Twelve Dividend Machines Boosting Dividends

When evaluating dividend stocks, the culture of maintaining dividend increases throughout various economic cycles is important. Companies that generate excess chas flows are more likely to maintain and increase their dividends. Much more important however are the fundamentals that will pave the way for future dividend increases. Investors should also focus on income stocks which have sustainable dividends.

The companies which announced dividend increases in the past week include:

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company increased its quarterly dividend by 10% to 33 cents/share. This dividend aristocrat has raised distributions for 29 years in a row. Yield: 2.80% (analysis)

V.F. Corporation (VFC) designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. The company increased its quarterly dividend by 14.30% to 72 cents/share. This dividend aristocrat has raised distributions for 39 years in a row. Yield: 2.20% (analysis)

Reynolds American Inc. (RAI), through its subsidiaries, manufactures and sells cigarette and other tobacco products in the United States. The company increased its quarterly dividend by 5.70% to 56 cents/share. This dividend stock has raised distributions for 8 years in a row. Yield: 5.80%

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. The company increased its quarterly distributions to $1.24/share. This master limited partnership has raised distributions for 10 years in a row. Yield: 5.20%

Holly Energy Partners, L.P. (HEP) operates a system of petroleum product and crude oil pipelines, storage tanks, distribution terminals, and loading rack facilities. The company increased its quarterly distributions to 87.50 cents/share. This master limited partnership has raised distributions for 7 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. The company increased its quarterly distributions to 74.75 cents/share. This master limited partnership has raised distributions for 7 years in a row. Yield: 5.30%

Meredith Corporation (MDP), a media and marketing company, engages in magazine publishing and related brand licensing, television broadcasting, integrated marketing, interactive media, and video production businesses in the United States. The company increased its quarterly dividend by 50% to 38.25 cents/share. This dividend achiever has raised distributions for 19 years in a row. Yield: 5.60%

UMB Financial Corporation (UMBF), a multi-bank holding company, provides banking and other financial services in the United States. The company increased its quarterly dividend by 5.10% to 20.50 cents/share. This dividend achiever has raised distributions for 21 years in a row. Yield: 2.30%

Nu Skin Enterprises, Inc. (NUS) develops and distributes anti-aging personal care products and nutritional supplements worldwide. The company increased its quarterly dividend by 18.50% to 55 cents/share. This dividend achiever has raised distributions for 12 years in a row. Yield: 1.30%

Perrigo Company (PRGO), through its subsidiaries, develops, manufactures, and distributes over-the-counter (OTC) and generic prescription (Rx) pharmaceuticals, infant formulas, nutritional products, and active pharmaceutical ingredients (API) worldwide. The company increased its quarterly dividend by 14.30% to 8 cents/share. This dividend stock has raised distributions for 9 years in a row. Yield: 0.30%

MSC Industrial Direct Co., Inc. (MSM), together with its subsidiaries, operates as a direct marketer and distributor of metalworking and maintenance, repair, and operations products to industrial customers in the United States. The company increased its quarterly dividend by 13.60% to 25 cents/share. This dividend stock has raised distributions for 9 years in a row. Yield: 1.50%

NewMarket Corporation (NEU), through its subsidiaries, engages in the petroleum additives and real estate development businesses. The company increased its quarterly dividend by 10% to 55 cents/share. NewMarket Corporation has raised distributions for 7 years in a row. Yield: 1.50%

Full Disclosure: Long AFL

Relevant Articles:

- Why Sustainable Dividends Matter

- Five Metrics of Successful Dividend Companies

- Seven wide-moat dividends stocks to consider

- Dividend Investing Risks

Why Sustainable Dividends Matter

My strategy entails purchasing dividend growth stocks which meet qualitative and quantitative entry criteria. The goal of my dividend growth portfolio is to purchase stocks that will raise dividends for years, without me having to reinvest anything back. The stream of dividend income will be used to fund my retirement, while the dividend growth will provide protection against inflation. I do not plan on selling, unless one of these three situations occur.

My strategy relies on companies which grow dividends over time. However, I do expect that I will experience dividend cuts and eliminations. Despite the fact that I own more than 40 individual stocks, a few rotten apples could lead to flat or lower dividend income for me. One of the three reasons that cause me to sell a stock is when it cuts distributions. However, I do end up replacing the cutter with a company from a similar sector, which meets my entry criteria. For example, when I sold the financial State Street (STT) in 2009, I replaced it with Aflac (AFL).

As a result, in order to reduce the risk of dividend cuts, I analyze the sustainability of the dividend payments before I commit any capital to new or existing positions. For most stocks, this means evaluating whether the dividend payout ratio is less than 60%. The dividend payout ratio is the percentage of earnings that the company distributes to shareholders in the form of dividends. Besides the absolute percentages, I also look for the trends in this ratio. In addition, I focus on the earnings and the dividend growth over the past decade, in order to assess any changes that could potentially affect the sustainability of dividend payments. Some companies increase dividends much faster than earnings, which lead to increase in the dividend payout ratio. This typically puts a limit on future dividend growth, because increasing dividends faster than earnings would lead to unsustainable payout. Thus, a clear rising trend in the payout ratio is a potential warning sign, particularly if the ratio is rising above 50%.

While I can calculate the ratio right now, once I initiate a position, I realize that things can change afterwards. A company that raises dividends faster than earnings, will eventually be in a position where it might not be able to reinvest sufficient amounts into the business. This could lead to dividend cuts, which are to be avoided. Another item to note includes structural changes. Banks such as US Bancorp (USB) and Bank of America (BAC) used to be darlings for dividend growth investors. However, the events of 2008 led to steep dividend cuts. An investor, who purchased these stocks in the 1990’s, could not have foreseen the events that led to the financial crisis of 2007 – 2009. Only those who monitored their portfolios closely and weren’t “married” to their stock holdings would have been nimble enough to dispose of the stock after the first dividend cut in 2008.

