Eaton Vance (EV) Dividend Stock Analysis 2011

Eaton Vance Corp. (EV), through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. It also provides investment management and counseling services to institutions and individuals. Eaton Vance is a dividend champion which has paid uninterrupted dividends on its common stock since 1976 and increased payments to common shareholders every year for 30 years.

The most recent dividend increase was in October 2010, when the Board of Directors approved a 12.50% increase in the quarterly dividend to 18 cents/share. Eaton Vance’s largest competitors include Franklin Resources (BEN), T. Rowe Price Group (TROW) and Blackrock (BLK). In a previous article I mentioned that I am bullish on asset managers for the long run, and Eaton Vance fits by default.

Over the past decade this dividend growth stock has delivered an annualized total return of 5.30% to its shareholders.

The company has managed to deliver a 6.60% annual increase in EPS since 2001. Analysts expect Eaton Vance to earn $1.82 per share in 2011 and $1.99 per share in 2012. In comparison Eaton Wance earned $1.42 /share in 2010. The company has managed to consistently repurchase 2.25% of its common stock outstanding over the past decade through share buybacks.

Overall I am bullish on asset managers in the long run, and Eaton Vance fits by default. As we have millions of baby boomers retiring and needing financial advice, I expect them to use financial advice from certified planners, which would pre-sell open and closed-end funds and other financial products. Once a product has been sold to investors, it creates a recurring income stream to the provider of funds. The revenues that investment managers generate are realizable in cash almost instantaneously, which is a big plus. New product offerings could also contribute to growth, although at $199 billion in asset under management, it won’t be the main source of revenues for Eaton Vance. Acquisitions to obtain companies that target high-net worth individuals could be a big driver for future growth, as would be expansion internationally. Another positive is that as US stock prices keep increasing, this would eventually attract more investors to add in more money, which would create even higher profits for companies like Eaton Vance. Overtime I expect Eaton Vance to get an even larger pile of assets under management due to all of the above mentioned reasons, which would lead to earnings and dividend growth.

One of the largest risks for Eaton Vance includes competition, which could result in net outflows for assets under management as well as decrease in fees charged to clients. Another risk includes prolonged declines in equity markets, which could turn investors off stock market investing. Most notably that hasn’t been the case for Eaton Vance during the “lost decade”, as assets under management grew from $49.20 billion at the end of 2000 to $199 billion as of July 31, 2011.

The company generates a very high return on equity, which has followed the ups and downs of the stock market 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 19.80% per year over the past decade, which is higher than the growth in EPS.

A 20% growth in distributions translates into the dividend payment doubling almost every three and a half years. If we look at historical data, going as far back as 1990, we see that Eaton Vance has actually managed to double its dividend every four years on average.

The dividend payout ratio has almost tripled from 17% in 2001 to 47% in 2010. The reason behind this increase was the fact that dividend growth exceeded earnings growth over the past decade. Based on forward earnings for 2011 however, the payout ratio is less than 40%. 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 Eaton Vance is trading at 13.10 times earnings, yields 3.20% and has a sustainable dividend payout. The company rarely yields more than 2.50%, is attractively valued per my entry criteria, which is why I view the current weakness in the stock price as a good opportunity to add to my position.

Full Disclosure: Long EV

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How dividend stocks protect investors from inflation

I have noticed that every time I write about dividend growth stocks whose yield is less than 3%, some novice investors wonder whether this return is even worth it. Some even go on to question whether this stock will be even able to provide protection against inflation. Such comments solidify my beliefs that dividend growth investing is the most misunderstood strategy in the investing world.

First, dividend investors should not forget about capital gains. Investing in a stock, simply because it yields a certain percentage should be avoided. In fact, many investors who chase high yielding stocks are playing with fire, using money they need badly. Investors should focus on selecting the best stocks, and then try to purchase them at the right prices. Companies with growing earnings that pay a dividend yield of 2%- 3% will likely deliver solid capital gains in the process. As a result, the total returns for these dividend investors who were smart enough to capitalize on that opportunity, will exceed the dividend yield alone. Capital gains are not guaranteed of course, and are not as reliable a source of income in retirement as dividend checks. A long term investor who plans to hold on to the stock of a dividend paying stock with growing earnings stands a great chance of enjoying stock price increases in the process of holding this security.

