Dividend Growth Investor Newsletter

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Wednesday, June 29, 2011

16 Core Dividend Stocks for your income portfolio

There are approximately 300 stocks in the world, which have managed to increase dividends for at least ten years in a row. As a dividend growth investor I have analyzed in some detail almost all of these stocks, even though most of them will probably never meet my entry criteria. One reason behind that is valuation. Another, more important reason is that few of these companies have sustainable competitive advantages. As a result, in my articles describing dividend growth investing I tend to focus on a narrow list of quality candidates.

The reason behind this is because there are only a handful of quality dividend growth stocks which meet the above characteristics. These companies have a proven track record of dividend increases, fueled by earnings growth which was a direct result of having a strong brand name and a product or service which they can charge premium prices for.

Right now, I find these quality companies to be the core of my dividend portfolio. If I were starting in dividend investing today, I would certainly be accumulating these stocks first, before looking for other opportunities.

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company has raised dividends for 49 years in a row and its ten year annual dividend growth rate is 10%. Yield 2.80% (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has raised dividends for 39 years in a row and its ten year annual dividend growth rate is 13%. Yield 3% (analysis)

The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company has raised dividends for 34 years in a row and its ten year annual dividend growth rate is 9.90% . Yield 3.60% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has raised dividends for 48 years in a row and its ten year annual dividend growth rate is 12.40%. Yield 2.70% (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company has raised dividends for 49 years in a row and its ten year annual dividend growth rate is 13%. Yield 3.40% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company has raised dividends for 55 years in a row and its ten year annual dividend growth rate is 10.90%. Yield 3.30% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has raised dividends for 24 years in a row and its ten year annual dividend growth rate is 8.10%. Yield 3.10% (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company has raised dividends for 34 years in a row and its ten year annual dividend growth rate is 16.90%. Yield 2.50% (analysis)

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company has raised dividends for 28 years in a row and its ten year annual dividend growth rate is 21.30%. Yield 2.60% (analysis)

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. The company has raised dividends for 29 years in a row and its ten year annual dividend growth rate is 10%. Yield 2.50% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised dividends for 37 years in a row and its ten year annual dividend growth rate is 17.80% . Yield 2.70% (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The company has raised dividends for 39 years in a row and its ten year annual dividend growth rate is 8.80%. Yield 3.70% (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. The company has raised distributions for 15 years in a row and its ten year annual distribution growth rate is 10.90%. Yield 6.40% (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. Yield 3.80% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company has raised dividends for 34 years in a row and its ten year annual dividend growth rate is 26.50% . Yield 2.90% (analysis)

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company has raised dividends for 46 years in a row and its ten year annual dividend growth rate is 8.30%. Yield 2.50% (analysis)

At the end of the day I understand that purchasing a new dividend achiever with excellent growth prospects could deliver outstanding total returns over time. This is a hit and miss approach however, as high growth could simply be an aberration of short term economic trends. The beauty of the stocks above however is that they deliver consistent results. They deliver results like clockwork. These companies are leaders in their industries, which makes their success difficult to emulate. Their products/services are relatively immune from recessions, although they are not bulletproof. The rising stream of dividends provide investors with an edge that would generate strong returns over time.

Full Disclosure: Long all stocks listed above

Relevant Articles:


This article was included in Carnival of Personal Finance #316
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Monday, June 27, 2011

Eight Golden Geese Laying Golden Eggs for Shareholders

The story of the golden goose describes very well the world of dividend investing. On the outside, dividend stocks act like normal stocks as they go up in bull markets and go down in bear markets. On the inside however, these cash machines generate so much in excess cash flow that they are able to successfully reinvest in their business, while also paying higher dividends every year. Investors who hold onto their dividend growth stocks get a dividend check every quarter. Selling those dividend stocks and investing in the next hot tech stock would mean that investors would not be getting their golden eggs in a timely manner anymore, and would be at the mercy of the markets for their returns.

Several golden geese, announced plans to deliver higher dividends ( larger golden eggs) to their shareholders:

Hingham Institution for Savings (HIFS) provides various financial products and services to individuals and small businesses in Boston and southeastern Massachusetts. The company raised its quarterly distributions by 4% to 25 cents/share. Hingham Institution for Savingsis not a dividend achiever, but has increased its quarterly dividend in each of the past sixteen years. The company also pays a special dividend with its regular dividend payment in the fourth quarter. The stock currently yields 2.40%. (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company raised quarterly its distributions by 7.80% to 24.25 cents/share. Medtronic is a dividend champion, which has increased its quarterly dividend in each of the past 34 years. The stock currently yields 2.50%. (analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. The company raised its quarterly distributions by 0.20% to 14.49 cents/share. Realty Income is a dividend achiever, which has increased its quarterly dividend for 17 years in a row. The stock currently yields 5.30%. (analysis)

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. This dividend achiever raised its quarterly distributions by 7.30% to 55 cents/share. W.P. Carey & Co has increased its quarterly distribution for 14 consecutive years. The company’s units currently yield 5.70%.

