Accumulating Dividend Stocks is a Long Term Process

My previous article “Does Entry Price Matter to Dividend Investors?” created a lot of discussion. To summarize, it is important to have some valuation guidelines, before purchasing a dividend stock. This is to protect the investor in the very likely event that they “fall in love” with a stock and purchase it regardless of price. After all, purchasing a stock at inflated price levels might lead to sub-par returns for several years.

The typical valuation guidelines I use include a minimum yield of 2.50% for new or existing investments, as well as a maximum of 20 times earnings I am willing to pay for a company. I would sometimes purchase shares in companies I deem to have great potential, which yield less than 2.50%. My purchase of a small position in Visa (V) is an example of this. I would never however initiate a position in or add to a position when I am paying more than 20 times earnings.

I typically accumulate my positions over long periods of time. I currently add or initiate positions in 2- 3 stocks per month. At this rate, chances are that I purchase stock in a given company about once or twice per year. In the case of companies like McDonald’s (MCD), this means that I bought stock in 2008, 2009, 2010 and 2011. As long as the stock trades at less than $105/share, I might be able to add to my position in 2012 as well. Even if the stock zooms past $105/share, I would still have exposure to it, although I might invest my new funds elsewhere. Unlike other investors however, I do not avoid buying stocks simply because they “went up”. Many investors missed the boat at McDonald’s (MCD) at $70 or $80/share, because they figured that the stock has increased too fast, and thus waited for a dip before adding to their positions. This is the type of market timing, which should be avoided. Now, If investors didn’t want to pay more than 15 times earnings, then waiting for the dip after McDonald’s increased above $75-$80/share was a perfectly reasonable excuse. The key to successful investing is having a strategy that fits your personality, and then trying to stick to it.

Many times, I would see a stock defy gravity and trade at 25 times earnings. I would wait for a dip before initiating or adding to my position. Sometimes it might take months and even years before the stock reaches an attractive valuation either because of a stock correction or because earnings increased faster than share prices. In an era of instant investment gratification, where investors can buy and sell stocks in the matter of nanoseconds, this seems like eternity. With dividend growth investing however, a big part of success comes not just by identifying the best companies and initiating a position in them, but also by holding onto them for as long as possible. If the stock I really want to purchase is overvalued, I would find another candidate for my money. There are over 200 dividend achievers in the US, which means that there are always investment opportunities out there for dividend investors.

For example, some of the recent buys I have made in my portfolio over the past month or two include:

Johnson & Johnson (JNJ) engages in the research, development, manufacture, and sale of various products in the health care field worldwide. The company has raised dividends for 49 years in a row. The stock trades at a P/E of 14.20 and yields 3.50%. (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised dividends each year since 2008, when it was spun off from Altria Group (MO). However, its dividend growth culture could be traced back to the four decades of dividend increases at the original Altria Group. The stock trades at a P/E of 17.10 and yields 3.70%. (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has raised dividends for 48 years in a row. The stock trades at a P/E of 18.90 and yields 2.50%. (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. The stock trades at a P/E of 15.70 and yields 3.30%. (analysis)

Just because a stock is in overbought territory however, doesn’t mean it is a sell either. Too often I see investors disposing of their positions in otherwise fine dividend stocks, just because the price went into overbought territory. This creates taxable events for them and then they have to worry about reinvesting the proceeds in other stocks. The end result is typically similar to the scenario where they simply held on to the original stock and reinvested the distributions elsewhere.

To quote Warren Buffett, his first rule of success involves not losing money. His second rule of success involves not forgetting the first rule. The goal of dividend investing is a growing stream of income as well as capital preservation that comes with it. Investors chase overvalued stocks because they are afraid to miss the boat on future price gains and dividend increases. Unfortunately, stocks with higher valuations have a higher chance that anything that goes wrong could have a negative effect on share price or income stream. Investors who purchase stocks at reasonable valuations however, have better chances of realizing rising price and dividend returns.

At the end of the day, dividend investing is challenging because it involves a great deal of psychology. Investors are driven by their fears and greed. By developing a strategy that works for them, and sticking to it, investors should be better able to handle the mental aspects of the game.