Second, naysayers that claim that a stock whose yield is lower than inflation should be avoided, are using faulty logic. As mentioned in the preceding paragraph, stocks deliver dividends and the potential for capital gains. As a result, an increase in stock prices will maintain purchasing power of the principal. In addition, what these naysayers tend to ignore is that while the yield could be lower than inflation, investors will generate a rising stream of dividend income by investing in companies which regularly increase distributions to shareholders. Income investors should focus on whether the income stream can increase faster than inflation, rather than whether the current yield is higher or lower than inflation. A portfolio of quality dividend stocks with rising earnings and dividends will deliver sufficient income growth to provide an inflation adjusted stream of dividend income while also delivering capital gains in the process.

For example back at the end of 2007, shares of McDonald’s (MCD) traded at $58.91/share. The company paid an annual dividend of $1.50/share, for a yield of 2.50%. Investors who avoided McDonald’s stock in 2007 because its yield was less than the rate of inflation made a huge mistake however. Fast forward to September 2011, the stock is trading at $87.37/share. However, the company is now paying a quarterly dividend of $0.70/share or a cool $2.80 in annual dividends. This amounted for a 86.70% increase in dividend income for the enterprising dividend investors who spotted this opportunity in 2007. This is much higher than the inflation since the end of 2007. The capital gain of 48.30% also helped to preserve the purchasing power of the principal as well. Check my analysis of the stock.

Between 1920 and 2008 US stocks have managed to increase dividends by 4.70% per year on average, which is 1.70% higher than the average inflation per year. I expect dividend growth to be similar over the next 90 years, as global companies sell products and services to the existing middle class of the developed world as well as the emerging middle class in new economic powers such as China, India and Brazil. Besides McDonald’s (MCD), other companies that will profit from these trends include:

The Coca-Cola Company(KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. The company's global operations account for 70% of its revenues. Coca-Colahas a ten year dividend growth rate of 10% per year and a sustainable dividend payment. The company has increased dividends for 49 consecutive years and yields 2.80%. (analysis)

Procter & Gamble (PG) provides consumer packaged goods in the United States and internationally. The company derives 58% of its revenues from its international operations. Procter & Gamble has a ten year dividend growth rate of 10.90% per year and a sustainable dividend payment. The company has increased dividends for 55 consecutive years and yields 3.40%. (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. International operations account for 52% of the company's revenues. Johnson & Johnson has a ten year dividend growth rate of 13% per year and a sustainable dividend payment. The company has increased dividends for 49 consecutive years and Yields 3.70%. (analysis)

Full Disclosure: Long all stocks mentioned above

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McDonald’s: A true champion for dividend investors

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. It franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, desserts, snacks, and other beverages, as well as full or limited breakfast menu. As of June 30, 2011, the company operated 32,943 restaurants in 117 countries, including 26, 598 franchised restaurants; and 6,345 company operated restaurants. Check my analysis of McDonald’s (MCD).

McDonald’s beefed up its quarterly dividend by 14.80% to 70 cents/share. This most recent dividend hike marks the 35th consecutive annual dividend increase for this dividend aristocrat. The company has managed to keep growing its same store and total sales worldwide, even during the financial meltdown of 2008 - 2009 as well as the recent fears of a double dip recession. Since the start of the financial crisis in 2007, McDonald’s has managed to raise dividends per share by 86.70% and earnings per share by 137%. The stock is up 48.30% since the end of 2007. This calculation does not even include dividends. An investment at the end of 2007 would be generating a yield on cost of 4.80%.

McDonald’s 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 introducing its “Plan to Win” strategy eight years ago, the golden arches has focused its strategy on internal growth through maximizing existing restaurants’ profitability. In addition, the company has focused on its stores profitability and focusing efforts on strengthening its strong brand name, by disposing of non-core assets such as Chipotle Mexican Grill (CMG) and Boston Market. The international segment, which accounts for over half of its sales, is a major driver of growth, which would not slow down even if the fears of a global double dip recessions do materialize. A major part of the strategy is focusing on generating cash flow, rather than focusing on growth for growth’s sake.