Casey’s General Stores, Inc. (CASY), together with its subsidiaries, operates convenience stores under the names of Casey’s General Store, HandiMart, and Just Diesel in the Midwestern states. The company raised distributions by 11.10% to 15 cents/share. This dividend achiever has increased distributions for 12 years in a row. Yield: 1.50%

John Wiley & Sons, Inc. (JW-A), together with its subsidiaries, publishes print and electronic products that provide content and digital solutions to customers worldwide. The company raised distributions by 25% to 20cents/share. This dividend achiever has increased distributions for 18 years in a row. Yield: 1.60%

Best Buy Co. (BBY), Inc. operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. The company raised its quarterly distributions by 6.70% to 16 cents/share. Best Buy has increased its quarterly dividend for 9 years in a row. The stock currently yields 2%.

Duke Energy Corporation (DUK) operates as an energy company in the Americas. It operates through three segments: U.S. Franchised Electric and Gas, Commercial Power, and International Energy. The company raised its quarterly distributions by 2% to 25 cents/share. Duke Energy has increased its quarterly distribution for 7 consecutive years. The company’s units currently yield 5.30%.

Currently I find Medtronic (MDT) and Hingham Institution for Savings (HIFS) to be back into buy territory per my entry criteria. I added to my Realty Income (O) position on the recent pullback. Despite the slow distribution growth, I expect Realty Income to start laying larger eggs soon, as it completes more projects.

Full Disclosure: Long MDT, O, HIFS

Relevant Articles:

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Sunday, June 26, 2011

Weekend Reading Links - June 26, 2011

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From Dividend Growth Investor
Articles From DIV-Net Members
There are some really good articles here, please take time and read a few of them.


at

Friday, June 24, 2011

McDonald’s (MCD) Dividend Stock 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. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. McDonald’s has paid uninterrupted dividends on its common stock since 1976 and increased payments to common shareholders every year for 34 years.

The most recent dividend increase was in September 2010, when the Board of Directors approved an 11% increase to 61 cents/share. The major competitors of McDonald’s include Yum! Brands (YUM) and Starbucks (SBUX).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.80% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 15.50% per year since 2001. Analysts expect McDonald’s to earn $5.09 per share in 2011 and $5.55 per share in 2012. This would be a nice increase from the $4.58/share the company earned in 2010. On average the company has managed to repurchase 2.20% of its stock annually over the past decade. I expect future earnings per share growth to average 10% per year over the next decade.

Analysts expect the company to manage to deliver 4% - 5% annual sales growth over the next few years. Growth in Asia/Pacific and Europe would likely outstrip US revenue growth. The international segment, which accounts for almost 55% of profits, has accounted for much of the growth in the past and is also expected to deliver growth in the future. The company has been able to achieve sales growth through innovation in its menu, introduction of different drinks as well as using its dollar menu items. Since 2003 the company has focused its strategy mostly on internal growth through maximizing existing restaurants’ profitability. For example, the company is spending half of its CAPEX on new stores, while the other is mostly spent on redesigning of its existing locations. In addition, the company has focused on its stores profitability by disposing of non-core assets such as Chipotle Mexican Grill (CMG) and Boston Market.
One of the main risks behind the company is food inflation. However, given its strong brand name, the company should be able to pass on some of the rising food costs to consumers, without alienating them.

The company has been able to increase in return on equity from the high teens in early 2000s to over 30% over the past three years. 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 26.50% per year since 2000, which is much higher than the growth in EPS. Future dividend growth would likely average 10% per year.

A 26% growth in distributions translates into the dividend payment doubling almost every three years. If we look at historical data, going as far back as 1979, we see that McDonald’s has actually managed to double its dividend every fouryears on average.

Over the past decade the dividend payout ratio has increased from 18% in 2001 to 49% in 2010. This has mostly been as a result of dividend growth being faster than earnings growth. 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 McDonald’s fits my entry criteria trading at 16.60 times earnings, yields 3.10% and has a sustainable dividend payout. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long MCD and YUM

Relevant Articles:

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Wednesday, June 22, 2011

Is your dividend income riskier than expected?

I try to maintain a conservative portfolio of dividend growth stocks, where I maintain proper asset allocation, position sizing and have exposure to asset classes and markets outside of the US. You could see my portfolio here.

Since my investments are spread out in several brokerages, it makes sense to keep track of them in one place using spreadsheet software. This makes it easy to compare the overall position size of each stock that I own in relation to my total portfolio overall. In an ideal world, In a dividend portfolio consisting of 40 stocks, one would expect to have a 2.50% allocation to each one of them. In reality however, building a dividend portfolio takes time. The companies which might have been great buys in 2008, might not fit in my entry criteria today. Since I only sell after a dividend cut, I hold on to companies which are overvalued today but either keep or increase their distributions. As a result the allocation to these companies decreases over time, since I constantly add new money to the accounts and reinvest dividends selectively.

