How to Build a Retirement Dividend Portfolio with only $1000/month

Most articles on retirement investing assume that a lump sum of approximately $1 million is invested in order to provide income in retirement. In reality however, few individuals receive a lump-sum of such proportions all at once. Instead, many individual investors end up with a substantial nest-egg through long-term saving and investing. This long-term investing utilizes the power of compounding during the time it took to accumulate the nest egg. With dividend investing, instead of focusing on an asset number, investors typically focus on generating a specific amount of income. In a previous article I discussed the ways to increase your dividend income.

The way that younger dividend investors should approach retirement is no different. They should save a set amount of funds each month and purchase quality dividend stocks that are attractively priced at the time. After that, they should strive to reinvest dividends selectively or using drips. As they build their portfolios over time, investors in the accumulation stage should also avoid concentrating their efforts on just a handful of stocks. In order to have a properly diversified portfolio, which will withstand dividend cuts during financial crises, investors in the accumulation stage should hold at least 30 individual domestic and international securities representative of the ten market sectors in the S&P 500.

Diversification is not a silver bullet however, as certain risks, such as market risk cannot be diversified away, unless of course a non-correlated asset such as Real Estate or Fixed Income is added to the portfolio mix. In addition, investors should not diversify for the sake of diversification, and should stick to purchasing quality dividend stocks and attractive valuations.

So how can one accumulate a dividend portfolio that would generate sufficient dividend income in retirement?

I ran the numbers using the following assumptions:

An investor saves $1000/month and is able to allocate them to dividend growth stocks which yield 3% at the time and grow distributions at 7% per year. At that rate the distributions will double every ten years. This investor will also re-invest the accumulated dividends into more shares of dividend growth stocks yielding 3% which grow distributions at 7% per year.
This means that in year 21, this investor will be able to generate over $20,000 in annual dividend income based off the $240,000 investment. The purchasing power of this investment will be cut in half assuming a 3% annual rate of inflation.

In order to increase their dividend income, the investor should either save a higher amount of money every month or they should let their investment compound for a longer period of time. Saving $2000/month will generate over $41,000 in dividend income in year 21. If one saves $2000/month for 30 years however, this would lead to an annual dividend income of $118,000 by year 31.

The types of dividend growth stocks that investors could purchase include:

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has managed to boost dividends for 39 consecutive years, and has also managed to increase them by 13% per year over the past decade. Yield: 3.20% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has managed to boost dividends for 37 consecutive years, and has also managed to increase them by 17.80% per year over the past decade. Yield: 2.80% (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The company has managed to boost dividends for 39 consecutive years, and has also managed to increase them by 8.80% per year over the past decade. Yield: 3.80% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has managed to boost dividends for 48 consecutive years, and has also managed to increase them by 12.40% per year over the past decade. Yield: 2.70% (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of health care products worldwide. The company has managed to boost dividends for 39 consecutive years, and has also managed to increase them by 9.20% per year over the past decade. Yield: 4.20% (analysis)

In addition, this example did not account for taxes. If investors could afford to stash away as much as possible in tax deferred accounts which let them compound their investments tax free for decades, they will avoid paying the tax man every year out of their investment returns. The drawback is that withdrawals from such accounts are difficult and costly to make if one wants to retire before the age of 59.

Relevant Articles:

- How to increase your dividend income with these four dividend stocks

- Dividend Portfolios – concentrate or diversify?

- Fixed Income for dividend investors

- Diversified Dividend Portfolios – Don’t forget about quality

- Roth IRA’s for Dividend Investors

Five Show me the money dividend stocks

Investors can realize a return on investment either in the form of capital gains or whenever they receive a dividend. Capital gains are tricky, since if they are not realized they could disappear and quickly turn into unrealized losses. The volatile market environment over the past several months has lead to trillions of dollars in stock market losses worldwide. As a result, more investors are seeking to invest in stable corporations, which provide positive feedback every quarter in the form of cash dividends. Particularly of interest are the stocks of these companies which not only pay a stable dividend, but can also afford to grow that dividend. As a result, investors of such dividend paying stocks are not at the mercy of the market in order to generate returns from their investments. They could afford to patiently wait on the sidelines, and get paid for doing so, while the irrational Mr. Market zig-zags.

