure: Long NUE and RPM

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My Entry Criteria for Dividend Stocks

There are thousands of stocks traded on US and international markets. If one were to analyze in detail all of these stocks it would probably take them a lifetime to accomplish this task. Luckily, dividend growth investors have several lists they could use to aide in the search for quality dividend stocks.

The first criterion that I use is that a company must have consistently raised distributions for at least ten years in a row. According to the dividend champions list, maintained by Dave Fish, there were 234 companies trading in the US which have managed to accomplish this. The reason behind requiring at least a decade of consistent dividend growth is to weed out all companies which are inconsistent in their dividend policies.

The second criterion includes removing companies which trade at a price/earnings ratio that is above 20. Even the best dividend paying companies such as Coca-Cola (KO) or Procter & Gamble (PG) are not worth buying at any price. In fact it could be argued that the reason behind the lackluster performance of the US Stock Market and many dividend stocks over the past decade is because they were grossly overvalued in the early 2000s. Despite the fact that many of these companies were able to substantially increase earnings and dividends over the past decade, these stocks are only now beginning to appear attractively valued. The only returns these shareholders were able to generate over the past decade were mostly from dividends.

The third criterion includes removing all stocks whose dividend payout ratio is higher than 60%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. Otherwise a high payout could show that the company cannot afford to pay the distribution and that the risk of a dividend cut is high.

Next, I want to look at earnings growth over the past decade, and dividend growth that exceeds inflation over the past decade.We want companies that grow earnings per share. This provides fuel for future dividend increases and increases the likelihood that the intrinsic value of the business grows over time.

After applying the set of criteria described above, the dividend investor should have a more manageable list for further research. While some investors also use dividend growth as another criterion, I typically want to only see it in the positive territory. The individual dividend growth is dependent on the type of company in the dividend yield and growth trade-off. After that I evaluate dividend growth prospects on a company by company basis. In addition, certain companies which pass-through most of their income to shareholders such as REITs and MLPs should be evaluated using a separate set of criteria that fits better with the type of business structure investors are analyzing.


It is important to remember that dividend investing should not be seen as a mechanical process. Investors should further analyze in detail the companies which their list generates and evaluate their competitive advantages, understand their business model and decide for themselves whether future dividend growth could be maintained.

Full Disclosure: Long PEP,PG,KO, WMT, MCD, CVX, CL

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