For REITs, I use Dividends to Fund From Operations (FFO) ratio, whereas for Master Limited Partnerships I use the Distributions to DCF ratio. Read more about REITs here. Read more about MLPs here.

Some recent dividend growth stocks I have purchased, that have sustainable distributions include:

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company spots a dividend payout of 33.80%. This dividend champion has raised distributions for 34 years in a row and currently yields 2.90%. Check my analysis of the stock.

Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. The company spots a dividend payout of 30.60%. This dividend aristocrat has raised distributions for 36 years in a row and currently yields 2.70%. Check my analysis of the stock.

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company spots a dividend payout of 36%. This dividend achiever has raised distributions for 17 years in a row and currently yields 2.60%. Check my analysis of the stock.

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. This master limited partnership has one of the highest distribution coverage in the MLP arena of 1.50 as of Q2 2011. Enterprise Product Partners has raised distributions for 14 years and yields 5.60%. Check my analysis of this MLP.

Full Disclosure: Long AFL, MDT, WAG, UTX, EPD

Relevant Articles:

- Four High Yield REITs for current income

- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors

- Five Metrics of Successful Dividend Companies

- Six Dividend Stocks to Hold Forever

This article was featured in the Carnival of Wealth

Ten Income Stocks Confident in their Growth Prospects

Dividends are paid out of real cash, generated by businesses. In order for these companies to be able to afford it, they should be expecting to generate sufficient amounts of cashflow. Thus, companies which announce an increase in their distributions, show their optimism about near-term business prospects. It is particularly refreshing to hear about companies which are optimistic about their future, particularly in light of all bearish news around Greece and US Budget deficits to name a few.

The following companies were confident enough in their business prospects, to increase distributions over the past week. Some were even bold enough to provide guidance extending over several years into the future:

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. This master limited partnership raised distributions to $1.16/unit. This was an increase of 4.50% compared to the last distribution paid out in 2010. This master limited partnership has increased distributions for 15 years in a row and currently yields 6.10%. According to this press release, the partnership will distributed almost $5/unit in 2012, followed by a 5%-7% distribution growth for the foreseeable future. Check my analysis of Kinder Morgan.

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This high yielding real estate investment trust increased its monthly distribution by a fraction of a penny to 0.1451875 cents/share. Overall, the four increases in distributions since the start of 2011 have resulted in annual dividend increases of 1.50 cents/share to $1.736625/share. While this distribution growths looks low, investors should not forget that Realty Income is one of the few REITs that did not cut distributions during the financial meltdown. The company has raised dividends for 17 years in a row and yields 5.40%. Check my analysis of the stock.

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. The company raised its quarterly dividend by 5.60% to 19 cents/share. This marked the 31st consecutive annual dividend increase for this dividend champion. Yield: 3.10%. Check my analysis of the stock.

Stepan Company (SCL), together with its subsidiaries, engages in the production and sale of specialty and intermediate chemicals to manufacturers in various industries worldwide. The company raised its quarterly dividend by 7.70% to 28 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion. Yield: 1.50%.

Met-Pro Corporation (MPR) manufactures and sells product recovery and pollution control equipment for purification of air and liquids, fluid handling equipment for corrosive, abrasive and high temperature liquids, and filtration and purification products in the United States and internationally. The company raised its quarterly dividend by 7.60% to 7.1 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Yield: 3.20%.

Magellan Midstream Partners, L.P. (MMP), together with its subsidiaries, engages in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. The master limited partnership increased distributions by 1.90% to 80 cents/unit. This represents a 7.40% increase over the distribution paid out in the last quarter of 2010. Magellan Midstream Partners has increased distributions for 11 consecutive years. Yield: 5.10%

Visa Inc. (V) operates retail electronic payments network worldwide. It facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. The company raised its quarterly dividend by 46.70% to 22 cents/share. This was the third consecutive annual dividend increase since the company went public in 2008. The stock yields only 1%, but could be the next big dividend growth story.

Cass Information Systems, Inc. (CASS) provides payment and information processing services to large manufacturing, distribution, and retail enterprises in the United States. The company raised its quarterly dividend by 6.25% to 17 cents/share. This marked the tenth consecutive annual dividend increase for this future dividend achiever. Yield: 1.90%

Bar Harbor Bankshares (BHB) operates as the holding company for Bar Harbor Bank & Trust that provides various banking products and services to individuals, businesses, not-for-profit organizations, and municipalities primarily in Hancock, Washington, and Knox counties. The company increased dividends by 1.80% to 28 cents/share. Bar Harbor Bankshares has increased dividends for 9 consecutive years. The quarterly dividend has been raised 3 times over the past year, after being flat for 2 years. The flat period included half of 2008 and 2010 and the whole year 2009. Yield: 3.90%

Prosperity Bancshares, Inc. (PRSP) operates as the holding company for Prosperity Bank that provides retail and commercial banking services to small and medium-sized businesses and consumers. The company raised its quarterly dividend by 11.40% to 19.50 cents/share. This marked the 14th consecutive annual dividend increase for this future dividend achiever. Yield: 2.10%

As a side note, I own the i-shares of Kinder Morgan (KMR). Investors in KMR do not receive cash distributions, but receive shares proportional to the ownership interest they have in the stock. The cash distributions for KMP and KMR are equal, the only difference is that KMR distributions are paid in the form of additional shares.