Analysts are expecting 13.50% increase in EPS in 2011 to $5.20/share, followed by a 10% increase to $5.72 /share in 2012. The new annual dividend rate of $2.80/share is sustainable at a conservative 54% dividend payout ratio. Currently, McDonald’s is attractively valued per my entry criteria at 16.80 times 2011 earnings. Investors will also get paid a 3.20% yield on cost, which will be growing by at least by 10% per year for the next decade. I will consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long MCD

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Dividend Growth Portfolio

This is the dividend growth portfolio, which will be part of the dividend growth project. You could see my actual portfolio holdings on this page.

The average starting yield as of September 23 is 4.25%.

Walgreen (WAG) Dividend Stock Analysis 2011

Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. The company’s drugstores sell prescription and non-prescription drugs, and general merchandise. Walgreen is a dividend aristocrat which has paid uninterrupted dividends on its common stock since 1933 and increased payments to common shareholders every year for 36 years.

The most recent dividend increase was in July 2011, when the Board of Directors approved a 28.60% increase in the quarterly dividend to 22.50 cents/share. Walgreen’s largest competitors include Wal-Mart (WMT), CVS Caremark (CVS) and Rite-Aid (RAD).

Over the past decade this dividend growth stock has delivered an annualized total return of 1.40% to its shareholders.

The company has managed to deliver a 10.50% annual increase in EPS since 2001. Analysts expect Walgreens to earn $2.62 per share in 2011 and $2.99 per share in 2012. In comparison Walgreen earned $2.12 /share in 2010. The company has managed to consistently repurchase 0.50% of its common stock outstanding over the past decade through share buybacks.

Future earnings growth will be fueled by new store openings, acquisitions as well as store remodeling and improved internal growth strategies. Walgreens expects to increase comparable stores count by 2.50% – 3%. The recent acquisition of New York based Duane Reade for $1.1 billion in 2010, provided Walgreens with 257 pharmacies and 2 distribution centers. Store renovations, improving the product mix, and increasing inventory efficiency will add to profitability, as will realizing synergies from acquisitions such as the Duane Reade one. The company’s recent acquisition of Drugstore.com, will pave the way for expanding the company’s web presence.

The return on equity has decreased to 14.50% after reaching a high of 19% in 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 17.30% 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 4 years. If we look at historical data, going as far back as 1980, we see that Walgreen’s has actually managed to double its dividend every five years on average.

The dividend payout ratio has doubled from 16% in 2001 to 30% in 2010. The reason behind this increase was the fact that dividend growth exceeded earnings growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Walgreen’s is trading at 14.30 times earnings, yields 2.50% and has a sustainable dividend payout. The company rarely yields more than 2.50%, so I view the current weakness in the stock price as a good opportunity to add to my position.

Full Disclosure: Long WAG

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Dividend Investing Risks

Every article on long term investing stresses the importance of the power of compounding. Basically, investing a certain amount of initial capital at a particular annual return for a given time period would lead to a much higher amount at the end of the investment period.

While this concept is valid, investors should not rush in blindly and purchase any type of asset for long-term compounding of their wealth. In order to stack the odds in their favor, dividend investors should develop a focused strategy. This would allow them to compound their money for as long as possible, while increasing their wealth.

Some of the factors I use in order to minimize risks of ruin include developing an entry criteria, holding over 40 stocks in my dividend portfolio and reinvesting dividends selectively. It also doesn’t hurt to focus on companies with strong competitive advantages, which are able to generate rising earnings and therefore can afford to pay me a rising dividend payment every year.

After all, compounding might be one of the eight wonders in the worlds according to Einstein. However, one fails to do their homework, they could end up suffering huge losses in principal and income. After all, investors who meticulously reinvested dividends in companies like Fannie Mae (FNM), Lehman Brothers (LEH), General Motors (GM) or Enron (ENE) ended up losing almost everything, even if they compounded their wealth for generations.