Full Disclosure: Long MCD, JNJ, PM, CL, PEP

Relevant Articles:

- How to make money in dividend stocks despite Wall Street

- Does entry price matter to dividend investors?

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- PepsiCo (PEP): A Better Value than Coca Cola (KO)

Seventeen Consistent Dividend Raisers in the News

Each week I list out the companies whose Board’s of Directors has approved an increase in distributions. I then further narrow the list by including only companies which have shown commitment to raising distributions for at least five years in a row. The purpose of this exercise is to note whether any companies in my dividend portfolio are raising distributions and also to identify any hidden dividend gems. Further screening based on quantitative factors such as valuation, earnings growth, dividend sustainability could add value by decreasing the list of potential candidates for further research to a more manageable level.

There were 17 stocks which announced dividend hikes over the past week:

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company raised its quarterly distributions by 5.10% to 41 cents/share. This dividend aristocrat has raised distributions for 47 years in a row. Yield: 2.50% (analysis)

T. Rowe Price Group, Inc. (TROW) is a publicly owned asset management holding company. The company raised its quarterly distributions by 9.70% to 34 cents/share. This dividend champion has raised distributions for 25 years in a row. Yield: 2.30% (analysis)

Genuine Parts Company( GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. The company raised its quarterly distributions by 10% to 49.50 cents/share. This dividend king has raised distributions for 56 years in a row. Yield: 3.10% (analysis)

Novartis AG (NVS), through its subsidiaries, engages in the research, development, manufacture, and marketing of healthcare products worldwide. This international dividend achiever raised its annual dividends from 2.20 CHF to 2.25 CHF/share. At the current exchange rate, the annual dividend is equivalent to $2.50/share. Novartis has raised distributions for 15 consecutive years. Yield: 4.30% (analysis)

Essex Property Trust, Inc., (ESS) is a real estate investment trust (REIT), which engages in the ownership, operation, management, acquisition, development, and redevelopment of apartment communities primarily in the West Coast of the United States. The company raised its quarterly distributions by 5.80% to $1.10/share. This dividend achiever has raised distributions for 18 years in a row. Yield: 3.10%

Infinity Property and Casualty Corporation (IPCC), through its subsidiaries, provides personal automobile insurance with a concentration on nonstandard auto insurance in the United States. The company raised its quarterly distributions by 25% to 22.50 cents/share. This dividend achiever has raised distributions for 10 years in a row. Yield: 1.60%

RenaissanceRe Holdings Ltd. (RNR), together with its subsidiaries, provides reinsurance and insurance products and services worldwide. The company raised its quarterly distributions by 3.80% to 27 cents/share. This dividend achiever has raised distributions for 17 years in a row. Yield: 1.50%

The Gap, Inc. (GPS) operates as a specialty retailing company. The company raised its quarterly distributions by 11.10% to 12.50 cents/share. This dividend stock has raised distributions for 8 years in a row. Yield: 2.70%

Analog Devices, Inc. (ADI) engages in the design, manufacture, and marketing of analog, mixed-signal, and digital signal processing integrated circuits (ICs) used in industrial, automotive, consumer, and communication applications. The company raised its quarterly distributions by 20% to 30 cents/share. This dividend stock has raised distributions for 10 years in a row. Yield: 3.10%

MOCON, Inc. (MOCO) develops, manufactures, markets, and services measurement, analytical, and monitoring products to detect, measure, and analyze gases and other chemical compounds. The company raised its quarterly distributions by 5% to 10.50 cents/share. This dividend stock has raised distributions for 10 years in a row. Yield: 2.70%

TELUS Corporation (TU) provides telecommunications products and services primarily in Canada. The company raised its quarterly distributions to 61 cents/share. This dividend stock has raised distributions for 9 years in a row. Yield: 4.30%

Rogers Communications, Inc. (RCI) operates as a communications and media company in Canada. The company raised its quarterly distributions by 8.20% to 39.50 cents/share. This dividend stock has raised distributions for 7 years in a row. Yield: 4.10%

Imperial Oil Limited (IMO) engages in the exploration, production, and sale of crude oil and natural gas in Canada. The company raised its quarterly distributions by 9.10% to 12 cents/share. This dividend achiever has raised distributions for 20 years in a row. Yield: 1%