The following dividend growth stocks raised distributions to shareholders over the past week:

McCormick & Company, Incorporated (MKC) engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. It operates in two segments, Consumer and Industrial. The company raised its quarterly distributions by 10.70% to 31 cents/share. This marked the 26th consecutive annual dividend increase for this dividend champion. Yield: 2.70% (analysis)

Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company raised its quarterly distributions by 9.80% to 45 cents/share. This marked the 99th consecutive annual dividend increase for this dividend champion. Yield: 2.50% (analysis)

Hormel Foods Corporation (HRL), together with its subsidiaries, produces and markets various meat and food products in the United States and Internationally. The company raised its quarterly distributions by 17.60% to 15 cents/share. This marked the 46th consecutive annual dividend increase for this dividend champion. Yield: 2.10%

Lancaster Colony Corporation (LANC) engages in the manufacture and marketing of consumer products focusing primarily on specialty foods for the retail and foodservice markets in the United States. The company operates in two segments, Specialty Foods, and Glassware and Candles. The company raised its quarterly distributions by 9.10% to 36 cents/share. This marked the 49th consecutive annual dividend increase for this dividend champion. Yield: 2.20%

United Bankshares, Inc. (UBSI), through its subsidiaries, provides commercial and retail banking services and products in the United States. The company raised its quarterly distributions by 3.30% to 31 cents/share. This marked the 38th consecutive annual dividend increase for this dividend champion. Yield: 5%

Full Disclosure: Long MKC

Relevant Articles:

- Becton, Dickinson and Company (BDX) Dividend Stock Analysis

- McCormick & Company (MKC) Dividend Stock Analysis

- Dividend Champions - The Best List for Dividend Investors

- Capital gains for dividend investors

Should you follow Buffett’s latest investments?

Warren Buffett is one of the most successful investors of all time. He has been able to transform a small textile company into a $200 billion conglomerate, with interests in insurance, manufacturing, utilities and railroads. One of the most followed segment of the business however is the investment portfolio. In a previous article, I discussed how investors who closely followed Buffett’s moves in the Berkshire Hathaway (BRK.B) stock portfolio between 1976 and 2006 would have significantly outperformed the market.

The company is required by the SEC to publicly disclose its stock holdings each quarter. Sometimes, Buffett is able to request an exception for holdings he is in the process of accumulating. This is to ensure that investors who closely follow his trades do not bid up the prices of stocks he is purchasing, while he is building up his positions.

Over the past week, Berkshire Hathaway disclosed new holdings in International Business Machines (IBM), Visa (V) and Direct TV (DTV), Intel (INTC), CVS Caremark (CVS) and General Dynamics (GD). I have long speculated that Buffett is a closet dividend investor. Indeed, Berkshire’s portfolio generates over $1.40 billion in annual dividend income. Most of the new additions represent stocks which could easily be characterized as dividend growth companies. I have analyzed each one below, in order to determine if they are decent buys at the moment.

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. Big Blue has paid dividends for 100 years, and raised them for each of the past 16 years. The company has been able to transform itself from a hardware company to service and consulting juggernaut. I would consider initiating a position in IBM on dips below $150. The major issue with IBM is the low yield of 1.70%. (analysis)

Intel Corporation (INTC) engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. The leader in microprocessors has been able to raise distributions for 8 years in a row. I would consider adding the stock to my portfolio in a few years. Yield: 4.10% (analysis)

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. Since initiating a dividend in 2008, the company has raised it three times. Given its low payout ratio, and expected growth in EPS, Visa has the potential to become the next big dividend growth stock. Yield: 0.70%

General Dynamics Corporation (GD) provides business aviation, combat vehicles, weapons systems and munitions, military and commercial shipbuilding, and communications and information technology products and services worldwide. This dividend achiever has managed to boost distributions for 20 years in a row. Betting on this firm means betting that US will continue engaging in war activity in the future, and that the budget deficits would not decrease the appetite for military equipment. Yield: 3%

CVS Caremark Corporation (CVS) operates as a pharmacy services company in the United States. The company has managed to boost distributions for 8 years in a row. Yield: 1.50%

Overall, I find all of these as great businesses, which fit the Buffett model of having durable competitive advantages, pricing power and strong cash flow generation. Of all, I find Visa has the potential to be a great dividend growth story for the next few decades. Visa and MasterCard (MA) are basically a duopoly, which will certainly benefit from an increasing number of cashless transactions globally. Despite the low current yield, and the fact that the shares are close to being overvalued currently, I found the megatrends powerful enough to initiate a position in the stock. The long term dividend growth and total return potential of a company like Visa is hard to ignore. Thus being said, from a risk management perspective, I will only keep a smaller position in the company.

Full disclosure: Long V

Relevant Articles:

- Warren Buffett – A Closet Dividend Investor

- Warren Buffet - The richest investor in the World

- Berkshire Hathaway Historical Total Return Performance

- Dividend Investors are getting paid for waiting

This article was featured in Carnival of Personal Finance #337

Twelve income stocks boosting distributions

As I mentioned in a previous article, the most satisfying press release coming from a dividend paying corporation, is the one announcing a dividend increase. For dividend growth investors, who have analyzed the company and purchased its stock based on the dividend growth capabilities of that business, this provides a strong almost instantaneous feedback in the form of a higher reward. After all, a company which can afford to continuously to raise distributions year after year, will generate rising returns on investment for investors who were shrewd enough to select it at the right time. The consistency of dividend increases, ensures that investors can live off that income stream and attain financial independence.

