Wednesday, August 31, 2011

Are Dividend Investors Benefiting from Stock Buybacks?

Corporations typically return cash to shareholders in two ways – through share buybacks or in the form of dividends. In a previous article I compared and contrasted both methods of returning cash to shareholders.

My analysis of Chubb (CB) spurred a lively discussion among readers, some of which use Net Payout Yield. The net payout yield represents the total amount of cash paid for dividends and spent on share buybacks, divided by the market value of the company. Some investors believe that this should be taken in consideration, whenever someone analyses a stock.

Rather than take these readers words for it, I decided to crunch some numbers. I noted that Chubb (CB) has spent the following amounts for share repurchases over the past 4 years: ( in millions of $)



The most interesting part in this exercise is that the highest price for Chubb stock was $66 reached in 2011. Before that, the highest price was in 2008 at $65. What the company is not showing is that it is repurchasing shares, yet it is also issuing shares most probably to executives who have chosen to exercise their stock options at ridiculously low prices.

The company has spent $1.88 billion on dividends over the past 4 years. However, it has spent $6.24 billion on share repurchases. It spent 3.30 times more on buybacks than on dividends.

An investor with 4.23 million shares in 2006 would have owned 1% of the entity, whereas now they would own 1.30% because of the anti0dillutive effect of share repurchases. However the stock ended 2006 at $53. Had all the cash been paid out as dividends, the investor would have received $19 in dividends/share over a 4 year period (for a 36% return). ( I get to $19 by adding up 1,881 billion spent for dividends and the 6,237 billion spent for buybacks and assuming the number of shares stayed constant, and then dividing by 423 million shares).

Instead, the investor received $5.36 in dividends in total for 2007, 2008, 2009, and 2010. The stock closed 2010 at $60. So the total return was 23%.

I also analyzed three of the largest dividend paying stocks, which repurchased massive amounts of stock over the past several years. The companies include Wal-Mart (WMT), Exxon-Mobil (XOM) and IBM (IBM).

ExxonMobil (XOM) shareholders would have received $21.61/share between 2007 – 2010 has all the cashflow been returned in the form of dividends (for a 28.20% return). Instead, shareholders received a paltry $6.32/share over the 2007-2010 period. The stock closed 2006 at 76.63and traded at 11.60 times earnings. The stock closed 2010 at 73.12 and traded at 11.80 times earnings. The amounts paid per each repurchased share appear reasonable. The increase in share count in 2010 was prompted by the acquisition of XTO energy. Check my analysis of XOM.



Wal-Mart Stores (WMT) shareholders would have received $11.82/share between 2007 – 2010 has all the cashflow been returned in the form of dividends (for a 25.30% return). Instead, shareholders received a paltry $4.13/share over the 2007-2010 period. The stock closed 2006 at 46.18 and traded at 17.40 times earnings. The stock closed 2010 at 53.93 and traded at 12.90 times earnings. When looking at the amount paid per share over the past 4 years, investors should remember that the stock price never went above $63 during our study period. While the share buybacks might not have been beneficial to ordinary WalMart (WMT) shareholders, they have been helpful for the Walton family. The Walton family stake in Wal-Mart has increased to above 50%, mainly due to the fact that the family is holding on to their stock, while the company is using shareholder’s cash to repurchase stock held by others. Check my analysis of WMT.



It seems that IBM (IBM) shareholders would have received $40.53/share between 2007 – 2010 has all the cashflow been returned in the form of dividends (for a 41.70% return). Instead, shareholders received a paltry $8.05/share over the 2007-2010 period. The stock closed 2006 at 97.15 and traded at 16 times earnings. The stock closed 2010 at 146.76 and traded at 12.70 times earnings. The amounts paid per each repurchased share look particularly out of line, given the fact that IBM never traded above $150 until early 2011. Check my analysis of IBM.



Of course, over the long term, (after 10-20 years), the price of each of the stocks mentioned above would be much higher than what it trades for today. As a result, the partners in the business who sold below at current prices would be kicking themselves for their sell decisions between 2007 -2010. However, the partners in the business who held on to their investment would have seen this share repurchase as a smart option.

To summarize however, I would much rather receive special dividends, than get share buybacks.

Full Disclosure: Long CB, WMT, XOM

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Monday, August 29, 2011

Altria Group (MO): High Dividend Growth Stock

Altria Group’s Board of Directors announced a fresh dividend hike over the past week. Owning shares of this company for several years has delivered a rising stream of dividend income to me, and an appreciation of the simple truths mentioned above. Check my analysis of the stock.

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. The company increased its quarterly distributions by 7.90% to 41 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion. Despite all the issues that tobacco companies have faced over the past decade, the increased regulation has created an environment which has helped deliver solid results for shareholders. While the number of smokers decreases each year, the increases in cigarette prices more than compensate for that. In addition, it is almost impossible for a new cigarette manufacturer to create a brand to compete with established players like Altria Group (MO). Despite all the gloom, the company has been the best performer in the S&P 500 over the past 50 years.

Investors, looking at the historical distributions of Altria since 2007, see a big dip in dividends. There is a rational explanation for this however - Altria spun off Kraft (KFT) in 2007 and Phillip Morris International (PM) in 2008. As a result, investors who purchased Altria (MO) stock at the end of 2006 would own shares of Altria (MO), Phillip Morris International (PM) and Kraft (KFT), all of which have increased distributions over the past 5 years. As a result, this investor would have received a rising stream of dividend income in each of the past 5 years since the spin offs began. Standard and Poor’s eliminated Altria from its list of dividend aristocrats in 2008, which was a move that is almost as wrong as reducing the rating of the US in recent weeks. The company’s shareholders didn’t suffer reduced dividend income, which is why the S&P’s move to boot Altria from the elite dividend index was highly suspect. This is the primary reason why I am mostly ignoring the dividend aristocrats index and focusing on the dividend champions index exclusively.