Full Disclosure: Long KMR, O, EV

Relevant Articles:

- Dividend Stocks offer stability amidst market volatility

- How dividend stocks protect investors from inflation

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

- Dividend Investing in a Low Interest Rate Environment

Archer-Daniels-Midland (ADM) Dividend Stock Analysis

Archer-Daniels-Midland Company (ADM) procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. Archer-Daniels-Midland is a dividend aristocrat, which has paid uninterrupted dividends on its common stock since 1927 and increased payments to common shareholders every year for 36 years.

The most recent dividend increase was in February 2011, when the Board of Directors approved a 6.70% increase in the quarterly dividend to 16 cents/share. Archer Daniels Midland ’s largest competitors include Bunge (BG), Corn Products Intl (CPO) and Griffin Land and Nurseries (GRIF).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.80% to its shareholders.

The company has managed to deliver a 16.70% annual increase in EPS since 2002. Analysts expect Archer-Daniels-Midland to earn $3.07 per share in 2012 and $3.40 per share in 2013. In comparison Archer-Daniels-Midland earned $3.13 /share in 2011.

The company plans to spend almost $2 billion on capex and acquisitions. The company has been able to expand commodity processing capacities through acquisitions, new plant construction and plant expansions. A recovering global economy might increase export demand, which would provide sufficient growth for the company’s corn processing operations. Increased demand for soft drinks and snack foods will be beneficial for ADM’s high-fructose corn syrup business.


The company’s Returns on Equty has been quite volatile, and closely followed the volatility in EPS. 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 13.30% per year over the past decade, which is lower than the growth in EPS.

A 13% growth in distributions translates into the dividend payment doubling every five and a half years. If we look at historical data, going as far back as 1990 we see that Archer-Daniels-Midland has managed to double its dividend almost every 5 years on average.

The dividend payout ratio has been on the decline since 2002. Lately it has stabilized around 20%, which is very conservative. 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 Archer-Daniels-Midland is attractively valued and is trading at 8.90 times earnings, yields 2.30% and has a sustainable forward dividend payout. I would add to my position subject to availability of funds on dips below $25.60/share.

Full Disclosure: Long ADM

Relevant Articles:

- Best Dividends Stocks for the Long Run

- Ten Dividend Stocks Beating Inflation

- Three Dividend Strategies to pick from

- How much money do you really need to retire with dividend stocks

Seven wide-moat dividends stocks to consider

Wide-moats, or strong competitive advantages exist in almost every industry. It is very difficult to take away market share from such companies, because they have strong consumer loyalty and strong brand names synonymous with being the best at what they do. These features protect the companies from competitors, and help them generate high returns on equity and charge higher prices to consumers.

Lowest Prices

Wal-Mart (WMT) is the most successful retailer in the world. The company has marketed itself as the lowest price retailer for almost everything consumers spend money on. The sheer scale of Wal-Mart (WMT) (analysis) has enabled it to squeeze lower prices from suppliers and increase operating effectiveness. In addition, its massive investment in technology has enabled to retailer to deliver the right goods when they are needed most. As a result it would be very difficult and costly to emulate the company’s business model. Check my analysis of Wal-Mart (WMT).

Strong Brand Names

Coca-Cola (KO) (analysis) has a portfolio of drinks, most prominent of which is Coke. It is a strong global brand, and consumers are willing to pay the premium to buy the product. It is true that there are alternatives to Coke from Pepsi (PEP) (analysis), but any Coke drinker would surely tell the difference between the two. I personally enjoy Coke and would never drink a Pepsi, although I own shares in both stocks. Furthermore the quality of Coca-Cola drinks is another reason why generations of consumers worldwide are buying the company’s drinks.
Another company with a strong portfolio of brand names includes Philip Morris International (PM) (analysis), which sells cigarettes and other branded tobacco products outside of US. The addictive product

Patents

Medical Device and Pharmaceutical companies spend billions in R&D in each year in order to address health issues for patients worldwide. Once a new drug is introduced, it undergoes years of trials and testing before hitting the market. After a patent is granted to the pharmaceuticals company, typically for a period of 20 years in the US, the company can pretty much charge as much as it wants to consumers. The reason is that there are few substitutes for most drugs, until generic competition starts eroding market shares. It is very rare that big pharma companies introduce competing drugs treating the same conditions. Companies with strong patents include Abbott Laboratories (ABT) (analysis) and Johnson & Johnson (JNJ) (analysis).

Geographic Location

Another type of competitive advantage exists when a company has a virtual monopoly at a particular geographical area. A prime example of that includes utilities companies such as Con Edison (ED) (analysis) or pipeline companies such as Kinder Morgan (KMP) (analysis). When consumers in New York need electricity, there is only Con Edison to supply this service to them. When oil and gas producers need to move their product between terminals, they don’t have a choice but to use the strategically positioned pipelines from companies like Kinder Morgan. It is so prohibitively expensive to set up the infrastructure for utilities and pipelines that making the investment in a parallel infrastructure would not be profitable.

Full Disclosure: Long all stocks mentioned above

Relevant Articles:

- Five Metrics of Successful Dividend Companies
- How dividend stocks protect investors from inflation

- How to choose between dividend stocks?

- Dividend Investing Risks

Enterprise Product Partners (EPD) – quietly building wealth for unitholders

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.

Last week, Enterprise Product Partners declared its 29th consecutive quarterly distribution increase. The board of directors of the General Partner increased the distribution rate to 61.25 cents/unit. This represented a 5.20% increase over the distribution paid in the third quarter of 2010. This dividend achiever has increased distributions in every year since 1999. As a unitholder, it pays well to get paid a high yield while also having my income increased over time. Check my analysis of the partnership.