I have identified a one high yielding sector, which has been bid up by investors looking for yield in a zero-interest environment.

Since I first reviewed pipeline Master Limited Partnerships a few years ago, I have fallen in love with this sector. After all, there is nothing sexier than a business which is a virtual monopoly in the distribution of oil, gas, and other commodities through its toll-like pipelines. Building a pipeline is extremely costly, which minimizes the risk that a competitor would target your clients. Pipelines are highly regulated, and their rates typically increase by the rate of inflation every year. While commodities prices are highly volatile, the volumes of carbons delivered each year is relatively stable. In addition, stability is further aided by the fact that pipeline MLPs typically are not exposed to the price fluctuations of the commodities they transport. Add in to that the fact that large portions of the distributions are not taxable and the fact that MLP’s distribute almost all of their cashflows to unitholders, and it is no wonder MLPs have been seen as a safe haven by dividend growth investors. MLPs not only pay high yields, but they also offer strong distribution growth over time, which keeps purchasing power of distribution income intact.

The major risks behind MLPs include legislation and interest rates. If the debt ridden US government decides to abolish the favorable pass-through entity structure that the MLP’s enjoy, the sector would be hard hit similar to what investors in Canadian Royalty Trusts experienced since 2006. Currently, MLP’s are not taxed at the entity level, but at the individual unitholder’s level. If MLPs are converted to corporations, they would likely end up distributing much less to unitholders.

In addition, since most MLPs distribute most of their free cash flow to unitholders, they grow their business by selling additional units or selling debt in the public markets. If the yields these MLP’s pay are much lower than today, investors would likely ignore these partnerships. In addition, if interest rates increase, MLPs would find it more expensive to obtain debt financing, which could mean that some projects would not be realized because their rate of return would not be sufficient to cover the increase in interest expenses. By having limited access to capital in order to make acquisitions to grow the business, investors would suffer from stagnant distributions and lower unit prices because of the rise in interest rates.

Some of the largest MLPs include Kinder Morgan (KMP) and Enterprise Products Partners (EPD). They have the highest weighting in the Alerian MLP Index.

Enterprise Products Partners L.P. (EPD) provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the continental United States, Canada, and Gulf of Mexico. The partnership has raised distributions for 14 years in a row and currently yields 5.80%. (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. The partnership has raised distributions for 15 years in a row and currently yields 6.60%. (analysis)

While there are risks to MLPs, a reasonable allocation to the sector could boost current portfolio yields and also deliver distributions growth over time. As dividend investors, it is important to take reasonable risks, and manage them accordingly by not being overcommitted to a certain sector.

Full Disclosure: Long Kinder Morgan Partners and Enterprise Products Partners

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Phillip Morris International Delivers Another Smoking Hot Dividend Increase

Over the past week the Board of Directors of tobacco giant Phillip Morris International (PM) approved a 20.30% increase in its quarterly dividend to 77 cents/share. This was the fourth consecutive annual dividend increase for the company, since it was spun off from Altria Group (MO) in 2008.

In a previous article I outlined a few reasons why I am buying Phillip Morris International (PM) now. The company is well positioned to capitalize on its strong brand in emerging economies, while having the benefit of reduced liability risk in developed countries, since its operations are diversified on a global scale. Phillip Morris International expects to generate earnings growth that will provide shareholders with a rising stream of dividend income over time. In addition, the stock also spots a higher than average dividend yield, which makes it irresistible for income investors. Check my analysis of the stock.

The current dividend increase was the largest ever. The previous three dividend increases were for 17.40%, 7.40% and 10.40% in 2008, 2009 and 2010. Analysts are expecting this tobacco giant to earn $4.78/share in 2011, followed by $5.23/share in 2012. The company’s forward dividend payout ratio is at 64%, which is sustainable.

Phillip Morris International derives 37.60% profits from the EU, 27.50% from Eastern Europe, Middle East and Africa, 26.60% from Asia and 8.30% from Latin America and Canada. It is growing through continued product innovation, cost cutting, acquisitions and through organic growth in some emerging markets in Asia and Latin America. There are some risks to investing in tobacco companies, as increased regulation will make the operating environment more difficult.