Full Disclosure: Long MO, PM, KFT

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Friday, August 26, 2011

Sysco (SYY) Dividend Stock Analysis

Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. Sysco is a dividend champion has paid uninterrupted dividends on its common stock since 1933 and increased payments to common shareholders every year for 41 years.

The most recent dividend increase was in November 2010, when the Board of Directors approved a 4% increase to 26 cents/share.

Over the past decade this dividend growth stock has delivered an annualized total return of 3.90% to its shareholders.

The company has managed to deliver an increase in EPS of 9.50% per year since 2001. Analysts expect Sysco to earn $1.97 per share in 2011 and $2.07 per share in 2012. In comparison Sysco s earned $1.99 /share the company earned in 2010. The company has managed to consistently repurchase 1.50% of its common stock outstanding over the past decade through share buybacks.


The company’s near term growth prospects will be limited due to fewer Americans going out to eat due to the high unemployment. Additionally, high food inflation and the inability of the company to pass on all of these sharp price hikes on to cash strapped customers from the restaurant industry, which accounts for almost two-thirds of sales, have trimmed earnings growth. Longer-term however, as working adults have less time to prepare meals at home, the business of companies like Sysco should benefit. Increasing the number of distribution centers as well as better management of inventory costs would add to profitability as well. Other areas where Sysco will look to grow earnings include increasing the amount of consolidated purchasing as well as through acquisitions in the US and abroad.

The company has managed to generate high returns on equity, which had consistently remained above 29%. 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 15.30% per year over the past decade, which is much higher than the growth in EPS.

A 15% growth in distributions translates into the dividend payment doubling almost every five years. If we look at historical data, going as far back as 1975, we see that Sysco has actually managed to double its dividend every four years on average.

Over the past decade the dividend payout ratio increased from 26% to 49%. The primary reason behind this steep increase was that dividends increased at almost twice the rate of 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 Sysco is trading at 13.90 times earnings, yields 3.80% and has a sustainable dividend payout. The company currently fits my entry criteria and I would look to add to my position in it subject to availability of funds.

Full Disclosure: Long SYY

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Wednesday, August 24, 2011

Dividend Stocks – The safest investment in the world

We live in challenging times. Commodities such as oil, gold and silver are going up amid speculation that we are going to have high inflation. Given the ample liquidity pumped into the financial system by central bankers around the world, speculators are bidding up precious metals. In addition, investments such as treasury bonds generate yields which are very low. Chances are that these fixed income instruments would lose purchasing power if inflation accelerates. Other “growth” investments such as Linkedin (LNKD), Pandora (P), Groupon and Facebook seem to be generating investors’ interest because they are part of “social media”, despite the fact that their valuations are unsustainable. So how can investors maintain their sanity, generate returns and live off their portfolios in such uncertain world?

The answer is in dividend growth stocks. Only companies which have solid financial results tend to share a portion of their income with shareholders in the form of dividends. Companies which are weak or focus on growth at all costs tend not to pay a dividend, which means that investors can generate a return on investment only if a greater fool bids up the stock price. On the other hand, companies that pay a portion of their earnings as dividends, generate a consistent return to shareholders. This is a definite plus when stock prices are falling or going sideways for extended periods of time. As a result companies that regularly pay rising dividends to shareholders, tend to be favored by long term holders.

The reason behind the appeal of dividend growth stocks is that only companies which fit certain quantitative and qualitative criteria can afford to create a string of consecutive dividend increases. Qualitative characteristics include strong competitive advantages, strong market share, diversification of operations on a global scale , investment in innovation as well as strong brand names which consumers use on a daily basis and for which they can afford to pay a premium price. At the end of the day, even if we experience another recession, consumers would keep eating, shaving, showering, using water and electricity or talking on the phone. Quantitative criteria include items such as dividend growth, earnings growth, valuation, and return on equity or current yield.

Companies that raise dividends also provide a rising stream of income which retirees could use to live off their portfolios. As a result, investors would not have to worry about selling their growth stocks when the market tanks in order to pay their monthly expenses. The rising dividend stream also ensures that retiree’s incomes are keeping up with inflation. Over time the increase in earnings and dividends makes the company more valuable, which leads to increases in share prices as well, as more investors realize that the shares are undervalued.

Some of the safest dividend stocks, which fit my entry criteria include:

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. The company has increased distributions for 15 years in a row. Yield: 6.60%(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: 3.70% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company has increased distributions for 55 years in a row. Yield: 3.40% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company has increased distributions for 49 years in a row. Yield: 2.70% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has increased distributions for 48 years in a row. Yield: 2.70% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has increased distributions for 37 years in a row. Yield: 2.80% (analysis)

This is just a sample of quality dividend growth stocks which are sufficiently profitable to afford a rising dividend payment in good times and in bad times.

Full Disclosure: Long all stocks mentioned above

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Monday, August 22, 2011

Six Dividend Stocks Increasing Distributions Despite Market Volatility

Several companies raised distributions over the past week. The companies which I highlighted in this article have each raised dividends for at least five years in a row. These companies also announced dividend increases over the past week. I typically utilize this list in order to find hidden dividend gems. One hidden dividend gem uncovered was Hingham Institution for Savings (HIFS), which has delivered a 61.60% total return since I analyzed the stock in April 2010.