Tim Hortons Inc. (THI) develops, franchises, and operates quick service restaurants primarily in Canada and the United States. The company raised its quarterly distributions by 23.50% to 21 cents/share. This dividend stock has raised distributions for 5 years in a row. Yield: 1.60%

Torchmark Corporation (TMK), through its subsidiaries, provides individual life and supplemental health insurance products, and annuities to middle income households. The company raised its quarterly distributions by 25% to 15 cents/share. This dividend stock has raised distributions for 7 years in a row. Yield: 1.30%

Flowserve Corporation (FLS) engages in the design, manufacture, distribution, and service of industrial flow management equipment. The company raised its quarterly distributions by 12.50% to 36 cents/share. This dividend stock has raised distributions for 6 years in a row. Yield: 1.30%

Texas Pacific Land Trust (TPL) engages in the sale, lease, and management of land in the United States. The company raised its annual distributions by 9.50% to 23 cents/share. This dividend stock has raised distributions for 7 years in a row. Yield: 0.50%

Not all stocks on this list are buys at current prices. Dividend investors need to screen these names using their basic valuation criteria. The next step would be tofamiliarize themselves with the nature of each company's business before even considering initiating or adding to their positions in any of the stocks listed above.

Full Disclosure: Long CB

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PepsiCo (PEP): A Better Value than Coca Cola (KO)

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 (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). The company is a dividend aristocrat which has increased distributions for 38 years in a row. The most recent dividend increase was in May 2011, when the Board of Directors approved a 7.30% increase in the quarterly dividend to 51.50 cents/share. PepsiCo’s largest competitors include Coca Cola (KO) and Dr Pepper Snapple Group (DPS).

Over the past decade this dividend growth stock has delivered an annualized total return of 5.50% to its loyal shareholders.

The company has managed to deliver an average increase in EPS of 12.10% per year since 2001. Analysts expect PepsiCo to earn $4.41 per share in 2011 and $4.65 per share in 2012. This would be a nice increase from the $3.91/share the company earned in 2010. Over the past decade, PepsiCo has consistently managed to repurchase 1% of its outstanding shares every year, on average.

PepsiCo has recognized that carbonated drink sales are not going to grow significantly in the future, which is why it has focused on fast growing non-carbonated soft drinks. The company’s innovation in the area has been successful with the introduction of Aquafina , Gatorade and Propel, Lipton teas and Tropicana. Pepsi has also started to emphasize on health and wellness, and has worked to minimize the amount of trans fats in its snack foods. Future earnings growth could also come from synergies associated with the acquisitions of its bottlers, streamlining of operations and cost cutting. The distribution networks of the bottlers acquired could be used to push some of PepsiCo’s non-beverage products such as snacks and other foods. Earnings growth could also come from strategic acquisitions, as well as product innovations in health and wellness food and beverage section. In 2011, PepsiCo acquired the leading Russian food and beverage company Wimm-Bill-Dann (WBD), in an effort to position itself in the growing emerging market in Russia and to build its nutrition business.

The company has a high return on equity, which has remained above 30%, with the exception of a brief decrease in 2005. 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 14% per year since 2001. A 14% growth in distributions translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1978, we see that PepsiCo has actually managed to double its dividend every six and a half years on average.

Over the past decade the dividend payout ratio has remained above 50% briefly in 2008. 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, PepsiCo is attractively valued at 15.70 times earnings, yields 3.30% and has a sustainable dividend payout. In comparison Coca Cola (KO) yields 3% and trades at a P/E of 19. I find PepsiCo to be a better value than Coca Cola in the current environment. Investors who subtract the one-time accounting gains from Coke's EPS would find Coca Cola overvalued relative to PepsiCo. As a result, I would give major preference to PepsiCo shares over Coca Cola.

Full Disclosure: Long PEP and KO

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Does entry price matter to dividend investors?

The reason for the lost decade in stocks is that many otherwise quality companies were overvalued in the early 2000s. For example Johnson & Johnson (JNJ) was trading at 29.30 times earnings in early 2000, whereas McDonald’s (MCD) traded at 26.90 times earnings. Even some of the best dividend stocks are not worth paying more than 20 times forward earnings.