As a result, of all the 40 or so stocks I own, almost half of them have a below average weight in my total portfolio. These stocks account for 24% of my portfolio value and 18% of my total dividend income. One quarter of all the stocks I own have an allocation of one percent or less in each company. These stocks account for 6% of my portfolio value but only for 4.5% of the income.

This means that almost half of the names in my portfolio account for 76% of the total portfolio value and 82% of the total dividend income I generate per year.

I was particularly worried when I noted that three stocks were responsible for generating 21.50 % of my total dividend income. These three stocks had a total weighting of 12.50% in my portfolio. These are three high yield dividend stocks which so far have rewarded me with generous distributions coupled with decent increases along the way. The companies include:

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. 10 year dividend growth rate: 10.90% Yield: 6.40% (analysis)

Enbridge Energy Partners, L.P. (EEP) owns and operates crude oil and liquid petroleum transportation and storage assets, as well as natural gas gathering, treating, processing, transmission, and marketing assets in the United States. Yield: 6.90%

Universal Health Realty Income Trust (UHT) operates as a real estate investment trust (REIT) in the United States. 10 year dividend growth rate: 2.80% Yield: 6.10% (analysis)

As a result of this analysis, I would probably stop adding money to these positions until my dividend income and stock weights decrease to more manageable levels. On a side note, my investments in Kinder Morgan and Enbridge Energy Partners are primarily in the form of i-shares such as KMR and EEQ. As a result I receive distributions in the form of fractional units, which does not trigger a taxable event. If I were to sell those fractional units however, I would be generating a short-term capital gain.

Two stocks which have a lower weight in my portfolio than average include Air Products and Chemicals and Wal-Mart Stores.

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. 10 year dividend growth rate: 10% Yield: 2.60% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. 10 year dividend growth rate: 17.80% Yield: 2.80% (analysis)

I would look forward to increase my positions to these stocks more aggressively over the next few months given their strong fundamentals as well.

Full Disclosure: Long all shares listed above

Relevant Articles:

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Monday, June 20, 2011

Kinder Morgan Partners – One Company three ways to invest in it

Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets. This master limited partnership has consistently increased distributions since 1997.

There are three ways to invest in the partnership:

The first is by purchasing the limited partner units traded on NYSE under ticker (KMP). These are limited partnership units, which generate K-1 tax forms to unitholders. Most of the distributions which investors receive on a quarterly basis represent a return of capital, which means that it is not taxable unless investors decide to sell their units or unless their cost basis drops below $0. This return of capital reduces the cost basis of investors. The lower cost basis would trigger capital gains when units are sold. When the tax basis drops below $0, any distributions are taxed as ordinary income. I have analyzed Kinder Morgan Partners (KMP) in this article.

The second is by purchasing the LLC units traded on NYSE under ticker (KMR). KMR is a limited partner in and manages and controls the business and affairs of KMP. KMR has no properties and its success is dependent upon its operation and management of KMP and KMP's resulting performance. The only asset that KMR owns is KMP shares. Investors in KMR do not receive cash distributions, but receive shares proportional to the ownership interest they have in the stock. The cash distributions for KMP and KMR are equal, the only difference is that KMR distributions are paid in the form of additional shares.

The third way in investing in Kinder Morgan is by purchasing shares in the general partner interest, which recently started trading on NYSE under ticker (KMI). KMI owns the general partner and limited partner units in KMP. KMI also owns 20 percent of and operates Natural Gas Pipeline Company of America (NGPL), which serves the high-demand Chicago market. Another valuable asset behind KMI is the Incentive distribution rights behind the general partner, which entitles it to 50% of the distributions above certain thresholds. This is why any growth in KMP distributions would really accelerate growth in KMI dividends. KMI is set up as a corporation, which is why investors should receive a form 1099- DIV at the end of the year and have their dividends taxed at no more than 15%.

I purchased the i-units of KMR since I am in the accumulation phase and since they are trading at a steep discount to KMP units. It is true that KMR shares do not offer a “cash payment” per se, although investors could sell the additional shares received each quarter and obtain cash income that way. Investors could purchase KMR and hold it in tax deferred retirement accounts such as ROTH-IRA’s for example, without worrying about the unrelated business tax income (UBTI). Although in a previous article I have discussed why I do not believe the UBTI is an issue for tax-deferred accounts, nevertheless some investors might still worry about this potential tax penalty.

I also purchased KMI as a dividend growth play. While the yield is decent at 4%, I view the company to have excellent dividend growth potential.

Full Disclosure: Long KMR and KMI

Relevant Articles:


This article was included in the Carnival of Personal Finance #315 : Bring on the Long Weekends
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Sunday, June 19, 2011

Weekend Reading Links - June 19, 2011

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From DIV-Net Members
There are some really good articles here, please take time and read a few of them.
at

Friday, June 17, 2011

Wal-Mart (WMT) Dividend Stock Analysis

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. Wal-Mart Stores has paid uninterrupted dividends on its common stock since 1973 and increased payments to common shareholders every year for 37 years.