Below, I have highlighted twelve cash machines, which announced dividend increases over the past week. All of the companies listed below have raised distributions for at least five consecutive years:

Brown-Forman Corporation (BF-B) engages in manufacturing, bottling, importing, exporting, and marketing alcoholic beverages. The company raised its quarterly dividend by 9.40% to 35 cents/share. This marked the 28th consecutive annual dividend increase for this dividend champion. Yield: 1.90% (analysis)

Sysco Corporation (SYY), through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily to the foodservice or food-away-from-home industry. The company raised its quarterly dividend by 3.80% to 36 cents/share. This marked the 10th consecutive annual dividend increase for this dividend champion. Yield: 4% (analysis)

National Bankshares, Inc. (NKSH) operates as the holding company for the National Bank of Blacksburg, a chartered national bank that provides a range of retail and commercial banking services to individuals, businesses, non-profits, and local governments in Virginia. The company raised its semi-annual dividend by 8.30% to 52 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. The company has raised dividends two times in the past year. Yield: 4%

The Laclede Group, Inc. (LG), through its subsidiaries, engages in the retail distribution, sale, and marketing of natural gas. The company raised its quarterly dividend by 2.50% to 41.50 cents/share. This marked the ninth consecutive annual dividend increase for the stock. Yield: 4%

The Williams Companies, Inc. (WMB), through its subsidiaries, engages in finding, producing, gathering, processing, and transporting natural gas primarily in the United States. The company raised its quarterly dividend by 25% to 25 cents/share. This marked the second dividend increase this year for Williams Companies, which has raised distributions for 8 years in a row. Yield: 3.30%

MDU Resources Group, Inc. (MDU) operates as a diversified natural resource company in the United States. The company generates, transmits, and distributes electricity, as well as distributes natural gas. The company raised its quarterly dividend by 3.10% to 16.75 cents/share. This marked the 21st consecutive annual dividend increase for this dividend achiever. Yield: 3.30%

NIKE, Inc. (NKE), together with its subsidiaries, engages in the design, development, marketing, and sale of footwear, apparel, equipment, and accessory products for men, women, and children worldwide. The company raised its quarterly dividend by 16.10% to 36 cents/share. This marked the 10th consecutive annual dividend increase for this dividend achiever. Yield: 1.60%

Union Pacific Corporation (UNP), through its subsidiary, Union Pacific Railroad Company, provides rail transportation services in North America. The company raised its quarterly dividend by 26.30% to 60 cents/share. This marked the 6th consecutive annual dividend increase for this dividend stock. Yield: 2.40%

New Jersey Resources Corporation (NJR) provides retail and wholesale energy services. It operates in two segments, Natural Gas Distribution and Energy Services. The company raised its quarterly dividend by 5.60% to 38 cents/share. This marked the 17th consecutive annual dividend increase for this dividend achiever. Yield: 3.20%

Royal Gold, Inc. (RGLD), together with its subsidiaries, engages in the acquisition and management of precious metal royalties. The company raised its quarterly dividend by 36.40% to 15 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Yield: 0.80%

The Hanover Insurance Group, Inc. (THG), through its subsidiaries, underwrites commercial and personal property, and casualty insurance coverage in the United States. The company raised its quarterly dividend by 9.10% to 30 cents/share. This marked the 8th consecutive annual dividend increase for this dividend stock. Yield: 3.20%

StanCorp Financial Group, Inc. (SFG), through its subsidiaries, provides group insurance products and services in the United States. The company raised its annual dividend by 3.50% to 89 cents/share. This marked the 14th consecutive annual dividend increase for this dividend stock. Yield: 2.70%

Full disclosure: Long BF-B and SYY

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- Four important dates for dividend investors

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- Dividend Champions - The Best List for Dividend Investors

- Yield on Cost Matters

Microsoft (MSFT) Dividend Stock Analysis

Microsoft Corporation (MSFT) develops, licenses, and supports a range of software products and services for various computing devices worldwide. Microsoft has paid uninterrupted dividends on its common stock since 2003 and increased payments to common shareholders every year for 7 years. The company is one of four AAA rated companies in the US.

The most recent dividend increase was in September 2011, when the Board of Directors approved a 25% increase in the quarterly dividend to 20 cents/share. Microsoft ’s largest competitors include Apple (AAPL), Google (GOOG) and Oracle (ORCL).

Over the past decade this dividend growth stock has delivered an annualized total return of 2.10% to its shareholders.

The company has managed to deliver a 16 % annual increase in EPS since 2001. Analysts expect Microsoft to earn $2.79 per share in 2012 and $3.08 per share in 2013. In comparison Microsoft earned $2.69 /share in 2011. The company has consistently managed to repurchase 3% of its outstanding stock since 2002.