Investors who purchase shares in companies trading at high valuations will be stuck with a low yielding security for a long period of time. In addition, companies whose share prices spot high valuations tend to be more volatile. One lousy quarter where earnings per share missed estimates by one penny could bring in lower prices for a long period of time. On the other hand, a company which is attractively valued, cannot go much lower because the company would be trading below what it might be worth to an acquirer. In addition, a company with a P/E below 20, which has a payout ratio of 50%, can easily afford to have a current yield of 2.50%. A company with a P/E of 50, with a 50% payout ratio will probably only yield 1%.

The issue with high multiple stocks is that future growth is already accounted for in the stock price. This means that long-term investors could likely see little in gains even if earnings grow over time. Companies cannot realistically grow above 20% per year for extended periods of time. Once growth slows down, the P/E ratio will contract, and the price would either go down or stay flat if earnings have increased sufficiently in order to compensate for the lower multiple.

On the other hand companies which are trading at low multiples today are attractive candidates for several reasons. First, a company with a low multiple that pays out one third to one half of its earnings as distributions could offer a very sizeable current yield. For example, chipmaker Intel (INTC) has a P/E of 10, a payout ratio of 35% but yields 3.20%.

Second, companies with low multiples that grow earnings per share will be able to offer high dividend growth coupled with above average current yields. This could lead to high yields on cost to investors who were shrewd enough to recognize the opportunity. The rising dividend payment would provide buy and hold investors with a rising return on investment. They would essentially get paid higher amounts each year, simply for holding their stock.

Third, as the dividend stream increases, value investors are going to recognize the value the company offers and would try to bid up prices. Even acquirers might decide to purchase these cash rich businesses, which would increase the price for the target.

Some quality dividend stocks, which are trading at low P/E ratios include:

Archer Daniels Midland (ADM) trades at a P/E of 13.80 and yields 2.20%. The company has raised dividends for 36 years in a row. (analysis)

Aflac (AFL) trades at a P/E of 11.50 and yields 2.70%. The company has raised dividends for 29 years in a row. (analysis)

Target (TGT) trades at a P/E of 12.30 and yields 2.30%. The company has raised dividends for 44 years in a row. (analysis)

Wal-Mart Stores (WMT) trades at a P/E of 13.20 and yields 2.30%. The company has raised dividends for 37 years in a row. (analysis)

Intel (INTC) trades at a P/E of 11.50 and yields 3.10%. The company has raised dividends for 8 years in a row. (analysis)

Chevron (CVX) trades at a P/E of 7.90 and yields 3%. The company has raised dividends for 24 years in a row. (analysis)

Medtronic (MDT) trades at a P/E of 12.60 and yields 2.40%. The company has raised dividends for 34 years in a row. (analysis)

Full disclosure: Long all companies except INTC and TGT

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This article was featured on Carnival of Personal Finance #350: The Little Prince’s Journey to Financial Enlightenment and Carnival of Wealth, Nice Guy Edition

Six Notable Dividend Stocks Giving Raises to Shareholders

When was the last time you received a raise at your day job? Many investors slave away at their day jobs, working long hours and meeting unreasonable deadlines in an effort to receive higher pay. Many dividend growth investors who own shares of some of the most prominent dividend champions keep getting raises in their dividend income every year. They are in effect making higher incomes by having their money work for them, and profiting by the hard work occuring at the firms they have invested in. It is especially intriguing to note that some companies like Coca-Cola have managed to raise distributions every year for half a century. In order to profit from this investing strategy however, investors need to purchase quality wide-moat stocks, which pay a dividend and have the corporate culture that shares a portion of rising profits with shareholders.