Enterprise Product Partners is organized as a master limited partnership, where income and cash are proportionally distributed to unitholders. Since it is a partnership, shareholders are called unitholders and dividends are called distributions. With MLPs, typically only a portion of the cash distributions is taxed as ordinary income. The remainder represents a tax deferred distribution, which reduces the partner’s cost basis in the partnership. If the partner sells, this would translate into higher capital gains taxes they have to pay to the IRS.

The return of capital deferral is a result of depreciation on the massive capital assets that the partnership owns. Just like with real-estate, even if pipelines are fully depreciated on the company’s books, they will likely be in a good condition for continued exploitation. As a result, an important metric to use with MLPs is distributable cash flows. The partnership maintained a distribution payout ratio of 77% in 2010. Enterprise is also one of the few partnerships which have no incentive distributions rights for the general partner.

I will be considering adding to my position in the partnership on any price declines. The yield of 5.70%, coupled with solid distribution growth potential make this company a buy.

Full Disclosure: Long EPD

Relevant Articles:

- Enterprise Products Partners L.P. (EPD) Dividend Stock Analysis
- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
- General vs Limited Partners in MLP's
- MLPs for tax-deferred accounts

Best Dividend Articles as of Mid-October 2011

For your Weekend reading enjoyment, I have highlighted some of the most popular articles from the past month, which were posted on this site.

1) Ten Top High Dividend Growth Stocks for Long Term Returns

In this article, I describe ten dividend champions, which have managed to increase distributions at double digit rates over the past decade.

2) Best Dividend Stocks of 2011, Q3 Update

In this article, I calculate my year to date return of the four stocks I selected as part of an ongoing stock competition. I went back and noticed that i performed as well as S&P 500 in 2009, while outperforming handily in 2010 and so far in 2011.

3) How dividend stocks protect investors from inflation

In this article, I explain how dividend growth stocks provide a rising stream of income to investors, which typically meets or exceeds the rate of inflation. Therefore, the right type of dividend growth stocks provide solid capital gains and an inflation adjusted stream of income.

4) How to choose between dividend stocks?

In this article I attempted to create a framework for choosing between dividend stocks, given the constraints that I face in terms of capital, diversification and stock attractiveness.

I am also actively seeking feedback from readers on topics of interest for future articles. Feel free to post your ideas below. I can also be reached back at dividendgrowthinvestor at gmail dot com.

RPM International (RPM) Dividend Stock Analysis

RPM International Inc. (RPM), together with its subsidiaries, manufactures, markets, and sells various specialty chemical products to industrial and consumer markets worldwide. RPM International is a dividend champion which has paid uninterrupted dividends on its common stock since 1969 and increased payments to common shareholders every year for 37 years.

The most recent dividend increase was in October 2011, when the Board of Directors approved a 2.40% increase in the quarterly dividend to 21.50 cents/share. RPM International ’s largest competitors include Valspar (VAL), PPG Industries (PPG) and Sherwin-Williams (SHW).

Over the past decade this dividend growth stock has delivered an annualized total return of 11.60% to its shareholders.

The company has managed to deliver a 4.60% annual increase in EPS since 2001. Analysts expect RPM International to earn $1.60 per share in 2012 and $1.77 per share in 2013. In comparison RPM International earned $1.46 /share in 2011.



The company’s Returns on Equty has been quite volatile, and closely followed the volatility in EPS. 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 6% per year over the past decade, which is higher than the growth in EPS. Dividend increases have been largely symbolic over the past three years however.

A 6% growth in distributions translates into the dividend payment doubling every twelve years. If we look at historical data, going as far back as 1996, we see that RPM International has actually managed to double its dividend every 15 years on average.

The dividend payout ratio has remained below 50% in only 3 of the past ten years, and has closely tracked the volatility in earnings. Based on forward earnings for 2011 however, the payout ratio is close to 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently RPM International is trading at 13.40 times earnings, yields 4.10% and has a sustainable forward dividend payout. The erratic earnings picture over the past decade however makes this stock a hold.

Full Disclosure: Long RPM

Relevant Articles:

- Dividend Champions - The Best List for Dividend Investors

- Are Dividend Investors Benefiting from Stock Buybacks?

- Dividend Stocks – The safest investment in the world

- Why I am a dividend growth investor?

Five Metrics of Successful Dividend Companies

Everybody likes winners. Looking at the history of the most successful dividend stocks, I have been able to identify several traits, which have been strong predictors of performance.

- Rising EPS

A business has to be able to have strong competitive advantages and to deliver value to consumers in the form of goods or services they need. By having a strong brand, a business can afford to raise prices, and have a differentiated product that is more desirable that the competition. A business that manages to grow earnings per share either organically or through acquisitions, can afford to pay a rising dividend.

- High Return on Equity

High returns on equity are important to companies. Only a company with a wide-moat is able to charge higher prices. Growing such business might not be as easy simply through additional investments in it. Companies with high returns on equity are typically characterized with having excessive cash flows generated each year, which cannot be easily deployed 100% in the business. Some portion will be deployed, but these companies need to be mindful of the returns generated from new investments. If you generate 20% on your investment, making a new investment might increase earnings per share, but it might not be desirable because it could generate a lower return on equity. I typically want to see a stable ROE, because a declining one shows me that management is taking on any project available, regardless of profitability, without having the best interests of shareholders in mind.