The companies include:

Cincinnati Financial Corporation (CINF) engages in the property casualty insurance business in the United States. The company raised its quarterly dividend by 0.63% to 40.25 cents/share. Cincinnati Financial Corporation is one of eleven companies in the world which have managed to consistently raise dividends for over half a century. Yield: 6.10% (analysis)

MGE Energy, Inc. (MGEE), through its subsidiaries, operates as a public utility holding company. It engages in generating, purchasing, transmitting, and distributing electricity. The company raised its quarterly dividend by 2% to 38.26 cents/share. MGE Energy, Inc. is a dividend champion which has rasied dividends for 35 years in a row. Yield: 3.80%

Delta Natural Gas Company, Inc. (DGAS) distributes or transports natural gas in central and southeastern Kentucky. The company raised its quarterly dividend by 2.90% to 35 cents.share. Delta Natural Gas Company, Inc. has consistently raised distributions for 7 years in row. Yield: 4.50%

ITC Holdings Corp. (ITC), through its subsidiaries, engages in the transmission of electricity in the United States. The company raised its quarterly dividend by 5.20% to 35.25 cents/share. ITC Holdings Corp. has raised distributions for 7 consecutive years. Yield: 2%

Maxim Integrated Products, Inc. (MXIM) designs, develops, manufactures, and markets a range of linear and mixed-signal integrated circuits worldwide. The company raised its quarterly dividend by 4.80% to 22 cents/share. Maxim Integrated Products, Inc. is a dividend achiever which has consistently raised dividends for 11 years. Yield: 4.10%

Nordson Corporation (NDSN) manufactures equipment used for precision dispensing, testing and inspection, and surface preparation and curing. The company raised its quarterly dividend by 19% to 12.50 cents/share Nordson Corporation is a dividend champion which has regularly raised dividends for 48 years in a row. Yield:1.10%

Full Disclosure: Long CINF and HIFS

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Friday, August 19, 2011

Illinois Tool Works (ITW) Dividend Stock Analysis

Illinois Tool Works Inc. (ITW) manufactures a range of industrial products and equipment worldwide. Illinois Tool Works is a dividend champion, has paid uninterrupted dividends on its common stock since 1933 and increased payments to common shareholders every year for 47 years. The most recent dividend increase was in August 2010, when the Board of Directors approved a 9.70% increase to 34 cents/share.

The largest competitors of Illinois Tool Works include Timken Co (TKR), Kaydon Corp (KDN) and SKF AB (SKFRY).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.10% to its shareholders.
The company has managed to deliver an increase in EPS of 9.70% per year since 2002. Analysts expect Illinois Tool Works to earn $3.93 per share in 2012 and $4.59 per share in 2013. In comparison Illinois Tool Works earned $3.03 /share the company earned in 2011.
The global economic recovery as well as strategic acquisitions should boost performance over the next few years. The greater industrial and manufacturing activity worldwide has led to strong performance in the company’s transportation, industrial packaging as well as the power systems and electronics segments. Other growth factors include the company’s focus on increasing its international exposure in countries like China, Brazil and India as well as focusing on organic growth through product innovation. Almost 60% of the company’s sales are derived from outside the US.Illinois Tool Works essentially consists of almost 60 separate businesses, whose
managers are given the authority to make important business decisions. This decentralized organizational structure lets managers get results by doing what is best for the particular operational unit.

The returns on equity are on the rebound, after hitting a low of 11.80% in 2010. Right now this indicator is on the rebound, as higher expected earnings would certainly improve returns on equity. 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 13.40% per year over the past decade, which is much higher than the growth in EPS.
A 13% growth in distributions translates into the dividend payment doubling almost every five and a half years. If we look at historical data, going as far back as 1987, we see that Illinois Tool Works has actually managed to double its dividend every five years on average.

Over the past decade the dividend payout ratio increased from 32% to 42%. 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 Illinois Tool Works is trading at 11 times earnings, yields 3.20% and has a sustainable dividend payout. I would consider adding to my position subject to availability of funds.

Full Disclosure: Long ITW

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Wednesday, August 17, 2011

Why I am a dividend growth investor?

I am a dividend growth investor because my research has uncovered that dividend growth stocks perform very well over time. I purchase stocks in solid companies which pay dividends, and regularly increase them each year. This is the strategy I am using in order to live off dividends in retirement. My research shows that a portfolio of carefully selected dividend stocks will provide a sufficient income stream for me to live on, without having to touch principal. The fact that the companies I purchase also grow earnings to pay growing distributions each year means that over time stock prices would go higher, thus providing some protection to my capital from inflation.

My neighbor is not a dividend investor. My neighbor purchases index funds and hopes to rely on an asset depletion strategy commonly referred to as the four percent rule. You can read more about the original research about it here. Basically, my neighbor is relying on total returns from index funds, in order to fund their retirement. Historically, stocks have produced an annual return of 9% - 10% per year. If one owns $1 million worth of an S&P 500 index fund, their return would be approximately $90-$100 thousand per year. Thus, selling $40,000 worth of stock each year would lead to a portfolio value of 1,050 to 1,060 million by the end of first year.