Microsoft is an example of a pure growth company, which has matured and become an income stock. The beauty of the company is that it still generates solid earnings growth and its Windows operating system is the backbone of businesses and consumers software needs worldwide. Most businesses worldwide are used to Word, Excel, Access and Powerpoint. As a result, it would be virtually impossible for a competitor to make these users switch to a different product. With corporations upgrading existing systems every 4 -5 years, Microsoft will be able to keep its toll-like business model on the PC market for years.

Microsoft has been relatively successful in its investments in other technology companies such as Apple (AAPL) and Facebook. Microsoft purchased shares of Apple back in 1997, but sold them in the early 2000’s. The investment in Facebook at a $15 billion valuation looked silly at the time, although now Facebook’s valuation is several times that.

The big challenge for Microsoft includes the market for handheld tablet devices. As consumers increasingly switch to these products, failure to capitalize on that trend could jeopardize the company’s future profitability. The major software system for mobile phones is Google’s Android, which has been widely popular with consumers. On the negative side, Microsoft has tried breaking into markets such as search advertising, mobile phones and video games, but has been unable to create the type of blockbuster business franchise, that the Windows operation has been for the past two decades.

The problem with tech stocks in general is that creating a long-standing moat is difficult, as technologies change all the time. As a result, companies need to keep reinvesting profits in research and development just so that they stay current on new technologies. For example, Microsoft has had a virtual monopoly on software for PC’s with its Windows system. However, if more consumers choose to replace PCs with tablets, Microsoft will be unable to generate high profits. As a result, it is difficult to predict what the future for Windows will be over the next two decades.

The company’s Returns on Equty has tripled over the past decade, to a mind boggling 45% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Microsoft started paying dividends in 2003, and paid a onetime special dividend of $3/share in 2004. The annual dividend payment has increased by 11.50% per year since 2005, which is lower than the growth in EPS. I would expect Microsoft to keep increasing in dividends at 10% per year at least until it reaches dividend achiever status.

A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 2005 we see that Microsoft has managed to double its dividend almost every 6 years on average.

The dividend payout ratio has been stable between 20% and 30% since 2004. 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 Microsoft is attractively valued and is trading at 9.30 times earnings, yields 3.00% and has a sustainable forward dividend payout. I would keep Microsoft on my radar, as it would be eligible for inclusion in my dividend growth portfolio when it becomes a dividend achiever.

Full Disclosure: None

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- Has the time for Tech Dividends arrived?

- Four Dividend Stocks safer than US Treasuries

- Dividends are Powering Up the Tech Sector

- Intel Corporation (INTC) Dividend Stock Analysis

How to create a bulletproof dividend portfolio

Investors who plan on living off their assets in retirement face several risks. The risks include inflation, longevity risks, extreme market conditions and liquidity. By creating a diversified dividend portfolio however, investors could not only address these risks, but have a very good odds of achieving a rising stream of dividend income, which means that they would never have to dip into principal to finance their retirement.

The first risk includes inflation. Over the past century, inflation has averaged 3% per year. While the effects of inflation are not visible over a period of five years or less, over the long run its eroding effect is significant. Even at 3%, the purchasing power of the dollar decreases by 50% in 24 years. That means that a bottle of Coca-Cola which costs $1.25 would likely cost $2.50 in 2034. Investors should realize that this is just an average however. Some costs would increase much faster than the average, while others would likely decrease over time. As a result, investors should be able to invest in assets which not only generate an inflation adjusted stream of income but also protect the purchasing power of their principal. I have discussed such investments in this article.

Companies such as Procter& Gamble (PG) and Coca Cola (KO) have the pricing power to pass cost increases over to their consumers. As a result, their earnings should be able to increase if there is any inflationary pressure.

The second risk is longevity risk. Investors typically depend on the four percent rule, which requires that a set percentage of one’s portfolio is sold each year, no matter what. In an event of an extended flat market, or if the retiree happens to have started retirement during a significant stock market top like the one in 1929 or 2000, then they would likely deplete their assets in less than 2 decades. A male that was born in 1946, is expected to live 19 more years according to this SSI Life Expectancy Calculator. The problem is that this is just an estimate – a major portion of those which have chosen to retire at 65 would likely live longer than average. Running out of money in retirement should never be an option, since it is impossible to predict the life expectancy of an individual with any precision.

Dividend Growth Investors do not have to worry about longevity risks, as long as they hold a properly diversified dividend portfolio. This portfolio should include at least 30 individual securities representative of as many sectors in the economy as well as a variety of geographic areas. This portfolio should also include certain noncorrelated assets such as fixed income as well. For an example dividend growth portfolio for the long term, check this portfolio. The process of building a bullet proof portfolio should take some time, as not all great dividend stocks are attractively valued at all times.