Currently, Phillip Morris International is attractively valued per my entry criteria, trading at 14.40 times earnings and yielding 4.50%. While at first pass it may seem that the company has not increased dividends for more than 10 years, there are several factors that make me ignore this criterion. The fact that the predecessor company which PMI was spun off from had raised distributions for 4 decades and the fact that PMI has raised dividends every year since the spin off provide enough evidence that this company will likely maintain the dividend growth culture of legacy Phillip Morris.

Full Disclosure: Long MO and PM

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Intel Corporation (INTC) Dividend Stock Analysis 2011

Intel Corporation (INTC) engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. It offers microprocessor products used in notebooks, netbooks, desktops, servers, workstations, storage products, embedded applications, communications products, consumer electronics devices, and handhelds. Intel has paid uninterrupted dividends on its common stock since 1992 and increased payments to common shareholders every year for 8 years.

The most recent dividend increase was in July 2011, when the Board of Directors approved a 15.90% increase in the quarterly dividend to 21 cents/share. This was the second consecutive double digit dividend increase for the past year. The largest competitors of Intel include Advanced Micro Devices (AMD), Xilinx (XLNX) and Altera (ALTR).

Over the past decade this dividend growth stock has delivered an annualized total return of 1.40% to its shareholders.

The company has managed to deliver a 30% annual increase in EPS since 2001. The reason for that was the fact that earnings were depressed during the implosion of the tech bubble. Analysts expect Intel to earn $2.37 per share in 2011 and $2.48 per share in 2012. In comparison Intel earned $2.01 /share in 2010. The company has managed to consistently repurchase 2.40% of its common stock outstanding over the past decade through share buybacks.

Earnings per share have been volatile between 2005 and 2009. Tech companies are notorious for being exposed to swings in the economy, as tech spending closely follows the economic cycles. Rapid product obsolescence, strong competition and the need for constant spending for innovation in order to keep up with competition and be ahead of technological advance are not good ingredients for long-term sustainable moat. Intel does have a competitive advantage over its next largest competitor, AMD, as it has the earnings power to outspend AMD on research and development. However it did lose market share five years ago to AMD, which offered a better product at a lower price. While Intel is the leader in providing processors to Personal Computers, this is not a major growth area. In addition, Intel’s product line is not as robust for mobile computing devices.

The return on equity has decreased from after reaching a high of 23% in 2005 and hit a low of 10.80% in 2009. Right now this indicator is on the rebound to above 20%. 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 in has increased by 25.80% per year over the past decade, which is lower than the growth in EPS.

A 25% growth in distributions translates into the dividend payment doubling almost every 3 years. If we look at historical data, going as far back as 1995, we see that Intel has actually managed to double its dividend every three years on average. Future dividend growth will likely be limited by EPS growth, which I do not expect to exceed the upper single digits over the next decade.

The dividend payout ratio has mostly remained below 50% with the exception of 2008 and 2009. 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 Intel is trading at 9.70 times earnings, yields 4.10% and appears to have a sustainable dividend payout. The company currently fits my entry criteria, and I would consider initiating a position subject to availability of funds and my portfolio sector allocation.

Full Disclosure: None

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Dividend Stocks offer stability amidst market volatility

The past few weeks have been characterized by high volatility in the stock market. At the same time prices for some of the most widely held blue chip dividend stocks have dropped less than the market. Some quality dividend stocks are even close to new 52 week highs, as investors try to put their money in safe investments. The reason why these dividend stocks are so popular is because their investors keep receiving their distributions every quarter, without interruption. In addition, these companies’ culture of consistently raising dividends for decades has created a loyal following by long-term investors. The regular dividend payment provides a cushion when there is a decrease in prices, as long-term investors are willing to step in and add to their positions on any weakness in the stock price.