The most recent dividend increase was in March 2011, when the Board of Directors approved a 20.70% increase to 36.50 cents/share. The major competitors of Wal-Mart Stores include Costco Wholesale (COST), Target (TGT) and Family Dollar (FDO).

Over the past decade this dividend growth stock has delivered an annualized total return of 2.60% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 12.20% per year since 2001. Analysts expect Wal-Mart to earn $4.44 per share in 2011 and $4.88 per share in 2012. This would be a nice increase from the $4.18/share the company earned in 2010. On average the company has managed to repurchase 2.20% of its stock annually over the past decade. Wal-Mart has one of the largest and most consistent stock buyback programs in the US.

Analysts estimate that Wal-Mart (WMT) will be able to achieve a 10% annual growth in EPS for the next 5 years. This will be driven largely by the company’s international operations, where the company is attempting to generate economies of scale. Wal-mart (WMT) has also decreased the number of new store openings in the US, in an effort to reduce cannibalization of sales. This has left it with extra free cash flows, which could be used to further reduce the share count. The company has started to invest in its existing stores, by redesigning them in some neighborhoods, in an effort to make them more appealing to a wider variety of shoppers. This could help Wal-Mart in squeezing in extra revenue per existing store, without having to rely too much on new stores for revenue growth in the US.


The company has had a high return on equity, which has remained in a tight range between 20% and 23% over the past decade. 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 17.70% per year since 2001, which is much higher than the growth in EPS.

An 18% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1976, we see that Wal-Mart has actually managed to double its dividend every three years on average.

Over the past decade the dividend payout ratio has increased from 18.70% in 2001 to 29% in 2010. This has mostly been as a result of dividend growth being faster than earnings growth. 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 Wal-Mart fits my entry criteria as it is trading at 11.50 times earnings, yields 2.80% and has a sustainable dividend payout. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long WMT

Relevant Articles:

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Wednesday, June 15, 2011

Why the best investment plans never turn out as expected

In most of my posts on dividend investing I tend to preach about a strict method for equity selection which focuses on valuation, dividend yield, dividend sustainability and a minimum number of annual dividend increases. I also typically mention the same stocks in most articles, which exhibit the type of dividend stock I am looking for.

When looking at the best performers in my portfolio over the past few years, I noted that sometimes the greatest dividend stocks tend to be different than what we expect them to be. Even in life, people sometimes search for the best job, or the love of their life using predetermined criteria. In the end they end up finding their true passion or life partner that is just right, despite the fact that it was different than expected.

Some of my best dividend performers include:

Family Dollar (FDO)- The reason why I purchased this stock is because I saw that the company was able to expand the number of stores in the US at a decent rate. This was going to drive earnings per share for the foreseeable future, which would ultimately result in higher stock prices and higher dividends. Last but not least, during the last recession, price conscious consumers flocked to dollar stores for their purchases. (analysis)

Walgreens (WAG) - One of the reasons why I purchased Walgreens is that it yielded close to 2.50% for the first time in decades. In addition to that the stock was trading at 14 times earnings, which was a steal. I also liked the fact that the company is decreasing the number of new store openings at untested locations, while gaining entry in new markets through acquisitions. (analysis)

Yum! Brands (YUM) - The reason why I purchased this stock is because it has a strong presence in China. In addition it has a strong opportunity for growth in the world’s most populous nation, beating rival McDonald’s (MCD).

The common characteristic behind all of these stocks is that they were purchased in a clear violation to my entry criteria. The most notable exception was that they were yielding below my minimum threshold of 2.50% at the time of purchase. I only initiated a small position in each of the three stocks mentioned above, mostly because of their low yields.

The main limitation behind this sample of course is that I selected three growth stocks during a period where the market has gone up by 100% since its March 2009 lows. Bull markets typically tend to favor growth stocks, as investors bid their prices up, while defensive sectors such as consumer staples might not rise as much. It is important to note however that while the stocks mentioned above were purchased at yields which were lower than my minimum threshold of 2.50%, their valuations were reasonable based off P/E ratios below 20 and double digit growth rates in EPS.

The point I am trying to make is that one should not get married to their positions. It is important to have a strategy, but it is also important that not all strategies will work all the time. While I do believe that Johnson & Johnson (JNJ), despite its recent difficulties, is a great dividend growth stock to own, it should be one of at least 30 in a diversified dividend portfolio. Diversification is important, not only to reduce the risk of concentrated bets on a sector that implodes but also to provide investors with a greater chance of including sectors and stocks which could provide decent total returns over time. As discussed in earlier articles, I am striving to have a dividend portfolio which is comprised of three types of dividend stocks. So far the higher yielding and the lowest yielding stocks have delivered the best total returns, while stocks in the sweet spot have done only ok. It is also important to keep a long term view on your investments as well, as your investing portfolio could go through several market cycles before and after you retire on it.