The third risk includes extreme market conditions. This could include bear markets, recessions and depressions. The beauty of most quality dividend stocks is that while their prices fluctuate with the market, their dividend payments are stable and even rising. As a result, investors are essentially paid for holding on to their investments. As long as the carefully selected dividend stocks maintain their profitability and can afford to pay the distributions, investors should do exactly that – hold on to their positions. Selling your stocks just because the market is down 20%- 30% and all the doom and gloomers are predicting the end of the world is not a good idea if the dividend is maintained or increased, unless of course the dividend is cut or eliminated. In order to withstand market corrections caused by recessions, investors should have a properly diversified dividend portfolio which has proper representation from the ten sectors in the S&P 500. Adding some international stocks could also reduce volatility in dividend and stock price returns as well. During the financial crisis of 2007 -2009 most of the dividend cuts were concentrated in the financial sector as some dividend aristocrats like Bank of America (BAC) and US Bancorp (USB) cut distributions. At the same time however, companies like PepsiCo (PEP) and McDonald’s (MCD) kept raising dividend stocks. This means that if dividend investors were properly diversified using the above mentioned principles, the effect on the financial crisis on their dividend income would have been insignificant at worst.

The fourth risk is liquidity. Investors who purchase annuities typically are able to generate a stable stream of income in exchange for handing over their nest egg to an insurance company. They pay a fee for this service, and have their money locked up. The annuity payment typically does not grow over time, which decreases the purchasing power of the income stream. If the retiree tries to sell the annuity, they would be hit with a large number of steep fees. In addition, most annuities stop paying income once the original participant is deceased. They could be extended to provide a payment to the participant’s spouse, but this would result in a lower current payment. This means that the next generation would not be able to benefit from the wealth accumulated by the retiree.

Investors who depend on dividend stocks for income in retirements, do not face any liquidity risks. Most of the best dividend stocks are actively traded blue chips, which could be sold every day that the market is open. Investors living off dividends should not dip into principal unless there are extreme circumstances, which absolutely requires this to happen. For example, Johnson & Johnson (JNJ) trades an average of 12 million shares per day. This means that unless the size for your trade is in the tens of thousands of shares, liquidity should not be an issue. That being said, most dividend investors focus on the long term dividend potential of their income stocks. However, knowing that your portfolio is quietly appreciating as well because of the higher earnings generation capacity of the business, is always appreciated as well.

Full disclosure: Long JNJ,PG, MCD, PEP, KO

Relevant Articles:

- Seven wide-moat dividends stocks to consider

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- A dividend portfolio for the long-term

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Six Dividend Winners Increasing Dividends and Returns

Life is full of unpredictability. That is why people naturally tend to gravitate towards leaders, which are consistent at winning. Dividend investors are no different. They look for proven winners, which can be relied upon to deliver results. Once a consistent winner is selected, dividend growth investors simply hang on to it, and get paid a rising stream of income for holding the investment. A rising dividend payment results in higher profits for the shareholders, making the dividend stock that produces the income more valuable over time.

The following dividend winners have been able to raise distributions for over five years in a row. In addition, they have also announced a distribution hike over the past week:

Automatic Data Processing, Inc. (ADP) provides business outsourcing solutions. The company operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. The company increased its quarterly dividend by 9.70% to 39.50 cents/share. This marked the 37th consecutive annual dividend increase for this dividend aristocrat. Yield: 3.10% (analysis)

Universal Corporation (UVV), through its subsidiaries, operates as a leaf tobacco merchant and processor primarily in North America, South America, Africa, Europe, and Asia. The company increased its quarterly dividend by 2.10% to 49 cents/share. This marked the 41st consecutive annual dividend increase for this dividend champion. Yield: 4.50% (analysis)

Vectren Corporation (VVC), through its subsidiaries, provides energy delivery services to residential, commercial, and industrial and other contract customers in Indiana and west central Ohio. The company increased its quarterly dividend by 1.40% to 35 cents/share. This marked the 52nd consecutive annual dividend increase for this dividend champion. Yield: 4.90%

Buckeye Partners, L.P. (BPL) owns and operates refined petroleum products pipeline systems in the United States. This master limited partnership increased its quarterly distributions to $1.025 /unit. This dividend achiever has raised distributions for 16 consecutive years. Yield: 6.20%

Atmos Energy Corporation (ATO), together with its subsidiaries, engages in the natural gas distribution, transmission, and storage businesses in the United States. The company increased its quarterly dividend by 1.50% to 34.50 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. Yield: 4.00%

AmerisourceBergen Corporation (ABC), a pharmaceutical services company, provides drug distribution and related services to healthcare providers and pharmaceutical manufacturers in the United States, the United Kingdom, and Canada. The company increased its quarterly dividend by 13% to 13 cents/share. This was the second increase in 2011 for this dividend stock, which has raised distributions for 7 years in a row. Yield: 1.30%