This was a good strategy for generations of do it yourself index investors. Accumulate as much in index funds as possible, and then sell off 4% of your initial portfolio value each year, while also adjusting for inflation. The one problem that this strategy creates is that it leads to a rapid depletion of the asset base during extended bear market declines or during flat markets. Stocks do not go up or down in a straight fashion each and every year. Investors who retired in the early 2000s and 2007-2009 saw this first hand.

In fact investors who put $1 million in an S&P 500 mutual fund in 1999 and using the 4 percent rule for withdrawals now have only $360,000 left.
The calculations assume a 3% annual inflation rate and a quarterly distribution. In addition, investors would have sold more than half of the shares they originally owned by August 2011. Given the expected withdrawal of $55,369 in 2011, the portfolio would be depleted in 6.50 years if stocks do not appreciate by 2020.

I have always had an issue with index funds. They are a decent vehicle for accumulating wealth, as they provide ordinary savers with the ability to have exposure to the stock market without understanding much about it. However, the traditional methods of selling off portions of your portfolio each and every year, is similar to cutting off the tree branch you are sitting on.
That’s why the idea of creating a dividend portfolio makes perfect sense for investors who are retired and even those who plan to retire some day in the future. Using this strategy, investors only spend the dividend income generated by their investments. Dividend income is more stable in comparison to relying exclusively on price appreciation. If you compare the price returns of my benchmark the S&P 500 index to the dividend returns you would see why retirees prefer the stability of dividends in retirement.

Dividend investors should carefully select stocks with solid fundamentals which could afford to grow distributions for years to come. They should also have a set of written rules, which would help them in evaluating stocks. You could read more about my entry criteria in this article. Investors should also try to create a diversified portfolio in order to minimize sector risks on their dividend income. There are approximately 300 dividend growth stocks in the world. After further screening, the enterprising dividend growth investor would likely find a more manageable list of 40 -50 securities which could be accumulated at the right prices.

By relying exclusively on spending only the rising income stream, investors would avoid depleting their asset base by selling off shares every year. As a result, dividend investors would not have to sell in a depressed market in order to pay for their living expenses and risk depleting their assets. Instead, dividend investors generate stable dividend income which rises over time and ensures that they generate an inflation adjusted stream of income. Dividned growth investors could thus avoid paying attention to rising and falling prices, because their dividends arrive timely, like clockwork. In essence, it feels as if dividend investors are getting paid for holding these stocks. Contrast this to the traditional model of retirement investing, where a flat or declining market would lead to outliving your assets and having to return back to work at the most unfortunate times for you.

The types of stocks which could provide such a stable dividend stream of income include:

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 has a ten year annual dividend growth rate of 26.5%. Yield: 2.80% (analysis)

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 has a ten year annual dividend growth rate of 10%. Yield: 2.80% (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 has a ten year annual dividend growth rate of 13%. Yield: 3.60% (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 has a ten year annual dividend growth rate of 21.3%. Yield: 3.20% (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 has a ten year annual dividend growth rate of 12.40%. Yield: 2.80% (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 has a ten year annual dividend growth rate of 8.10%. Yield: 3.30% (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 has a ten year annual dividend growth rate of 17.80%. Yield: 2.90% (analysis)

Eaton Vance Corp.(EV), through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. The company has raised dividends for 30 years in a row and has a ten year annual dividend growth rate of 12.60%. Yield: 3% (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 has a ten year annual dividend growth rate of 10%. Yield: 2.90%(analysis)

Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, NGLs, crude oil, refined products, and petrochemicals in North America. The company has raised dividends for 14 years in a row and has a ten year annual dividend growth rate of 8.30%. Yield: 5.60% (analysis)

Full Disclosure: Long all stocks mentioned in this article

Update October 2017:

Looks like the investor from 1999 would have $330,000 left today. Their annual withdrawals are now up to $66,114, which is equivalent to a 20% withdrawal rate at the current balance. This retiree is scheduled to run out of money in 5 years. It is very likely however that this person would have bailed out on their investments a long time ago, and would have returned to work.




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Monday, August 15, 2011

Five Dividend Stocks Paying Investors During Turbulent Times

The stock market delivered another rollercoaster week for investors. Luckily, as dividend investors, we kept receiving distributions on time. In addition, many companies keep raising distributions, despite the gloomy outlook on the economy. I have written before that dividend payments represent a more stable return than relying on capital gains for funding your retirement needs. In essence, investors who live off dividends in retirement from their diversified portfolios of blue chip dividend stocks and never touch principal, can ignore the day to day fluctuations in the market. These investors are essentially getting paid for holding these quality dividend stocks.

Over the past week, several consistent dividend stocks announced increases in their distributions. The companies include:

Badger Meter, Inc. engages in manufacturing and marketing liquid flow measurement and control technology products worldwide. The company increased its quarterly dividend by 14.30% to 16 cents per share. Badger Meter, Inc. is a dividend achiever, which has increased its quarterly dividend in each of the past 19 years. The stock currently yields 1.90%.

Textainer Group Holdings Limited (TGH), through its subsidiaries, engages in the purchase, ownership, management, leasing, and disposal of intermodal containers worldwide. The company increased its quarterly dividend by 6.50% to 33 cents per share. This was the third dividend increase for Textainer Group Holdings Limited in 2011, which has increased its quarterly dividend in each of the past five years. The stock currently yields 6.50%.

Acme United Corporation (ACU), together with its subsidiaries, develops and markets cutting, measuring, and safety products to the school, home, office, hardware, and industrial markets in the United States, Canada, Europe, and Asia. The company increased its quarterly dividend by 16.70% to 7 cents per share. Acme United Corporation has increased its quarterly dividend for 8 consecutive years. The stock currently yields 3%.