Another important thing to remember is that dividend investing is not a black box style investing method. Sometimes a company with great quality characteristics which is just shy from your entry criteria might make more sense, despite the fact that your data analysis says otherwise. While it is great to have predetermined criteria before purchasing a stock, sometimes it might be wise to break some of your rules in order to enter into the right position.

At the end of the day, pure dividend growth investing is mostly about identifying companies with rising earnings and dividends, and then riding this trend for as long as possible, despite current yields. Adding additional filters could protect investors at times of irrational exuberance, but could also limit their upside during economic rebounds. As a result, investing should be viewed not just in a quantitative but also in a qualitative way. Evaluating company qualities on a stock by stock basis, while highly subjective, could be the decisive factor behind your investment success.

Full Disclosure: Long FDO, WAG, YUM

Relevant Articles:


This article was included in the Carnival of Personal Finance # 314
at

Monday, June 13, 2011

Six Dividend Stocks Providing Increasing Returns for Shareholders

The only way to generate a return on a stock that does not pay dividends is to sell it. Once you sell that stock, you have a taxable event where you have to pay taxes on your whole gain all at once. Contrast this to dividend paying stocks, where a consistent dividend payment spreads out your returns and the taxable liabilities associated with it over time.

Several consistent dividend growth stocks announced increased distributions to shareholders, like clockwork. These increased distributions would surely increase the return on investment, particularly at a time when stock prices have been in a decline for six consecutive weeks.

Target Corporation (TGT) operates general merchandise stores in the United States. The company’s Board of Directors approved a 20% increase in its quarterly distribution to 30 cents/share. This marked the 44th consecutive annual dividend increase for this dividend aristocrat. Yield: 2.60% (analysis)

National Fuel Gas Company (NFG) , through its subsidiaries, operates as a diversified energy company primarily in the United States. The company operates through four segments: Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing. The company’s Board of Directors approved a 2.90% increase in its quarterly distribution to 35.50 cents/share. This marked the 41st consecutive annual dividend increase for this dividend champion. Yield: 2.10%

C. R. Bard, Inc. (CR) , together with its subsidiaries, engages in the design, manufacture, packaging, distribution, and sale of medical, surgical, diagnostic, and patient care devices worldwide. The company’s Board of Directors approved a 5.60% increase in its quarterly distribution to 19 cents/share. This marked the 40th consecutive annual dividend increase for this dividend aristocrat. Yield: 0.70%

Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It operates through three lines of businesses: Machinery, Engines, and Financial Products. The company’s Board of Directors approved a 4.50% increase in its quarterly distribution to 46 cents/share. This marked the 18th consecutive annual dividend increase for this dividend achiever. Yield: 1.90%

Birner Dental Management Services, Inc. (BDMS) provides business services to dental group practices in Colorado, New Mexico, and Arizona. The company’s Board of Directors approved a 10% increase in its quarterly distribution to 22 cents/share. This marked the eight consecutive annual dividends increase for the company. Yield: 4.62%

FedEx Corporation (FDX) provides transportation, e-commerce, and business services in the United States and internationally. It operates in four segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. The company’s Board of Directors approved a 8.30% increase in its quarterly distribution to 13 cents/share. This marked the 10th consecutive annual dividend increase for this dividend stock. Yield: 0.60%

Target Stores’ (TGT) recent dividend increase makes the company attractively valued per my entry criteria. Last time I evaluated the company was in 2008, before the financial crisis. I would analyze this retailer in detail in future weeks.

Full Disclosure: None

Relevant Articles:

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Friday, June 10, 2011

Exxon Mobil (XOM) Dividend Stock Analysis

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. Exxon Mobil is a component of the Dow Jones Industrials and the dividend aristocrats indexes. Exxon Mobil has paid uninterrupted dividends on its common stock since 1882 and increased payments to common shareholders every year for 28 years.

The most recent dividend increase was in April 2011, when the Board of Directors approved a 6.80% increase to 47 cents/share. The major competitors of Exxon Mobil include Chevron Corp (CVX), British Petroleum (BP) and Royal Dutch Shell (RDS-B).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.60% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 12.30% per year since 2001. Analysts expect Exxon-Mobil to earn $8.28 per share in 2011 and $8.85 per share in 2012. This would be a nice increase from the $6.22/share the company earned in 2010. On average the company has managed to repurchase 4.20% of its stock annually over the past decade. Exxon Mobil has one of the largest and most consistent stock buyback programs in the US.

The company has a strong reserve replacement ratio, which ensures it would not run out of oil. The sheer scale of the company gives it huge economies of scale. Its productivity is further boosted by the efficiency of developing new projects in Quatar, Norway and US. Exxon Mobil does business on over 200 countries and derives only 30% of its revenues from the US. The company has over 130 projects worldwide whose goal is to increase reserves of oil and natural gas. The company’s future acquisition of XTO Energy will boost natural gas production by over a quarter. XTO’s resources are close to the markets it serves. In addition to that technical expertise from XTO energy could assist Exxon Mobil in developing new shale fields worldwide. Exxon has been accumulating natural gas assets, which could provide the company with long term dividends given the low prices of natural gas.