Full Disclosure: Long ADP and UVV

Relevant Articles:

- Automatic Data Processing (ADP) Dividend Stock Analysis

- Dividend Aristocrats list for 2011

- Universal Corporation (UVV) Dividend Stock Analysis

- Dividend Champions - The Best List for Dividend Investors

Dividend Growth Stocks by Sector - Retail

Dividend growth investing is a strategy where investors purchase stock in quality companies, which have committed themselves to raising dividends for long periods of time. Dividend growers and initiators have been found to outperform the market over the past 40 years according to Ned Davis Research studies. I have previously discussed these studies in this article.

Just because one has a strategy which gives them an edge, or the ability to generate consistent returns, does not mean that all caution should be thrown to the wind. In order to be successful, investors should focus on companies with solid fundamentals, which are attractively priced and have sustainable dividend payments. In addition to that, investors should build diversified dividend portfolios, where companies from different sectors are being included.

Today I am going to discuss the companies in the retail sector. The dividend growth stocks which are representative of the sector include:

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend champion has raised distributions for 37 years in a row. The ten year annual dividend growth rate is 17.80%. Yield: 2.80% (analsyis)

Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has raised distributions for 44 years in a row. The ten year annual dividend growth rate 14.90is %. Yield: 2.40% (analsyis)

Lowe's Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer in the United States, Canada, and Mexico. This dividend champion has raised distributions for 49 years in a row. The ten year annual dividend growth rate is 17.60%. Yield: 2.80% (analsyis)

Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. This dividend champion has raised distributions for 36 years in a row. The ten year annual dividend growth rate is 16.50%. Yield: 2.50% (analsyis)

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. This dividend champion has raised distributions for 34 years in a row. The ten year annual dividend growth rate is 10.10%. Yield: 1.40% (analsyis)

Technically however, using Standard & Poor's classifications, Wal-Mart, Walgreen's are Consumer Staples, while Lowe's, Family Dollar and Target are examples of Consumer Discretionary stocks. The companies that are attractively priced today include Lowe's (LOW), Walgreen (WAG) and Wal-Mart Stores (WMT). Target (TGT) and Family Dollar (FDO) could be decent additions on dips below $48 and $36 respectively.

Full Disclosure: Long WMT, LOW, WAG, FDO

Relevant Articles:

- Seven wide-moat dividends stocks to consider

- Ten Top High Dividend Growth Stocks for Long Term Results

- Why the best investment plans never turn out as expected

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Four important dates for dividend investors

Investors who plan on living off dividends in retirement, should generally focus on companies paying regular, stable and rising distributions over time. This process requires analyzing stocks that fit a certain predetermined entry criteria, and keeping up to date on any developments.
One press release that makes my day every quarter is the one that discusses how a company’s Board of Directors has approved a quarterly dividend payment for shareholders. The most exciting press release is the one that discusses how a dividend increase has been approved. Understanding the dates mentioned in those press releases is essential for investors, as it will determine the timing of the distribution.

The four dates mentioned in a dividend press release include:

Dividend Declaration Date – This is the date on which dividends are declared by the board of directors.

Ex-Dividend Date – The Ex-dividend date is usually two days before the record date. This is the first day that the stock trades without the right to receive a dividend. On this day the price of the stock will be reduced by the amount of the dividend. The reduction comes from the price of the last trade in the previous session. If you purchase a stock on the ex-dividend date, you won’t receive a dividend until it is declared for the next time period. In order to be able to get the dividend, you will have to purchase the stock before the ex-dividend date.

Record Date - Shareholders who are not registered as of this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date.

Payment Date – This is the date on which the dividends are deposited directly in your investment account or sent in the mail.

The most important date of all is the ex-dividend date. If you purchase a stock one day before the ex-dividend date and sell it on the ex-dividend date, you will be entitled to receive the dividends.

Technically, some dividend investors get excited at the fact that they could own a stock for one day per quarter, and still be eligible to receive the dividend. In a previous article I explained the dangers behind the dividend capture strategy.

Here is a press release from Altria Group (MO), where the important dates are mentioned:

Altria Group, Inc. (Altria) (NYSE: MO) today announced that its Board of Directors voted to increase Altria's regular quarterly dividend by 7.9% to $0.41 per common share versus the previous rate of $0.38 per common share. The new annualized dividend rate is $1.64 per common share. The quarterly dividend is payable on October 11, 2011 to shareholders of record as of September 15, 2011. The ex-dividend date is September 13, 2011.

Basically what this means is that investors who owned Altria (MO) stock at the close of business on September 12, 2011, were entitled to receive a dividend of 41 cents/share on October 11, 2011.