Over the past week, six prominent dividend growth stocks raised distributions:

Abbott Laboratories engages in the discovery, development, manufacture, and sale of health care products worldwide. The company raised its quarterly dividend by 6.30% to 51 cents/share. This dividend aristocrat has raised distributions for 40 years in a row. Yield: 3.80% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. The company raised its quarterly dividend by 8.50% to 51 cents/share. This dividend aristocrat has raised distributions for 50 years in a row. After this action, there are now twelve companies in the world which have managed to boost distributions for over 50 years in a rw each. Yield: 3% (analysis)

The Sherwin-Williams Company (SHW) engages in the development, manufacture, distribution, and sale of paints, coatings, and related products primarily in North and South America, the Caribbean region, Europe, and Asia. The company raised its quarterly dividend by 6.80% to 39 cents/share. This dividend aristocrat has raised distributions for 34 years in a row. Yield: 1.60%

Sigma-Aldrich Corporation (SIAL), a life science and high technology company, develops, manufactures, purchases, and distributes various chemicals, biochemicals, and equipment worldwide. The company raised its quarterly dividend by 11.10% to 20 cents/share. This dividend aristocrat has raised distributions for 36 years in a row. Yield: 1.20%

Transcanada Corporation (TRP) operates as an energy infrastructure company in North America. The company operates in three segments: Natural Gas Pipelines, Oil Pipelines, and Energy. The company raised its quarterly dividend by 4.80% to 44 cents/share. This international dividend achiever has raised distributions for 12 years in a row. Yield: 4.20%

Buckeye Partners, L.P. (BPL) owns and operates refined petroleum products pipeline systems in the United States. This master limited partnership raised quarterly distributions to $1.0375/ unit. This was the fourth distribution increase over the past 12 months, and represented a 5.10% increase over the distribution paid in Q1 2011. Buckeye Partners is a dividend achiever which has boosted distributions for 16 years in a row. Yield: 6.70%

Full Disclosure: Long ABT, KO, SHW

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Abbott Laboratories (ABT): An attractively valued dividend aristocrat

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. The company is a dividend aristocrat which has increased distributions for 39 years in a row. The most recent dividend increase was in February 2011, when the Board of Directors approved a 9.10% increase in the quarterly dividend to 48 cents/share. Abbott’s largest competitors include Johnson & Johnson (JNJ), Bristol-Myers Squibb (BMY) and Sanofi (SNY).

Over the past decade this dividend growth stock has delivered an annualized total return of 3.50% to its loyal shareholders.

The company has managed to deliver an average increase in EPS of 12.90% per year since 2001. Analysts expect Abbott Laboratories to earn $4.65 per share in 2011 and $5.03 per share in 2012. This would be a nice increase from the $2.96/share the company earned in 2010.

The growth would come from increase in sales in rheumatoid arthritis and psoriatic arthritis drug Humira and the Xience drug eluting stent. The company’s growth is also dependent on the successful integration of the pharmaceuticals unit that it purchased from Solvay for $6.2 billion in 2010, which included Abbott with the cholesterol drugs Tricor and Trilipix. New launches, and

overseas market expansion should add in to Abbott's bottom line as well. Threats include generic competition to some of its cholesterol drugs. Abbott announced its intent to split in two companies in October 2011.

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.

The company has a high return on equity, which has remained above 20%, with the exception of a brief decrease in 2001 and 2006. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 8.60% per year since 2001. A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1986, we see that Abbott Laboratories has actually managed to double its dividend every six years on average.

Over the past decade the dividend payout ratio has largely remained above 50%. This indicator has been closer to 50% over the past few years. 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, Abbott Laboratories is attractively valued at 18.30 times earnings, yields 3.50% and has a sustainable dividend payout. In comparison Johnson & Johnson (JNJ) yields 3.50% and trades at a P/E of 14.50. I would continue monitoring Abbott Labs and will consider adding to a position in the stock on dips.

Full Disclosure: Long ABT and JNJ

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Dividend Investing is not a black or white process

My investment strategy is all about finding the right dividend growth stocks that fit my entry criteria, include stocks for as many sectors as possible and then reinvest dividends selectively. Some readers have expressed concerns with this strategy, particularly since to many investors dividend investing is synonymous with chasing high dividend yields.

Dividend investing is more than just including a few quantitative indicators about a certain stock or sector. It is also about understanding the big picture. Some novice investors focus exclusively on yield, which leads to investment decisions which do not take into account risks that the investor might face. I have written several articles on the dangers of chasing yield here and here.

I see several dangers of focusing on just one quantitative indicator. I used yield as an example for this article, but focusing only on dividend growth and projecting it into the future without understanding whether it is sustainable, is just as dangerous.