Ritchie Bros. Auctioneers Incorporated (RBA), which is an industrial auctioneer, that sells various equipment to on-site and online bidders worldwide, increased its quarterly dividend by 7.10% to 11.25 cents per share. Ritchie Bros. Auctioneers has increased its quarterly dividend for 9 years in a row. The stock currently yields 2.10%.

Torchmark Corporation, through its subsidiaries, provides individual life and supplemental health insurance products, and annuities to middle income households. The company increased its quarterly dividend by 9.10% to 12 cents per share. This was the second dividend increase for Torchmark Corporation in 2011, which has increased its quarterly dividend for 6 years in a row. The stock currently yields 1.30%.

Full disclosure: None

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Friday, August 12, 2011

Lowe’s (LOW) Dividend Stock Analysis

Lowe's Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer in the United States, Canada, and Mexico. Lowe’s is one of the original dividend aristocrats, has paid uninterrupted dividends on its common stock since 1961 and increased payments to common shareholders every year for 49 years.

The most recent dividend increase was in May 2011, when the Board of Directors approved a 27.30% increase to 14 cents/share. The largest competitor of Lowe’s includes Home Depot (HD).

Over the past decade this dividend growth stock has delivered an annualized total return of 3.40% to its shareholders.

The company has managed to deliver an increase in EPS of 9.10% per year since 2002. Analysts expect Lowe’s to earn $1.64 per share in 2012 and $1.90 per share in 2013. In comparison Lowe’s earned $1.42 /share the company earned in 2011.

The company does face some strong macroeconomic factors, the chief one being the slow housing market and the relatively high unemployment as of late. The company has been able to maintain its position by improving customer service and improving operational efficiencies. Repurchasing shares would also help in EPS growth. In the longer run, aging of homes should be beneficial for companies like Lowe’s, as homeowners would be spending more funds on projects related to maintaining the appeal of their residences.

Over the next few years, the company would generate sales growth by increasing the number of stores by 1.5% per year. Increases in same store sales should also add to the bottom line. The company is focusing on expanding its international presence, as it currently has 24 stores in Canada and 2 in Mexico. The stores in Mexico were opened in 2010, while the Canada operaions added 8 new stores in the past year. In addition, the company has a joint partnership with Australian retailer Woolworths, to develop home improvement stores in Australia.

The returns on equity have declined from a high of 21% in 2006 to a low of 9.60% in 2010. Right now this indicator is on the rebound, as higher expected earnings would certainly improve returns on equity. 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 31.50% per year over the past decade, which is much higher than the growth in EPS.

A 31% growth in distributions translates into the dividend payment doubling almost every two and a half years. If we look at historical data, going as far back as 1980, we see that Lowe’s has actually managed to double its dividend every five years on average.

Over the past decade the dividend payout ratio increased from 5% to 31%. 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 Lowe’s is trading at 16.60 times earnings, yields 2.90% and has a sustainable dividend payout. I recently initiated a position in the stock. I find the stock attractively valued on dips below 22.50.

Full Disclosure: Long LOW

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Wednesday, August 10, 2011

Now is the perfect time buy dividend stocks

Over the past week, stock markets kept falling around the world. Investors, scared that the economy is about to fall into another recession, fled stocks and went for safer instruments such as US Treasury bonds. Yet, while dividend stock prices fell in sympathy with the broader market, the drops were not as severe. The reason behind this is the fact that some quality dividend stocks are safer than your average stock. In this article I will explain why the market dip has created a perfect opportunity for dividend investors.

Many prominent dividend growth stocks have inherently strong business models, which allow these companies to grow earnings and dividends over time. The reason behind this resilience even during turbulent economic conditions is that these companies deliver products or services which loyal consumers are willing to purchase on a frequent basis, while paying a premium price. Consumers are thus sticking to the strong brands they know, which allow the companies to maintain and grow their dividends even during the most challenging times.

Many investors in these quality dividend stocks are long term buy and hold investors, who enjoy receiving a higher stream of dividends every year. As a result, these stockholders are less likely to get scared by the daily fluctuations on Wall Street. Since these investors are living off dividends, they do not have to resort to selling when the market is nosediving on good or bad news. This loyal group of buy and hold investors would likely add to their stock positions, since lower stock prices increase current dividend yields. Dividend investing works in all market conditions, since the dividend payment represents a positive return on investment that is less volatile than capital gains.

The decrease in stock prices over the past weeks has many investors scared that the market is forecasting a dip in the economy. This panic has started to create an environment, where enterprising dividend investors could start adding to their positions at cheaper prices. In fact, if stocks keep going lower, this would create tremendous opportunities for enterprising dividend investors to scoop up some of the best dividend stocks in the world at fire sale prices.

The list of attractively valued dividend stocks has been expanding for me over the past two weeks. The dividend growth stocks I plan on adding to over the next two months include:

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)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has increased dividends for 49 years in a row. Yield: 3.70% (analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This dividend achiever has increased dividends for 17 years in a row. Yield: 5.60% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. This dividend aristocrat has increased dividends for 49 years in a row. Yield: 2.80% (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. This dividend champion has increased dividends for 34 years in a row. Yield: 3.10% (analysis)

Lowe's Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer in the United States, Canada, and Mexico. This dividend aristocrat has increased dividends for 49 years in a row. Yield: 2.90% (analysis)

Eaton Vance Corp. (EV), through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. This dividend champion has increased dividends for 30 years in a row. Yield: 3% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. This dividend aristocrat has increased dividends for 55 years in a row. Yield: 3.50% (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. This dividend aristocrat has increased dividends for 39 years in a row. Yield: 3.30%(analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend achiever has increased dividends for 24 years in a row. Yield: 3.30% (analysis)

Kinder Morgan, Inc. (KMI) owns and operates energy infrastructure in the United States and Canada. Yield: 4.60% (analysis)

For a wider list of dividend stocks to consider adding to a dividend portfolio, check my post on core dividend stocks for income portfolios.