The return on equity closely followed the rise of oil prices up until 2008, the fall in 2008- 2009 and the subsequent increase ever since. Right now Exxon-Mobil has a high return on equity of 20%. Given the high oil prices, I expect ROE to reach its 2008 highs this year. 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 7.40% per year since 2001, which is lower than the growth in EPS.

A 7% growth in distributions translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1970, we see that Exxon Mobil has managed to double its dividend every ten and years on average.

Over the past decade the dividend payout ratio has generally followed a downward trend. This indicator spiked up on a few occasions mainly due to short term weakness in EPS caused by declines in oil and gas prices. 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 Exxon Mobil is trading at 11.50 times earnings, yields 2.30% and has a sustainable dividend payout. Despite rising oil prices, and the low P/E ratio, the company has a very stingy dividend payout in comparison to its peers. As a result, I would only consider adding to my position in the stock on dips below $75.

Full Disclosure: Long CVX, XOM, RDS-B

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Wednesday, June 8, 2011

Lifecycle of the dividend investor

Dividend stocks have traditionally been the investment vehicle for investors who are looking to generate a sustainable income stream from their capital. As a result they have a strong appeal amongst retired individuals for several reasons. In recent years however many investors have started to realize that these boring companies with predictable earnings and dividend streams tend to deliver strong total returns in addition to rewarding patient shareholders with regular dividend payments. The main reason behind this is that dividend stocks are typically not overpriced, and as a result offer more value for the investors dollars in comparison to high-flying but volatile growth stocks. With the implosion of the bubbles over the past decade, even younger investors are starting to realize that dividend investing could deliver strong total returns over time.

There are several stages which investors go through in their dividend investing endeavors. Most of these stages are governed by the individuals age, but some could be dictated by the investing experience of each investor.

The first stage could be broadly defined as the accumulation stage. Investors save money and put a certain amount towards dividend stocks. They reinvest dividends into additional shares and build their portfolio slowly over time. These investors are typically investing for growth, as they expect double digit yields on cost a few decades after making their purchases. Companies which appeal to such investors today include:

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has raised dividends for 48 years in a row and currently yields: 2.80% (analysis)

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company has raised dividends for 28 years in a row and currently yields: 2.60% (analysis)

Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company has raised dividends for 38 years in a row and currently yields: 1.90%(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. The company has raised dividends for 34 years in a row and currently yields: 3.60% (analysis)

McCormick & Company Incorporated (MKC) engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. It operates in two segments, Consumer and Industrial. The company has raised dividends for 25 years in a row and currently yields: 2.30% (analysis)

Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. The company has raised dividends for 35 years in a row and currently yields: 1.60% (analysis)

The second stage is the distribution stage. Investors who have accumulated a diversified portfolio of income producing securities are living off the dividend stream in retirement. The dividend income is sufficient to cover annual expenses. As a result the dividend investor does not have to sell any stock in their portfolio. This lessens the risk that the retiree will outlive their assets as they would not have to sell stock to cover expenses during bear markets.
Companies which might appeal to such investors are typically the ones that yield more than the market.

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. The company has raised dividends for 15 years in a row and currently yields: 6.20% (analysis)

AT&T Inc. (T) , together with its subsidiaries, provides telecommunication services to consumers, businesses, and other service providers worldwide. The company has raised dividends for 27 years in a row and currently yields: 5.60% (analysis)

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. The company has raised dividends for 37 years in a row and currently yields: 4.60% (analysis)

Universal Health Realty Income Trust (UHT) is a real estate investment trust (REIT) which invests in health care and human service related facilities. The company has raised dividends for 22 years in a row and currently yields: 5.80% (analysis)

The problem with the higher yielding approach is that it limits the choices for creating a diversified dividend portfolio to sectors such as Utilities, Master Limited Partnerships, Real Estate Investment Trusts and Telecom. Financials used to be a favorite sector for dividend investors, given their high dividend yields and long histories of dividend growth. The financial crisis of 2007-2009 made many investors reassess their portfolios and include other sectors in it.

Investing purely for dividend growth without taking into consideration current yields also has its own risks of course. It is extremely difficult to predict which company would be able to grow distributions at the same rate as it has done in the past. As a result low yielding dividend stocks which fail to raise distribution quickly enough could result in low yields on cost for a longer period than investors could tolerate. Low dividend stocks could also experience a higher volatility in their stock prices as well.

As a result, many investors are using a blended approach of high yield stocks with low dividend growth as well as lower yielding stocks with higher dividend growth. This way investors could position themselves to not only generate sufficient income today, but will also be able to grow that income over time in order to offset the eroding power of inflation.