The following blue chip dividend stocks have hardly moved during the volatile past month:

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. This dividend aristocrat has increased dividends for 39 years in a row. Abbott has a ten year dividend growth rate of 8.80% per year. The company has also managed to increase EPS at an annual rate of 11.20% over the past decade. 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. Johnson & Johnson has a ten year dividend growth rate of 13% per year. The company has also managed to increase EPS at an annual rate of 11.40% over the past decade. Yield: 3.50% (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. Procter & Gamble has a ten year dividend growth rate of 10.90% per year. The company has also managed to increase EPS at an annual rate of 15.30% over the past decade. Yield: 3.40%(analysis)

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company was spun off from Altria Group (MO) in 2008, and since then has raised dividends consistently every year. Yield: 3.70% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. This dividend aristocrat has increased dividends for 49 years in a row. Coca-Cola has a ten year dividend growth rate of 10% per year. The company has also managed to increase EPS at an annual rate of 12.30% over the past decade. Yield: 2.70% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. This dividend aristocrat has increased dividends for 34 years in a row. McDonald’s has a ten year dividend growth rate of 26.50% per year. The company has also managed to increase EPS at an annual rate of 20.70% over the past decade. Yield: 2.70% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrat has increased dividends for 37 years in a row. Wal-Mart Stores has a ten year dividend growth rate of 17.80 % per year. The company has also managed to increase EPS at an annual rate of 11.80% over the past decade. Yield: 2.80% (analysis)

What makes these businesses unique is that all of them have strong competitive advantages. Consumers are willing to use their products or services and even are willing to pay a premium price for it. As a result, these companies have been able to generate higher revenues, which translate to higher profits, in order to afford hiking dividends annually for decades. Long-term investors are holding onto these stocks because as long as these businesses keep selling to consumers, they will keep earning enough cash to pay higher distributions.

Full Disclosure: Long all stocks mentioned above

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My Bullish Case: Stocks are cheap

The past month has been marked with volatility and steep sell-off in stocks on a global scale. The unprecedented downgrade of US government debt from S&P, the high unemployment and the slowdown in the US economy all caused investors to be bearish on equities. As stocks keep on falling however, companies keep on generating positive earnings surprises. Despite all the bearish news, i believe that now is the perfect time to start accumulating stocks.

In an environment where everyone is inflating the gold bubble and the US Treasury bubble, stocks are being overlooked by investors. The “lost decade” has burned many US investors, who saw stagnating stock prices since the early 2000s. That being said, stock prices could go lower, thus making stocks an even better investment at lower valuations for smart long term investors.

For the 4 quarters ending June 30, 2011, S&P 500 index, which is my benchmark, has “earned” $83.87. The dividends paid to S&P 500 investors amounted to $24.34, while operating earnings amounted to $90.90. Based on the current S&P 500 price of $1154, the index is trading at a P/E ratio of 13.76 and yields 2.10%. Source S&P.

The average P/E ratio has been 20.80 times earnings since 1977. Based on that information, stocks are at their cheapest valuations in years. In addition, since 1871, P/E ratios on S&P 500 have averaged 15 times earnings.

Analysts are estimating that S&P 500 companies will generate operating earnings of $98 in 2011, followed by an increase in operating earnings to $112 in 2012. It looks as if investors are discounting that these increases will be much lower. However, even if earnings stagnate for several years, companies will generate a sufficient amount of earnings in 14 years which is equal to today’s S&P 500 prices.

Investors should not overlook the fact that most of the stocks with the highest weightings in the S&P 500 are global multinationals, which generate a high amount of their revenues and earnings from international operations. In a previous study I found out that international operations account for almost half of revenues for the top 10 companies in the S&P 500.

The types of companies that I am looking to invest in are blue chip dividend growth stocks, which have long histories of increasing dividends. The types of dividend stocks I am looking to buy on any further weakness include:

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. This dividend aristocrat has managed to hike dividends for 39 years in a row. The company has increased dividends at an annual rate of 13% over the past decade. Analysts are expecting earnings growth of 13.80% in 2011 and 9% in 2012. Yield: 3.30% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. This dividend champion has raised dividends for 48 years in a row. The company has increased dividends at an annual rate of 12.40% over the past decade. Analysts expect the company to grow EPS by 17.60% in 2011 and 9.90% in 2012. Yield: 2.50% (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. This dividend aristocrat has raised dividends for 39 years in a row. The company has increased dividends at an annual rate of 8.80% over the past decade. Analysts expect the company to grow EPS by 56.70% in 2011 and 7.50% in 2012. Yield: 3.70% (analysis)

Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and the Americas. This international dividend achiever has raised dividends for over one decade. The company has increased dividends at an annual rate of 9.20% over the past decade. Analysts expect the company to grow EPS by 21.60% in 2011 and 8.50% in 2012. Yield: 3.90% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend achiever has raised dividends for 24 years in a row. The company has increased dividends at an annual rate of 8.10% over the past decade. Analysts expect the company to grow EPS by 43.40% in 2011 and a 2% decrease in 2012. Yield: 3.10% (analysis)

These sleep well at night stocks should provide a rising dividend income stream to investors as well as the potential for capital appreciation.

Full disclosure: Long PEP, CL, ABT, UL, CVX

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Novartis AG (NVS) Dividend Stock Analysis

Novartis AG (NVS), through its subsidiaries, engages in the research, development, manufacture, and marketing of healthcare products worldwide. Novartis is an international dividend achiever, has paid uninterrupted dividends on its common stock since 1992 and increased payments to common shareholders every year for 14 years.

The most recent dividend increase was in November 2010, when the Board of Directors approved a 4.80% increase to 2.20 CHF/share. The largest competitors of Novartis include Pfizer (PFE), Merck (MRK) and GlaxoSmithKline (GSK).

Over the past decade this dividend growth stock has delivered an annualized total return of 8% to its shareholders.

The company has managed to deliver an increase in EPS of 11.30% per year since 2001. Analysts expect Novartis to earn $5.51 per share in 2011 and $5.73 per share in 2012. In comparison Novartis earned $4.26 /share in 2010. The company has managed to consistently repurchase 2.10% of its common stock outstanding over the past decade through share buybacks.

The company is focusing on developing new pharmaceutical products, expanding its generics division and launching new platforms such as vaccines. Novartis also owns 33% of the bearer shares of Roche Holdings (RHHBY), valued at $8.1 billion at the end of 2010. This represents a 6.40% interest in the total equity of Roche Holdings.

The company’s acquisition of Alcon makes it the leader in eyecare globally. The margins in this segment are high, the acquisition will be accretive to EPS starting in FY 2011 and there is an opportunity for expansion in emerging markets

As a pharmaceuticals company, Novartis’s success is dependent on launching new drugs. Two new drugs are expected to add solid returns to the bottom line – Gilenya for multiple sclerosis and Galvus for diabetes. The company has a very strong pipeline, with 60 compounds and 25 new molecules.

The return on equity has decreased from 18% in 2001 to 15.50% in 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 in US Dollars has increased by 18.70% per year over the past decade, which is higher than the growth in EPS. The increase in dividends in Swiss Francs has increased by 10.50% per year since 2001. Switzerland based companies, withhold 15% of any distributions made to US investors at source. US investors can deduct the 15% withholding on the US tax returns however. As a result, holding shares of Novartis in a tax-deferred account is not advisable, since no tax credit can be claimed on such accounts.

A 10% growth in distributions translates into the dividend payment doubling almost every 7years. If we look at historical data, going as far back as 1997, we see that Novartis has actually managed to double its dividend every six and a half years on average.

The dividend payout ratio is currently above 50%, although just by a few percentage points. 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 Novartis is trading at 13.20 times earnings, yields 3.60% and has a sustainable dividend payout. The company currently fits my entry criteria, and I would consider initiating a position subject to availability of funds and my portfolio sector allocation.

Full Disclosure: None

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Two High Yield Dividend Growth Stocks I am buying

When it comes to dividend investing, many investors tend to be either yield chasers or pure dividend growth investors. The real world however is not black and white. As a result, a more nuanced strategy where at least some minimum yield is requested before one purchases a stock that regularly raises distributions should deliver solid income over the long term.