- Decreasing number of shares

Some of the most successful companies in the world generate so much cash flow that they tend to have stock buybacks, which decrease the number of shares outstanding. This helps EPS, but also makes each share more valuable as it provides shareholders with a larger percentage of the business, without doing anything. Few companes consistently repurchase shares however, as most end up buying back stock when times are good and stock prices are high and stop buying back shares when times are tough but stock prices are low.

- Sustainable Dividend Payout Ratio

Some of the best dividend stocks have been able to create a balance between the amount of money they reinvest in the business, and the amount they distribute to shareholders in the form of dividends or share buybacks. A company that distributes too much to shareholders, might be unable to maintain its business without selling more stock or taking on additional debt. A company that pays too little in dividends might focus too much at growth at any price, which might reduce returns on equity over time.

- Dividend Growth History

The companies which are able to generate higher amounts of excess cash flows each year, tend to boost distributions annually. This creates a dividend stream for investors which increases at or above the rate of inflation each year. By strategically allocating these growing dividends through dividend reinvestment, investors are essentially turbocharging their income. There are less than 300 companies in the US which have a culture of sharing their success with shareholders in the form of higher dividends.

Five companies which provide excellent examples of the five metrics above include:

Wal-Mart Stores (WMT) has paid uninterrupted dividends on its common stock since 1973 and increased payments to common shareholders every year for 37 years. The company has managed to deliver an increase in EPS of 12.20% per year since 2001. On average the company has managed to repurchase 2.20% of its stock annually over the past decade. Wal-Mart has one of the largest and most consistent stock buyback programs in the US. The company has had a high return on equity, which has remained in a tight range between 20% and 23% over the past decade. Check my analysis of the stock.

Colgate-Palmolive (CL) is a dividend champion which has increased distributions for 48 years in a row. The company has managed to deliver an impressive increase in EPS of 9.60% per year since 2001. In addition, company has managed to decrease the number of shares outstanding by 1.30% per year over the past decade through share buybacks, which has aided earnings growth. It currently spots a return on equity of 78% and has a sustainable dividend payout ratio. Check my analysis of the stock.

PepsiCo (PEP) is a dividend aristocrat which has increased distributions for 38 years in a row. The company has managed to deliver an average increase in EPS of 10.90% per year since 2000. PepsiCo has a high return on equity, which has remained above 30%, with the exception of a brief decrease in 2004. The company has managed to repurchase 1.35% of its outstanding shares each year since 2001. Check my analysis of the stock.

McDonald’s (MCD) has paid uninterrupted dividends on its common stock since 1976 and increased payments to common shareholders every year for 35 years. The company has managed to deliver an increase in EPS of 15.50% per year since 2001. In addition, the company has managed to repurchase 2.20% of its stock annually over the past decade. The company has been able to increase in return on equity from the high teens in early 2000s to over 30% over the past three years. Check my analysis of the stock.

Procter & Gamble (PG) is a dividend aristocrat which has increased distributions for 55 years in a row. The company has managed to deliver an average increase in EPS of 14.50% per year since 2000. The return on equity has decreased since the purchase of Gillette several years ago, although it is on the increase. Procter & Gamble has spent billions repurchasing stock over the past decade. The only reason why the share count has increased slightly is due to the fact that major acquisitions were made using stock. Check my analysis of the stock.

Full disclosure: Long all stocks mentioned above

Relevant Articles:

- Ten Dividend Stocks with High Returns on Equity

- Dividends versus Share Buybacks/Stock repurchases

- Dividend Achievers Offer Income Growth and Capital appreciation

- Strong Brands Grow Dividends

AT&T and Coca-Cola are more expensive than you think

In my entry criteria, I typically focus on companies that have a sustainable dividend payment. A sustainable dividend payment is one where the ratio of dividends to earnings per share in a given year does not exceed 60%. In addition, I also focus on the price/earnings ratio, which is a ratio of the stock price over the annual earnings per share.

Astute readers would thus notice that I earnings per share is a key component of my analysis, as it is part of the P/E and dividend payout ratio calculations. For my analysis of earnings per share, I tend to focus on income from continuing operations. These generate earnings from sources, which have a high chance of recurring for many years. Many companies however generate one time gains or losses which directly affect earnings per share. As a result, I tend to “normalize” this key indicator, in order to have an objective analysis.

Two such companies, which appear to have higher earnings per share, due to one-time items include AT&T (T) and Coca-Cola (KO).

In a previous article, I have expressed my concerns over the sustainability of AT&T's and other telecom companies' dividend payments. On the surface however, it looked that AT&T (T) earned $3.35/share in 2010. This represents the highest EPS amount ever. In addition, the P/E ratio seems to be 8.50, while the dividend payout ratio is 51.30%. When you drill further into the earnings figures and switch to a quarterly view however, one would notice that the company earned $1.95 in the third quarter of 2010. This was much higher than the $0.54/share earned in the third quarter of 2009, and much higher than the $0.68/share earned in the second quarter of 2010. I researched the issue, and found this press release from the company’s website:

"Third-quarter 2010 net income attributable to AT&T totaled $12.3 billion, or $2.08 per diluted share, including $1.53 in one-time gains from a previously disclosed tax settlement and the sale of Sterling Commerce. "

This shows that the company earned $1.53/share from a one-time gain. In addition, $0.13/share came from discontinued operations. This leads to a normalized EPS of $0.42 for the quarter, which decreases earnings per share for 2010 to $1.69/share. As a result, the dividend payout ratio looks closer to 100%, whereas the P/E ratio looks close to 16.70. Even if AT&T manages to earn $2.40/share in 2011, its dividend coverage is still unsustainable at 72%. Check my analysis of the stock.