Full Disclosure: Long all stocks mentioned above except BDX and T

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This article was included in Carnival of Personal Finance #313.
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Monday, June 6, 2011

Natural Selection in Dividend Portfolios

Investors should purchase stocks with the intention to hold on to them forever. They should spend time analyzing the stocks to purchase, fine tuning their strategies and diversifying their portfolios properly. However they should realize that things and conditions change. Sometimes the best decision investors could do is sell their stocks when changes occur. As a result, even a portfolio of carefully selected wide moat companies could have big turnover over a time period of several decades. Nevertheless, it is important to try and select only the best dividend stocks after a rigorous screening on such lists as the dividend achievers or the dividend champions. Investors do have to remain nimble and on top of things, as any changes could lead to portfolio turnover over time.

The changes that could occur include buyouts, dividend cuts, spin offs and changes in the business environment. I highlighted several conditions which would make me to sell my dividend stocks in this article.

Many prominent dividend stocks could be attractive buyout targets for larger rivals or by companies which are looking to diversify into a new line of business. Shareholders usually receive a big premium which ensures that almost everyone makes a profit in the process. This doesn’t take into consideration the fact that a growing company might deliver much higher total returns if it stayed independent.

Recent examples of buyout include the acquisition of dividend aristocrats Anheuser-Busch in 2008 by Inbev (BUD). At the time the company which controlled almost half of the US beer market had a dividend record of 32 years of consecutive dividend increases.

Other examples of successful dividend growth stocks bought our include the Quaker Oats acquisitions by PepsiCo (PEP) in 2001 as well as Berkshire Hathaway’s (BRK.B) acquisition of GEICO in 1996. Investors who received stock in the acquirer had to evaluate whether they should keep it or sell it. Investors who received cash had to find other attractively valued replacements for their dividend portfolio.

The opposite of buyouts is spin offs, which is the creation of an independent company through the sale or distribution of new shares of an existing business/division of a parent company. Back in 2007 Altria Group (MO) spun off Kraft Foods (KFT) and distributed shares in the food company to its shareholders. In 2008 Altria also spun-off Philip Morris International (PM). This led to a decrease in the net dividend from 86 cents/share in 2007 to 29 cents/share in 2008. The company was a member of the dividend aristocrats index and boasted a long record of consistent dividend increases. After the spinoff however, it was removed from the index. Investors who closely followed the elite dividend index disposed of the stock. Others which used a more discretionary investing strategy had to evaluate the business of three companies – Altria Group (MO), Philip Morris International (PM) and Kraft Foods (KFT). All of the companies have been able to increase dividends since the spinoff.

Another corporate event which has been a decisive sell signal for many dividend investors is when companies cut or suspend dividend payments. Companies typically cut dividends as a last resort of action, which is why a dividend cut truly shows how dire the business conditions for the company really are. Selling right after a dividend cut has been a smart move. Overall investors who sold immediately after the dividend cut in 2007 and 2008 avoided major blowups such as Citigroup (C) or Washington Mutual (WM). This is typically when I sell my dividend stocks as well and then reinvest the proceeds in stocks which are attractively valued and have strong dividend growth potential. In my experience as a dividend investor, companies that cut dividends either have their stock prices decimated to zero or stage a huge recovery. Investors who purchase dividend cutters are playing against all odds, since a 100% gain followed by a 90% loss would not lead to sustainable wealth accumulation over time.

Full Disclosure: Long KFT, MO, PEP and PM

Relevant Articles:

- Six Dividend Stocks to Hold Forever
- Dividend growth stocks are attractive buyout targets
- Philip Morris International versus Altria
- Replacing dividend stocks sold
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Sunday, June 5, 2011

Weekend Reading Links - June 5, 2011

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From DIV-Net Members
There are some really good articles here, please take time and read a few of them.
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Friday, June 3, 2011

Chevron Corporation (CVX) Dividend Stock Analysis

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. Chevron is a component of the Dow Jones Industrials and the dividend achievers indexes. Chevron has paid uninterrupted dividends on its common stock since 1912 and increased payments to common shareholders every year for 17 years.

The most recent dividend increase was in April 2011, when the Board of Directors approved a 8.30% increase to 78 cents/share. The major competitors of Chevron include Exxon-Mobil (XOM), British Petroleum (BP) and Total (TOT).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.10% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 19.90% per year since 2001. Analysts expect Chevron to earn $12.19 per share in 2011 and $12.94 per share in 2012. This would be a nice increase from the $9.48/share the company earned in 2010. On average the company has managed to repurchase 0.76% of its stock annually over the past decade.

New field developments are expected to generate 1%-2% annual production growth over the next five years. Most of the capital spending on exploration and production would go into the Australia LNG, Gulf of Mexico and deepwater projects. Higher oil prices would also result in high earnings per share. The company is working on acquiring and developing assets which would provide strong results in the future and also add to its reserves. Chevron’s recent acquisition of Atlas Energy is just one example of this strategy. The company is also disposing of assets which generate lower margins. One example is the disposition of a refinery in the UK for $1.7 billion dollars.