Other companies which are going ex-dividend over the next week include:

Aflac (AFL), for which the ex-dividend date is on November 14, while the pay date is on December 1. Yield: 2.90% (analysis)

Con Edison (ED), for which the ex-dividend date is on November 14, while the pay date is on December 15. Yield: 4.10% (analysis)

Target (TGT), for which the ex-dividend date is on November 14, while the pay date is on December 10. Yield: 2.30% (analysis)

Chevron (CVX), for which the ex-dividend date is on November 16, while the pay date is on December 12. Yield: 3.10% (analysis)

United Technologies (UTX), for which the ex-dividend date is on November 16, while the pay date is on December 10. Yield: 2.50% (analysis)

Full Disclosure: Long MO, AFL, ED, CVX, UTX

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Ten Income Stocks Providing an Inflation Adjusted Stream of Income to Shareholders

Inflation is one of the major risks that retirees face when living off their nest eggs. The general increase of prices over time would leave retirees on fixed incomes scrambling to make ends meet in the decades since they left the workforce. Dividend growth stocks are one of the few asset classes available to investors to provide a stream of income that generally grows over time. For example, between 1920 and 2005 the dividends paid by the companies included in the Dow Jones Industrials Index (DIA) increased by 5.60% per year, which was more than the 3% annual inflation rate during the period.

Over the past week, ten reliable dividend stocks kept the tradition of rewarding their shareholders with higher inflation adjusted stream of income. The companies include:

Emerson Electric Co. (EMR) operates as a diversified manufacturing and technology company. The company engages in appliance solutions, climate technologies, industrial automation, motor technology, network power, process management, professional tools, and storage solutions businesses. This dividend aristocrat raised quarterly distributions by 15.90% to 40 cents/share. This marked the 55th consecutive annual dividend increase for the company. There are ten companies in the world which have managed to raise dividends for more than 5 decades. Yield: 3.30% (analysis)

Archer-Daniels-Midland Company (ADM) procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. This dividend aristocrat raised quarterly distributions by 9.40% to 17.50 cents/share. This marked the 37th consecutive annual dividend increase for the company. Yield: 2.40% (analysis)

Questar Corporation (STR) operates as an integrated natural gas holding company. This dividend aristocrat raised quarterly distributions by 6.60% to 16.25 cents/share. This marked the 33rd consecutive annual dividend increase for the company. Yield: 3.50%

Mercury General Corporation (MCY) , together with its subsidiaries, engages in writing private passenger and commercial automobile insurance in the United States. This dividend achiever raised quarterly distributions by 1.70% to 61 cents/share. This marked the 25th consecutive annual dividend increase for the company. Yield: 5.80%

Microchip Technology Incorporated (MCHP) engages in the design, development, manufacture, and market of semiconductor products for embedded control applications. This dividend achiever raised quarterly distributions to 34.80 cents/share. This marked the 10th consecutive annual dividend increase for the company. Yield: 3.90%

Lincoln Electric Holdings, Inc. (LECO), through its subsidiaries, manufactures welding and cutting products worldwide. This dividend achiever raised quarterly distributions by 9.70% to 17 cents/share. This marked the 17th consecutive annual dividend increase for the company. Yield: 1.80%

DeVry Inc.(DV), together with its subsidiaries, provides educational services worldwide. This dividend stock raised quarterly distributions by 9.40% to 17.50 cents/share. This marked the 6th consecutive annual dividend increase for the company. Yield: 0.80%

Aaron’s, Inc. (AAN) operates as a specialty retailer of consumer electronics, computers, residential furniture, household appliances, and accessories in the United States and Canada. This dividend stock raised quarterly distributions by 15.40% to 1.50 cents/share. This marked the 7th consecutive annual dividend increase for the company. Yield: 0.20%

Exterran Partners, L.P. (EXLP) provides natural gas contract operations services to customers in the United States. This master limited partnership raised quarterly distributions to 48.75 cents/share. Exterran Partners has raised distributions for 5 years in a row. Yield: 7.90%

Noble Corporation (NE) operates as an offshore drilling contractor for the oil and gas industry worldwide. This dividend stock raised quarterly distributions by 16.90% to 15.20 cents/share. This marked the 8th consecutive annual dividend increase for the company. Yield: 1.70%

The dividend increases of these companies certainly beat the pension raises that Social Security has provided over the past few years.

Full disclosure: Long EMR, ADM

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Stock Spin-Offs – What Should Dividend Investors do?

Several companies I own have announced that they plan on splitting in two separate entities. Abbott Labs (ABT) was the latest one to announce its intentions to split in two companies. Check my analysis of the stock. The question in the mind of every dividend growth investor is: “What should I do”?