For Coca-Cola (KO) a large portion of the EPS for 2010 investors are seeing is coming from a gain related to the purchase of CCE North American Operations. Most investors see annual EPS of 5.06/share in 2010, which makes the P/E 13 and the DPR to be 37.20%. Zooming in on the EPS for the fourth quarter of 2010, one could see that the firm had EPS of 2.46/share, which was higher than the Q4 2009 earnings of $0.66/share and the Q3 2010 earnings of $0.88/share.

From the company's press release:

"Fourth quarter reported EPS was $2.46, with comparable EPS at $0.72, up 9%, including a $0.02 dilutive impact to comparable EPS as a result of the Coca-Cola Enterprises transaction. Full-year reported EPS was $5.06, with comparable EPS at $3.49, up 14%. "

Here's more from the press release:

"As required by accounting standards, the Company revalued its 33% ownership of CCE to fair value at the closing date of the transaction to acquire CCE's North American operations, resulting in a $5.0 billion one-time non-cash gain in the fourth quarter of 2010."

So to summarize, I used EPS of $3.83 in my analysis of Coca-Cola, rather than $5,06 since the extra $1.23 dollars/share came from basically writing up the company's previous initial partial investment in the bottling plans when it acquired them in full. These are one time earnings events, so they should not be taken into consideration. This increased the P/E ratio to 17.30 and the dividend payout ratio to 49.10%.

As a result, I would stay away from AT&T (T), despite its mouth watering yield of 6%. I am wary of high-yielding stocks, particularly from the telecom sectors. I would also prefer buying PepsiCo (PEP) stock over Coca-Cola (KO), given the fact that PepsiCo is cheaper than Coke.

Full Disclosure: Long KO and PEP

Relevant Articles:

- Coca-Cola (KO) Dividend Stock Analysis
- AT&T (T) Dividend Stock Analysis
- Highest Yielding Dividend Stocks of the S&P 500
- How to choose between dividend stocks?

Ten Top High Dividend Growth Stocks for Long Term Returns

Dividend Growth Stocks are one of the best kept secret in the investing world. After all, these are high quality companies which have strong competitive advantages that allow them to generate rising earnings over time. As a result, most of these companies generate so much in excess cash flow, that they are able to pay a higher dividend over time without sacrificing long term growth.

Companies which raise dividends at a high rate could easily generate double-digit yields on cost for investors who bought early and at the right time.

I have highlighted the following dividend champions with the highest consistent dividend growth rates:

Lowe's Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer in the United States and Canada. The company has boosted distributions for 49 years in a row. Ten year Annual Dividend Growth Rate: 27.60%. Yield: 2.80% (analysis)

McDonalds’ Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company has increased distributions for 35 consecutive years. Ten year Annual Dividend Growth Rate: 26.50% Yield: 2.80% (analysis)

Raven Industries, Inc.(RAVN), manufactures various products for industrial, agricultural, construction, and military/aerospace markets in the United States and internationally. The company has boosted distributions for 25 years in a row. Ten year Annual Dividend Growth Rate: 18.20%. Yield: 1.50%

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has increased distributions for 37 consecutive years. Ten year Annual Dividend Growth Rate: 17.80% Yield: 2.80% (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company has boosted distributions for 49 years in a row. The company has increased distributions for 34 consecutive years. Ten year Annual Dividend Growth Rate: 16.90%. Yield: 3% (analysis)

Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. The company has increased distributions for 36 consecutive years. Ten year Annual Dividend Growth Rate: 16.50%. Yield: 2.50% (analysis)

Sigma-Aldrich Corporation (SIAL), together with its subsidiaries, develops, manufactures, purchases, and distributes a range of chemicals, biochemicals, and equipment worldwide. The company has boosted distributions for 35 years in a row. Ten year Annual Dividend Growth Rate: 15.20%. Yield: 1.10%

Becton, Dickinson and Company (BDX) is a medical technology company which develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company has increased distributions for 38 consecutive years. Ten year Annual Dividend Growth Rate: 14.90%. Yield: 2.10% (analysis)

Target Corporation (TGT) operates general merchandise and food discount stores in the United States. The company has boosted distributions for 44 years in a row. Ten year Annual Dividend Growth Rate: 14.90%. Yield: 2.40% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has increased distributions for 48 consecutive years. Ten year Annual Dividend Growth Rate: 12.40%. Yield: 2.70% (analysis)

Dividend investing is not an automatic process. Investors should analyze the stocks in detail in order to decide whether they stand a chance of increasing distributions in the double digits over the next decade. Investors should analyze not only quantitative factors such as earnings, dividend sustainability and ROE but also qualitative factors such as business model, competitive advantages, etc.

Full Disclosure: Long MCD, WMT, MDT, WAG, CL, LOW

Relevant Articles:

- How to choose between dividend stocks?

- Dividend Growth Portfolio Project

- Best Dividend Stocks of 2011, Q3 Update

- How dividend stocks protect investors from inflation

Diebold (DBD) Dividend Stock Analysis

Diebold, Incorporated (DBD) provides integrated self-service delivery and security systems and services primarily to the financial, commercial, government, and retail markets worldwide. Diebold is a dividend champion which has paid uninterrupted dividends on its common stock since 1954 and increased payments to common shareholders every year for 58 years. There are only ten companies which have raised dividends for over half a century. Diebold is the only company in the world which has managed to raise dividends for 58 years in a row.

The most recent dividend increase was in February 2011, when the Board of Directors approved a 3.70% increase in the quarterly dividend to 28 cents/share. Diebold’s largest competitors include NCR Corp (NCR), AVID Technology (AVID) and Stratasys (SSYS).

Over the past decade this dividend growth stock has delivered an annualized total return of 0% to its shareholders. Just like most other stocks, Diebold was overvalued at the beginning of the decade, which led to poor total returns.