I follow a similar strategy in my income portfolio. I purchase stocks with rising distributions which can afford to pay the dividend but I also have a minimum yield requirement of 2.50%. I tend to be skeptical over stocks which have high current yields, unless my individual company analysis proves otherwise. My analysis of the two income plays listed below has identified them as companies with sound business models. The recent downturn in the stock market has made the following dividend growth stocks with high yields attractive at the moment:

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company generates most of its revenues from outside the US, where the legislation is not as draconian. The company will be able to increase earnings by generating cost efficiencies in its cost reduction programs, acquiring companies internationally as well as innovating in growing markets in order to position itself favorably. Last but not least, tapping into the growth of emerging markets such as China and India, where it has a low presence could provide another opportunity for future growth. The company has raised distributions in every year since the spin-off from Altria Group (MO) in 2008. Phillip Morris International will be able to keep increasing dividends at the high single digit percentage points in the foreseeable future, while yielding 3.70% today. (analysis)

Kinder Morgan, Inc. (KMI) owns and operates energy infrastructure in the United States and Canada. Kinder Morgan owns the general partner and limited partner units in Kinder Morgan Partners (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%. The company will likely raise distributions at the low double digits for a few years, and currently yields 4.60% (analysis)

Owning these two high income dividend growth stocks makes sense for investors looking for high yield and a rising income stream. Investors should however always understand the risks behind each investments they purchase and try to spread it by obtaining allocation to different sectors in their diversified dividend portfolios.

Full Disclosure: Long PM, MO, KMI

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Universal Corporation (UVV) Dividend Stock Analysis

Universal Corporation (UVV), together with its subsidiaries, operates as a leaf tobacco merchant and processor worldwide. It engages in selecting, procuring, buying, processing, packing, storing, supplying, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products. Universal is a dividend champion has paid uninterrupted dividends on its common stock since 1927 and increased payments to common shareholders every year for 40 years.

The most recent dividend increase was in November 2010, when the Board of Directors approved a 2.10% increase to 48 cents/share. The largest competitors of Universal include Alliance One International (AOI), British American Tobacco (BTI) and Phillip Morris International (PM).

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 3.50% per year since 2002. Analysts expect Universal to earn $4.25 per share in 2012 and $4.50 per share in 2013. In comparison Universal earned $5.42 /share in 2011. The company has managed to consistently repurchase 0.70% of its common stock outstanding over the past decade through share buybacks.

The company is operating under challenging conditions. Recent customer efforts to obtain leaf directly from farmers have changed parts of the company’s business. In the last two years, both Japan Tobacco and Philip Morris International have taken steps to purchase more of their leaf needs directly from farmers. Philip Morris International's assumption of farmer contracts will reduce the company’s purchases of Brazilian leaf in fiscal year 2012. Universal management continues to expect that, after contracts expire this month, their processing volumes in the United States will decline significantly. As management has noted last year, they estimate that the reduction will cause a decrease of about $30 million in operating income. While the company has had some success in broadening its customer base and expanding the services it offers to customers, in the near term, it will not be able to replace all the processing volumes in the United States. The company’s four largest clients, accounting for 75% of its revenues include Japan Tobacco, Phillip Morris International (PM), British American Tobacco (BTI) and Imperial Tobacco.

Another challenge that the company is facing is the oversupply of tobacco leafs, which could hurt profitability in the near term. The company is managing this risk but reducing costs through operations restructuring.

On the bright side, the company is generating a high amount of free cash flows to pay the dividend and also buy back shares.

The company has managed to generate high returns on equity with the exception of a brief dip in 2006 on lower profitability. 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 4.20% per year over the past decade, which is slightly higher than the growth in EPS.

A 4% growth in distributions translates into the dividend payment doubling almost every 18 years. If we look at historical data, going as far back as 1974, we see that Universal has actually managed to double its dividend every nine years on average.

Over the past decade the dividend payout ratio has mostly remained unchanged, with the exception of a brief spike in 2006 – 2007 on lower short-term weakness in profitability. 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 Universal is trading at 7.80 times earnings, yields 4.80% and has a sustainable dividend payout. This value stock currently fits my entry criteria. While I find the dividend to be well covered, future dividend growth will be constrained by the lack of visibility concerning the company’s future earnings prospects.

Full Disclosure: Long UVV

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