If stock prices go lower from here, this would create an even better opportunity to acquire well-run companies at fire sales. For everyone else, dividend investing is a perfect strategy where investors get paid for holding on to their investments.

Full Disclosure: Long all stocks mentioned above

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Monday, August 8, 2011

12 Dividend Stocks Raising Distributions Despite Recession Fears

Over the past week, the buy and hold mentality of every investor was tested by the precipitous declines in major stock market indexes. Despite the facts that US corporations are sitting on a record pile of cash, that corporate profits are increasing and that stocks are trading at a fairly cheap multiple based off historical valuations, investors are fleeing the market and going into fixed income securities.

Yet, despite all the gloom in the markets, there were several companies which chose to ignore the fear of another recession. These corporations showed their bullishness in their businesses by approving higher dividend payments to shareholders. The companies announcing dividend increases over the past week include:

Illinois Tool Works Inc. (ITW) manufactures a range of industrial products and equipment worldwide. The company increased its quarterly dividend by 5.90% to 36 cents per share. Illinois Tool Works is a dividend champion, which has increased its quarterly dividend in each of the past 48 years. The stock currently yields 3.10%. (analysis)

Dover Corporation (DOV) and its subsidiaries manufacture industrial products and components, as well as provide related services and consumables in the United States and internationally. The company increased its quarterly dividend by 14.50% to 31.50 cents per share. Dover Corporation is a dividend aristocrat, which has increased its quarterly dividend in each of the past 56 years. The stock currently yields 2.30%. (analysis)

Leggett & Platt, Incorporated (LEG) designs and produces a range of engineered components and products worldwide. It operates in four segments: Residential Furnishings, Commercial Fixturing & Components, Industrial Materials, and Specialized Products. The company increased its quarterly dividend by 3.70% to 28 cents per share Leggett & Platt is a dividend aristocrat, which has increased its quarterly dividend in each of the past 40 years. The stock currently yields 5.50%.

Carlisle Companies Incorporated (CSL) manufactures construction materials in the United States and internationally. The company increased its quarterly dividend by 5.90% to 18 cents per share. Carlisle Companies is a dividend champion, which has increased its quarterly dividend in each of the past 34 years. The stock currently yields 1.90%.

Harleysville Group Inc. (HGIC), through its subsidiaries, engages in the property and casualty insurance business primarily in the eastern and midwestern United States. The company increased its quarterly dividend by 5.60% to 38 cents per share. Harleysville Group is a dividend champion, which has increased its quarterly dividend in each of the past 25 years. The stock currently yields 5.20%.

Aqua America, Inc. (WTR), through its subsidiaries, operates regulated utilities that provide water or wastewater services in the United States. The company increased its quarterly dividend by 6.50% to 16.50 cents per share. Aqua America is a dividend achiever, which has increased its quarterly dividend for 20 years in a row. The stock currently yields 3.10%.

Buckeye Partners, L.P. (BPL) owns and operates refined petroleum products pipeline systems in the United States. The master limited partnership increased its quarterly distributions by 1.25% over the prior quarter distribution to $1.0125 per unit. Buckeye Partners is a dividend achiever, which has increased its quarterly dividend for 16 years in a row. Current yield: 6.60%.

Monsanto Company (MON), together with its subsidiaries, provides agricultural products for farmers in the United States and internationally. It operates in two segments, Seeds and Genomics, and Agricultural Productivity. The company increased its quarterly dividend by 7.10% to 30 cents per share. Monsanto Company is a dividend achiever, which has increased its quarterly dividend for 11 years in a row. The stock currently yields 1.70%.

Boardwalk Pipeline Partners, LP, (BWP) through its subsidiaries, engages in the interstate transportation and storage of natural gas in the United States. The master limited partnership increased its quarterly distributions by 0.50% over the prior quarter distribution to 52.50 cents per unit. Boardwalk Pipeline Partners has increased its quarterly dividend for six years in a row. Current yield: 7.40%.

Alterra Capital Holdings Limited (ALTE), through its subsidiaries, provides specialty insurance and reinsurance products to corporations, public entities, and property and casualty insurers principally in Bermuda, Ireland, the United States, and the United Kingdom. The company increased its quarterly dividend by 16.70% to 14 cents per share. Alterra Capital Holdings Limited has increased its quarterly dividend for 11 years in a row. The stock currently yields 2.60%.

STERIS Corporation (STE) develops, manufactures, and markets infection prevention, contamination control, microbial reduction, and surgical support products and services to healthcare, pharmaceutical, scientific, research, industrial, and governmental customers worldwide. The company increased its quarterly dividend by 13.30% to 17 cents per share. STERIS Corporation has increased its quarterly dividend for 7 years in a row. The stock currently yields 2.20%.

Hawkins, Inc. (HWKN) manufactures, blends, and distributes bulk and specialty chemicals in the United States. It operates through two segments, Industrial and Water Treatment. The company increased its quarterly dividend by 6.25% to 32 cents per share. Hawkins has increased its quarterly dividend in each of the past 7 years. The stock currently yields 1.90%.