Analysts expect Diebold to earn $2.08 per share in 2011 and $2.31 per share in 2012. In comparison Diebold lost $0.31 /share in 2010. The company has managed to consistently repurchase 1.30% of its common stock outstanding over the past decade through share buybacks.

The earnings pattern over the past decade has been volatile while lacking any upward trend. Even if analyst’s estimates materialize for 2011 and 2012, the company’s EPS would still be below the 2004 highs of $2.54/share. If Diebold is unable to deliver a sustainable earnings growth over the next decade, it would be unable to continue increasing distributions to its shareholders.

The markets for its Automated Teller Machines (ATM) and other self-service stations are highly competitive, while competition is based on cost, service, innovation and improved productivity for clients. The company does have the opportunity to generate orders in emerging markets like India and Russia, where penetration of ATMs is lower than in the US. The financial crisis has been challenging to Diebold, as it hit its customers pretty hard. By increasingly relying on its services division, which generates more even revenue streams, the company could smooth out its uneven revenue sources.

The company’s Returns on Equty have closely followed the deterioration of earnings over the past decade. If the company manages to increase earnings per share past $2, ROE should increase comfortably in the mid to high teen percentage. 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 6% per year over the past decade, which is higher than the growth in EPS.

A 6% growth in distributions translates into the dividend payment doubling every twelve years. If we look at historical data, going as far back as 1961, we see that Diebold has actually managed to double its dividend every seven years on average.

The dividend payout ratio has remained below 50% in only 3 of the past ten years. Based on forward earnings for 2011 however, the payout ratio is close to 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Diebold is trading at 13.90 times 2011 earnings, yields 3.90% and has a sustainable forward dividend payout. The erratic earnings picture over the past decade however makes this stock a hold. If the company's management doesn't manage to increase earnings over the next decade, the company's streak of consecutive dividend increases will have to come to an end.

Full Disclosure: None

Relevant Articles:

- Nineteen Consistent Dividend Growth Stocks raising distributions

- Ten Dividend Kings raising dividends for over 50 years

- The Rule of 72

- High yield stocks for current income

How to choose between dividend stocks?

I invest in several dividend stocks every month. In order to end up with ideas to purchase, I have a rigorous screening process. I have described in detail what my entry criteria is in this article. Basically I look for certain quantitative factors such as valuation, dividend sustainability, return on equity and historical EPS and DPS growth. In terms of qualitative factors I look for competitive advantages, products with lasting impressions in customers and ability to grow earnings and dividends.

After narrowing down the list to a handful of stocks, I might end up with several that might look very similar to each other. While some investors could create an elaborate model using currently available data in order to provide an objective way to screen out candidates, projecting the past into the future seldom produces the desired outcome. At the end of the day one has to use their own judgment in order to select from a list of companies which spot similar characteristics.
Let’s assume that my quantitative screening process eliminated hundreds of dividend stocks from the dividend achievers index and narrowed the companies for further research to six. Let’s also assume that I could only purchase three stocks for whatever reason.

The six stocks I am looking at include:

Johnson & Johnson (JNJ): I have viewed Johnson & Johnson (JNJ) as the perfect dividend stock ever since I started investing in dividend stocks. As such I tend to have an above average position in it. The recent product recalls and the lack of immediate action on behalf of executives are a potential issue for the company, although I doubt it will lead to JNJ’s demise. The company should be able to turn around, and those that entered at current levels will likely generate strong returns in the future. I do have an above average position in the stock however. (analysis)

Procter & Gamble (PG): The company has some of the strongest brands in the world. For example, Gillette is true a wide-moat business brand. Men shave frequently, and the cartridges provide a recurring revenue stream for the company that sells it. Procter & Gamble is a well positioned portfolio of strong consumer brands, and as a result its business is relatively recession resistant, while also capitalizing on such hot trends such as the growing middle class in emerging markets. The issue I have with this company is that I frequently add to it when there are not many other opportunities, which means that I have an above average position in the stock. (analysis)

McDonald's (MCD): The company is one of the world’s most recognized brands. The golden arches has location all over the world. McDonald’s (MCD) has managed to continually reinvent itself and its menu, and delivered strong shareholder returns in the process. However it is lagging behind Yum! Brands (YUM) in China, which is a key market for growth. While the ten year dividend growth rate is at 26%, I expect distribution growth over the next decade to average 10%. (analysis)

Wal-Mart Stores (WMT): I have a below average position in the stock, given the fact that until the most recent dividend increase it was yielding less than 2.50%. While the stock has been able to raise dividends for 36 years, future growth might be harder to realize given the fact that the company already had $400 billion in sales. The company could increase its dividend payout ratio and try to squeeze efficiencies given its scale however, which should aid in dividend growth. Its operations abroad could also be a leading growth indicator for the future. Each share of the company produces a dividend income of $1.46. (analysis)

Coca Cola (KO): I like the product, as do many consumers worldwide. Coke is a stronger brand abroad than PepsiCo. The company is trading at a higher valuation than PepsiCo (PEP). It is a more pure play in soft drinks than PepsiCo, which has its risks however. Coca-Cola (KO) could generate a higher growth in the emerging markets than Pepsi, mostly due to its stronger brand abroad (based on my travel in emerging markets). Both Coke and Pepsi have slowed down the rate of dividend increases over the past few years. (analysis)

PepsiCo (PEP): Unlike its competitor, PepsiCo has a large exposure to the food industry. This has helped the company generate strong performance over the past decade versus Coca-Cola. I personally prefer the taste of Coke over Pepsi however, and many consumers seem to have similar taste buds than me. PepsiCo tends to make large acquisitions, which have worked so far. Sometimes it tends to overpay them, like the recent acquisition of Wimm-Bill-Dann (WBD). PepsiCo (PEP) is cheaper than Coca-Cola, and both have similar near term prospects. (analysis)

I have included my thoughts on each one of these. Given this analysis the end result was PepsiCo (PEP), McDonald's (MCD) and Wal-Mart Stores (WMT). Which three stocks would you have chosen, given the constraints I outlined above?