On the negative side, there is a court ruling in Ecuador against Chevron for a potential $8.60 billion, which amounts to $4.30/share. The likelihood of CVX having to pay this entire amount however is pretty slim to none however.

Over the past decade, the return on equity increased from 10% in 2001 to 20% by 2010. 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 8.80% per year since 2001, which is lower than the growth in EPS.

A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1990, we see that Chevron has actually managed to double its dividend every ten and a half years on average.


Over the past decade the dividend payout ratio has increased, and remained mostly under 50%. This indicator spiked up on a few occasions mainly due to short term weakness in EPS caused by declines in oil and gas prices. 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 Chevron is trading at 9.80 times earnings, yields 3% and has a sustainable dividend payout. The stock is attractively valued, and if the high oil prices are here to stay Chevron would certainly be able to enjoy high earnings per share in the foreseeable future. Despite the fact that Chevron fits my entry criteria, the massive run up in its share price since I last reviewed the stock in 2010 is makes me uneasy about committing additional capital in the stock. This being said, as long as the share price is below $115 the stock is a buy.

Full Disclosure: Long CVX

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Wednesday, June 1, 2011

Dividend Investing in a Low Interest Rate Environment

Yields on fixed income instruments have been in a decline over the past 30 years. While yields on long term obligations were in the mid to high teens in the early 1980’s due to higher inflation, they have come down quite a bit in the early 2010’s to some of the lowest levels in US history. As a result certain cash deposits such as Certificates of Deposits or Treasury Bills yield less than half a percent. Investors putting cash in any short-term fixed income instruments are not earning an adequate return on their investment and are also losing purchasing power of their savings because of inflation. As a result many savers have started taking on additional risk and getting into dividend paying stocks.

Investing in companies that pay dividends could be rewarding, since it could lead to a rising stream of dividend income, which bonds cannot provide. In addition to that, a portfolio of carefully chosen dividend companies might provide an inflation hedge, as companies pass on rising prices to consumers, which leads to increases in profits and dividends.

The main disadvantage behind investing in dividend stocks however is that your investment is not guaranteed by the FDIC, and could lose some or all of its value. In addition to that, unlike most bonds, dividends are not guaranteed and can be cut. Savers could still earn an adequate amount of interest by purchasing long-term bonds, but even if inflation is modest over the next few decades, it could leads to much lower real returns.

Investors who want to generate a rising stream of income that protects their principal and income from inflation should consider carefully selected dividend stocks. The first place to look is at companies which have a history of raising distributions for at least one decade. Companies which can do this are typically stable and mature businesses, which generate a sufficient amount of cash to expand and share the excess with shareholders in the form of dividends and share buybacks. Once management has committed to consistently raising distributions year in and year out they tend to be more conservative with cash and take only projects that have a higher chance of not only earning money but also earning a sufficient return on investment. Such management knows that cutting distributions would make shareholders unhappy, and would only do so if the business is in trouble.

Another thing that investors should look for is strong competitive advantages. Wal-Mart (WMT) is the largest retailer in the US, operating over 4000 stores domestically. Due to its sheer scale, the company could obtain favorable deals for merchandise and could generate efficiencies that lead to lower costs than competitors. Colgate Palmolive (CL) on the other hand produces quality brand consumer products such as toothpaste, which consumers have to buy in any economic environment. Procter & Gamble’s (PG) Gillette product line is another type of a strong brand which consumers are attached to and prefer to purchase over generic substitutes. As a result companies like Colgate (CL) and Procter& Gamble (PG) have strong competitive advantages in their respective areas.

Another quality to look for in dividend stocks is a business model which is relatively recession resistant. Even during recessions consumers still need to purchase groceries at low cost stores like Wal-Mart (WMT). Consumers still need to use shaving products from companies such as Procter & Gamble (PG), and they still need to brush their teeth with toothpaste from companies such as Colgate Palmolive (CL). The strong competitive advantages, combines with high returns on equity and relative immunity from recessions generates stability in earnings which translates in stable distributions.

The greatest dividend stocks not only have stable earnings however, but they also tend to increase profits over time through innovation, acquisitions and process improvements. A rising earnings pattern could translate in rising dividend incomes over time. This provides the necessary cushion that would protect your dividend income against inflation. Rising earnings also should translate in rising stock prices, which also bodes well for preserving the purchasing power of your principal.

Last but not least investors should only purchase companies which have a sustainable dividend payment and stocks which are not overvalued. When I see companies which pay out in dividends more than what they get in earnings, this automatically raises a red flag. Spending more than what you earn is rarely a sustainable business model for the future. Investors should look for companies which have obtained a proper balance between the amount of earnings they reinvest and the amount of earnings they distribute to shareholders. In addition, overpaying for stocks could lead to subpar returns over time, even if the business itself performs very well.

Full Disclosure: Long CL, PG, WMT

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