In general, as long as the characteristics which enabled the original company to raise dividends for decades are still intact, chances are that the separate entities will continue raising distributions. For example, Altria Group (MO) was able to spin-off Kraft (KFT) in 2007 and Phillip Morris International (PM) in 2008. Before that, the original company was able to raise annual distributions for over three decades. After the spin-offs, Altria (MO) has kept up with raising dividends to its shareholders, as did Phillip Morris International (PM). Both companies were able to increase earnings per share over the same period, which enabled them to achieve the task of higher dividends ever since.

Kraft (KFT) on the other hand has been unable to increase distributions more than once since the spin-off, due to its inability to increase earnings and due to the costs associated with the acquisition of Cadbury in 2010. Now Kraft (KFT) itself is in the process of splitting in two separate companies, the global snacks business with annual sales of $32 billion and a high margin grocery business, with annual sales of $16 billion.

Abbott Labs on the other hand is splitting in two companies. The first one will be a research-based pharmaceuticals company, which will own Abbott’s premier drug names such as Humira, Lupron, Synagis to name a few. It would be basically a drug company, which focuses on keeping its pipeline of new drugs coming to the market, through constant investment in research and development. Drug companies have faced steep patent cliffs over the past several years, which has intensified mergers in the sector.

The second company will be a diversified medical products company, and its name would remain Abbott. It would own established nutritional products, medical devices and diagnostics products as well as generic drugs outside of the US.

As a dividend growth investor, I plan on holding on to these stocks after the spin-offs. I believe that both companies would be able to better focus on their goals as standalone entities. Despite the fact that I do require a minimum of ten consecutive annual dividend increases in order to purchase new stocks, I make an exception for spin-offs. I do monitor each situation closely however, as inability to raise dividends over time would prohibit me from allocating any new capital to such positions.

Once investors receive the new shares in each of the new companies, initially I expect that the dividends in total to be equal to the total dividend paid out by Abbott. Overtime however, I expect these dividends to grow. As a result, given the fact that Abbott has had a long culture of dividend increases and the fact that it is priced attractively at the moment, I would keep accumulating the stock in my income portfolio.

Full disclosure: Long KFT, PM, MO, ABT

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Five Stocks Building Future Yields

One of the most misunderstood concepts of dividend investing is dividend yield. It typically takes a part of almost every dividend investors decision making process when evaluating an income investment. Investors who typically purchase a stock just for the current yield, could get disappointed down the road. The reason is that once investors purchase shares in a company, current yield stops being relevant for them, unless they decide to invest new money in the position. By purchasing shares, they have effectively managed to lock in the current yield. Their future dividend income is therefore dependent not on the dividend yield, but on the dividend payment that the security distributes.

In essence, before initiating a position, investors should evaluate the sustainability of its income stream. Common methods include dividend payout ratio, which measures the proportionate amount of earnings that is distributed to shareholders in the form of dividends. In most industries such as consumer staples for example, a dividend payout ratio below 50% indicates that the dividend payment is sustainable. In other industries such as real estate investment trusts, funds from operations payout is used in order to evaluate the sustainability of the dividend payout.

Investors should then delve deeper in order to understand how the company makes money. Reading the annual and quarterly reports on the SEC website, as well as press releases, stock research reports and news on the security is a must, in order to understand the business. Investors should look for some sort of a competitive advantage, which differentiates the investment from competitors. For example, Wal-Mart Stores (WMT) offers the lowest retail prices to consumers. The company has invested a significant amount of capital in improving its management of inventory and purchasing. Due to its sheer scale of operations, it commands lower prices from suppliers and generates efficiencies from distribution and administrative functions. This has allowed Wal-Mart (WMT) to bring the lowest prices to consumers. Check my analysis of the stock.

Next, investors should evaluate whether the companies analyzed would be able to generate higher earnings over time. Only companies that can generate higher earnings will be able to increase dividend payments.

Otherwise, anyone can compile a portfolio of stocks which have a high current yield. What is important for investors is not only how much this portfolio pays today, but also whether it would be able to at least maintain purchasing power in the future. Smart investors who purchased carefully researched dividend growth stocks, which offer potential for dividend increases above the rate of inflation, and which were priced attractively at the time of purchase have a high chance of creating a long lasting dividend producing portfolio.

Five companies, which are currently building higher future yields include:

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. The company has raised dividends for 35 years in a row, and has a ten year dividend growth rate of 26.50% per year. Yield: 2.80% (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised dividends every year since the spin-off from Altria Group (MO). Yield: 4.50% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised dividends for 37 years in a row, and has a ten year dividend growth rate of 17.80% per year. Yield: 2.80% (analysis)

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has raised dividends for 39 years in a row, and has a ten year dividend growth rate of 13% per year. Yield: 3.20% (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company has raised dividends for 34 years in a row, and has a ten year dividend growth rate of 16.90% per year. Yield: 3% (analysis)

Full Disclosure: Long MCD, PM, WMT, PEP, MDT

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