The particular bullish fact about these companies, is that each one of them has a long history of consistently raising dividends. For them, sharing their business success with shareholders in the form of paying higher dividends every year is business as usual.

I only wish I had more cash on hand to add to my portfolio of dividend paying stocks. This Warren Buffett quote summarizes my opinion on stocks going lower from here: “Be fearful when others are greedy, and be greedy when others are fearful.”

Full Disclosure: Long ITW

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Friday, August 5, 2011

Medtronic (MDT) Dividend Stock Analysis

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. Medtronic is a dividend chamption which has paid uninterrupted dividends on its common stock since 1977 and increased payments to common shareholders every year for 34 years.

The most recent dividend increase was in June 2011, when the Board of Directors approved a 7.80% increase to 24.25 cents/share. The largest competitors of Medtronic include Becton Dickinson (BDX), C.R. Bard (BCR) and Baxter International (BAX).

Over the past decade this dividend growth stock has delivered a negative annualized total return of 0.6% to its shareholders. A major reason for that was the fact that the stock was grossly overvalued in 2001, trading at a P/E of over 60.

The company has managed to deliver an increase in EPS of 15.20% per year since 2002. Analysts expect Medtronic to earn $3.46 per share in 2012 and $3.79 per share in 2013. In comparison Medtronic earned $2.86 /share the company earned in 2011.

What differentiates Medtronic from its competitors is its scale of operations, diversify and depth of products, focus on emerging markets and its culture of innovation. The company has managed to generate higher sales volumes in the past through strategic acquisitions and organic expansions. Future organic growth will be aided by maintaining and growing its strong product pipeline. The company is also focusing on restructuring and realigning its global operations, which is expected to decrease its annual costs by 20 to 25 cents/share by 2012.

The company has been able to generate consistently high returns on equity in the 18% -23% range over the past decade, with the exception of 2002, 2006 and 2007. 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% per year over the past decade, which is higher than the growth in EPS.

A 17% growth in distributions translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1978, we see that Medtronic has actually managed to double its dividend every four years on average.

Over the past decade the dividend payout ratio increased slightly from 25% to almost 29%. 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 Medtronic is trading at 11.50 times earnings, yields 2.90% and has a sustainable dividend payout. I find the stock attractively valued per my entry criteria and I will considering adding to my position in the stock as funds become available.

Full Disclosure: Long MDT

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Wednesday, August 3, 2011

Five Free Dividend Stocks

The last decade has been touted as the lost decade for stock investors. The main reason why stock prices have gone nowhere since 2000, is mostly because stocks were overvalued. The shareholders of the following dividend champions however. who purchased them at the end of 1999, were able to get more in dividends than the amount they paid for the stock. In essence, they received their original investment back in the form of dividends, while still retaining ownership of the shares and the future dividend income stream that comes along with it.

In order to come up with this list, I looked for dividend champions, which paid out more in dividends between 2000 and 2010, than the price of their stock on December 31, 1999.

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. This dividend champion has raised distributions for 42 years in a row. The stock closed at $23 at the end of 1999. Altria shareholders received 0.69 shares of Kraft Foods (KFT) for each share of Altria they owned in 2007. In addition, Altria shareholders received a share of Phillip Morris International (PM) in 2008 for each share of Altria shareholders held. Between 2000 and 2010, the 1999 investment in this tobacco stock would have generated a total of $35.18 in dividends from Altria (MO), Phillip Morris International (PM) and Kraft (KFT). Check my analysis of Altria. Yield: 5.70%

HCP, Inc. (HCP) is a Real Estate Investment Trust which invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing. This dividend champion has raised distributions for 26 years in a row. The stock closed at $11.93 at the end of 1999. Between 2000 and 2010, the 1999 investment in this real estate investment trust would have generated a total of $18.66 in dividends. Check my analysis of the stock. Yield: 5.10%

Federal Realty Investment Trust (FRT) operates as a real estate investment trust, which engages in the ownership, management, development, and redevelopment of retail and mixed-use properties. This dividend champion has raised distributions for 43 years in a row. The stock closed at $18.81 at the end of 1999. Between 2000 and 2010, the 1999 investment in this real estate investment trust would have generated a total of $23.99 in dividends. Yield: 3%

Washington Real Estate Investment Trust (WRE) is an equity real estate investment trust which focuses on office, medical office, industrial/flex space, retail, and multifamily real estate investments in the greater Washington D.C. area. This dividend champion has raised distributions for 39 years in a row. The stock closed at $14.71 at the end of 1999. Between 2000 and 2010, the 1999 investment in this real estate investment trust would have generated a total of $17.05 in dividends. Yield: 5.20%

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. This dividend champion has raised distributions for 25 years in a row. The stock closed at $2.4383 at the end of 1999. Between 2000 and 2010, the 1999 investment in this stock would have generated a total of $3.43 in dividends. Yield: 1.30%

To summarize, it matters what price you pay for a dividend stock. In addition, a high yielding stock must be able to maintain and grow the distribution for the foreseeable future. If you buy a stock for the high yield, but the dividend payment is unsustainable your dividend income will suffer and your investment will be worth less. If you purchase a stock with a low current yield, make sure it is trading at attractive valuations and that it is cheap. Then make sure that the business can afford to grow the dividend payment.