Full Disclosure: Long All stocks listed above

Relevant Articles:

- Dividend Growth Investing Gets No Respect
- Reinvesting Dividends Pays Off
- How to live off dividends in retirement
- 16 Core Dividend Stocks for your income portfolio

Dividend Growth Portfolio Project

The dividend growth portfolio project includes several dividend investing bloggers, each of whom has selected three dividend stocks to include in a hypothetical dividend growth portfolio.

The stock picks that I selected include Enterprise Products Partners (EPD), McDonald’s Corporation (MCD) and Chevron Corporation (CVX).

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. Investing in Chevron is a direct play on oil prices and the demand for energy. Long-term, the company is well positioned to capture sufficient profits in its Upstream segment, and has a solid strategy in exploring or acquiring promising assets that will fuel the growth in future earnings per share. Chevron will grow by acquiring and developing assets that will add to its reserves. New field developments are expected to generate 1%-2% annual production growth over the next five years. This dividend achiever has increased dividends for 24 years in a row and yields 3.30% (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. Enterprise Products Partners is the largest Master Limited Partnership in the US. Most of the partnership’s income is derived from oil and gas flowing through its vast network of pipelines. While prices of oil and gas are very volatile, the volumes of oil and gas transported in the US is relatively stable. MLPs like Enterprise Product Partners have a virtual monopoly on transporting oil and gas, as it is very expensive to build a pipeline, which is why opening a competing pipeline would not be a feasible idea. A large part of distributions that MLP investors receive are not taxed, as they represent return of capital caused by depreciation expense. This master limited partnership has increased dividends for 14 years in a row and yields 6% (analysis).

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. It franchises and operates McDonald’s restaurants worldwide. Analysts expect the company to manage to deliver 4% - 5% annual sales growth over the next few years. Growth in Asia/Pacific and Europe would likely outstrip US revenue growth. The international segment, which accounts for almost 55% of profits, has accounted for much of the growth in the past and is also expected to deliver growth in the future. The company has been able to achieve sales growth through innovation in its menu, introduction of different drinks as well as using its dollar menu items. This dividend aristocrat has increased dividends for 34 years in a row and yields 3.20% (analysis).

On a side note, my selection of Phillip Morris International (PM) was rejected, because the stock was already included in the portfolio. However, I truly believe PMI to be a great yield/growth combo for long-term investors.

Each of the other participants selected 3 income stocks. The dividend growth bloggers include:

The complete portfolio could be accessed from this link.

As with the other contest I participate in, I only include stocks as a long term investment.

Full disclosure: Long MCD, EPD, CVX

Relevant Articles:

- Philip Morris International (PM) Dividend Stock Analysis

- Best Dividend Stocks for 2011

- Dividend Aristocrats list for 2011

- Master Limited Partnerships (MLPs)

Best Dividend Stocks of 2011, Q3 Update

Dividend stocks offer the best of both worlds – capital gains along with a recurring quarterly cash income stream. The positive about dividned stocks is most evident during turbulent market conditions, when investors suffer from volatility and lower stock prices. Most of the quality dividend stocks have hardly moved during the turmoil that started several months ago, caused by fears about a double dip, unemployment and defaults by sovereign countries. The cash dividend serves as an added bonus, as it provides a cushion against further declines in the stock price.

Back at the end of 2010, I was asked to selected the best stocks for 2011, as part of an ongoing competition between several investment site publishers. You can read the reasons behind my four selections in this article. The four stocks I selected included:

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 raised its dividends by 20.30% this year. Yield: 3.70%. Check my analysis of the stock.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company raised its dividends by 5.60% this year. Johnson & Johnson has raised distributions for 49 consecutive years. Yield: 3.50%. Check my analysis of the stock.

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units: Beauty and Grooming, Health and Well-Being, and Household Care. The company raised its dividends by 9% this year. Procter & Gamble has raised dividends for 55 years in a row. Yield: 3.40%. Check my analysis of the stock.

PepsiCo, Inc (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe, and PepsiCo Asia, Middle East and Africa. The company raised its dividends by 7.30% this year. PepsiCo has raised dividends for 39 consecutive years. Yield: 3.20%. Check my analysis of the stock.

Overall, my dividend stock picks not only outperformed the growth stock selections, but are also outperforming the S&P 500 year to date. The year-to-date results are listed below:

Dividend Growth Investor +3.39%

Intelligent Speculator +3.19%

Million Dollar Journey -5.98%

Money Smarts Blog -13.14%

Where Does My Money Go -18.12%

The Financial Blogger -20.31%

My Traders Journal -35.82%

Wild Investor -37.26%

Beat the Index -45.07%

At the same time, S&P 500 index delivered a negative total return of 8.70% so far in 2011. It is reassuring to see quality dividend stocks maintain their value and sending investors cash through dividends, despite the market volatility.

Full Disclosure: Long PM, JNJ, PG, PEP

Relevant Articles:

- Dividend Stocks offer stability amidst market volatility

- Best Dividend Stocks for 2011

- Why Dividend Growth Stocks Rock?

- Four Dividend Stocks Safer than US Treasuries