Full Disclosure: Long KFT, MO and PM

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Monday, August 1, 2011

Master Limited Partnerships for Yield and Growth

Master limited partnerships dominated the list of consistent weekly dividend increases for a second consecutive week. Master limited partnerships are pass-through entities, which are mostly engaged in transportation, storage and distribution of oil and gas. MLPs are monopolies, which typically enjoy toll-booth type business models. MLP investors are called limited partners, and the shares are called units. MLPs are not taxed at the entity level, but at the individual unitholder level. The K-1 tax package details each individual partner’s share of the partnership’s income and expenditures from various sources. In addition, unitholders need to understand the difference between general and limited partners as well as tax implications for holding MLPs in tax deferred accounts.

Last week I mentioned that MLPs seems like the perfect dividend growth stocks, given their high yields and distribution growth. They do have some risks however, including interest rate, regulatory and business risks.

The master limited partnerships which raised distributions over the past week include:

Sunoco Logistics Partners L.P. (SXL) engages in the transport, terminalling, and storage of refined products and crude oil, as well as the purchase and sale of crude oil in the United States. This master limited partnership increased quarterly distributions to $1.215/unit. Sunoco Logistics Partners is a dividend achiever has increased distributions for ten years in a row. Yield: 5.70%

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. This master limited partnership increased quarterly distributions to 53.25 cents/unit. Enbridge Energy Partners has increased distributions for five consecutive years. Yield: 7.30%

Exterran Partners, L.P. (EXLP) provides natural gas contract operations services to customers in the United States. This master limited partnership increased quarterly distributions to 48.25 cents/unit. Exterran Partners has increased distributions for five years in a row. Yield: 8.10%

Holly Energy Partners, L.P. (HEP) operates a system of petroleum product and crude oil pipelines, storage tanks, distribution terminals, and loading rack facilities. This master limited partnership increased quarterly distributions to 86.50 cents/unit. Holly Energy Partners has increased distributions for seven years in a row. Yield: 6.50%

NuStar GP Holdings, LLC (NSH) owns general partner and limited partner interests in NuStar Energy L.P. that engages in the terminalling and storage of petroleum products, transportation of petroleum products and anhydrous ammonia, and marketing of asphalt and fuels. This master limited partnership increased quarterly distributions to 49.50 cents/unit. NuStar GP Holdings has increased distributions for five years in a row. Yield: 5.40%

DCP Midstream Partners, LP (DPM), together with its subsidiaries, engages in gathering, compressing, treating, processing, transporting, storing, and selling natural gas in the United States. This master limited partnership increased quarterly distributions to 63.25 cents/unit. DCP Midstream Partners has increased distributions for six years in a row. Yield: 6.30%

Williams Partners L.P. (WPZ) focuses on natural gas transportation, gathering, treating and processing, storage, natural gas liquid fractionation, and oil transportation activities in the United States. This master limited partnership increased quarterly distributions to 73.25 cents/unit. Williams Partners has increased distributions for seven years in a row. Yield: 5.70%

Alliance Resource Partners, L.P. (ARLP) engages in the production and marketing of coal for utilities and industrial users in the United States. Alliance Holdings GP, L.P. (AHGP) is the general partner for ARLP. Alliance Resource Partners (ARLP) raised its quarterly distributions to 58.25 cents/unit. Alliance Holdings GP (AHGP) raised its quarterly distributions to 58.25 cents/unit as well. ARLP has raised distributions for 9 years in a row and yields 3.00%. AHGP has raised distributions for 6 years in a row and yields 4.70%.

The corporations which announced dividend increases over the past week include:
Republic Services, Inc. (RSG) provides nonhazardous solid waste collection, transfer, and disposal services in the United States. The company increased its quarterly dividend by 10% to 22 cents/share. Republic Services has increased its quarterly dividend for nine consecutive years. Yield: 3%

Community Bank System, Inc. (CBU) operates as the holding company for Community Bank, N.A. that provides various banking and financial services to the retail, commercial, and municipal customers. It offers loans and accepts deposits. The company increased its quarterly dividend by 8.30% to 26 cents/share. Community Bank System is a dividend achiever which has increased its quarterly dividend for 17 consecutive years. Yield: 4.20%

Community Trust Bancorp, Inc. (CTBI) operates as the holding company for Community Trust Bank, Inc. that provides various banking products and services. The company increased its quarterly dividend by 1.60% to 31 cents/share. Community Bank System is a dividend champion which has increased its quarterly dividend for 31 consecutive years. Yield: 4.50%

Kellogg Company (K), together with its subsidiaries, engages in the manufacture and marketing of ready-to-eat cereal and convenience foods. The company increased its quarterly dividend by 6.20% to 43 cents/share. Kellogg has increased its quarterly dividend for 8 consecutive years. Yield: 3.10%

Crane Co. (CR) manufactures engineered industrial products in the United States and internationally. The company increased its quarterly dividend by 13% to 26 cents/share. Crane Co. has increased its quarterly dividend for 8 consecutive years. Yield: 2.20%

International Flavors & Fragrances Inc. (IFF) , together with its subsidiaries, creates, manufactures, and sells flavor and fragrance products in the United States and internationally. The company increased its quarterly dividend by 14.80% to 31 cents/share. International Flavors & Fragrances has increased its quarterly dividend for 9 consecutive years. Yield: 2.00%

Norfolk Southern Corporation (NSC), through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. The company increased its quarterly dividend by 7.50% to 43 cents/share. Norfolk Southern Corporation has increased its quarterly dividend for 10 consecutive years. Yield: 2.30%

Full Disclosure: Long EEQ and K

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