Stocks with higher current yields typically do not grow distributions at a rate that meets inflation, if they even raise distributions. As a result, investors who purchase such equities and spend all of their income would suffer from the reduced purchasing power of their dividend income.

Investors, who only focus on yield, might miss the boat on total returns as well. It is great to find a company yielding 6% - 8% today. It would take a company yielding 3%- 4% today growing distributions at 12% per year at least 6 years to reach a yield on cost of 6%-8%. Retiree’s who focus on dividend investing for current income might ignore dividend growth investing for this particular reason – they simply do not feel they have the time to wait. But if the only return comes from the distributions, while the value of the stock stagnates or even goes down, then investors would have lost purchasing power of their principal for the sake of higher current yield.

Furthermore, most companies yielding 6% – 8% today are pass-through entities such as Master Limited Partnerships, which could only grow their business by diluting existing unitholders through constant new unit offerings. Companies yielding 2% - 3% today, which could grow distributions by 10% annually for at least a decade, would most probably keep a current yield of 2%-3% for the majority of the time. Patient investors however would be able to generate higher yields on cost coupled with strong total returns over time. In a previous article I illustrated this principle with a real-life example using Abbott Laboratories (ABT). Check my analysis of Abbott (ABT).

Qualitative characteristics are important as well. Deciding whether a strong dividend growth stock will continue paying higher dividends into the future requires a healthy dose of guesstimation. I typically look for companies with durable competitive advantages, where shifts in technology would not lead to product obsolescence for several decades into the future. For example, companies like Coca Cola (KO) have a strong brand name, synonymous with quality that carries a certain level of expectations, which customers are willing to pay a premium price for. Other companies like that are able to pass on price increases onto customers. Check my analysis of Coca Cola (KO). McDonald’s (MCD) is another company that fits this criteria.

To summarize, while it is important to have a set of investment criteria, investors should always try to analyze each investment in detail, before they commit their hard earned cash to it. Being nimble and flexible in the investment world is a skill that comes with experience. After all, Warren Buffett has made billions by having the ability to think beyond a strict rule based investing.

Full Disclosure: Long MCD, KO, ABT

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Two Companies Raising Dividends for Over 50 years Announce Dividend Hikes

The companies that raised distributions over the past week include two which have raised distributions for over half a century. This includes several wars, oil price shocks, market crashes and inflation. While a long record of consistent dividend increases does not automatically translate into making these stocks great buys all the time, students of successful dividend investing should study the factors that led to the success of these enterprises. It takes a unique business model, coupled with the right environment to create such long lasting success, which has enabled them to foster a culture that led to dividends increases in every single year for over half a century. There are only eleven dividend kings in the world which have managed to accomplish this task.

The companies raising distributions over the past week include:

3M Company (MMM), together with subsidiaries, operates as a diversified technology company worldwide. This dividend king raised its quarterly dividends by 7.30% to 59 cents/share. The company has raised dividends for 54 years in a row. Yield: 2.70% (analysis)

Diebold, Incorporated (DBD) provides integrated self-service delivery and security systems and services primarily to the financial, commercial, government, and retail markets worldwide. This dividend king raised its quarterly dividends by 1.80% to 28.50 cents/share. The company has raised dividends for 59 years in a row. Yield: 3.60% (analysis)

Church & Dwight Co. (CHD), Inc., together with its subsidiaries, develops, manufactures, and markets a range of household, personal care, and specialty products under various brand names in the United States and internationally. This dividend achiever raised its quarterly dividends by 41.20% to 24 cents/share. The company has raised dividends for 16 years in a row. Yield: 2.10%

The Dun & Bradstreet Corporation (DNB) provides commercial information and insight on businesses worldwide. The company raised its quarterly dividends by 5.60% to 38 cents/share. The company has raised dividends for 6 years in a row. Yield: 1.80%

Jack Henry & Associates, Inc. (JKHY) provides integrated computer systems and services for in-house and outsourced data processing to commercial banks, credit unions, and other financial institutions primarily in the United States. The company raised its quarterly dividends by 9.50% to 11.50 cents/share. The company has raised dividends for 20 years in a row. Yield: 1.30%

Avista Corporation (AVA), an energy company, engages in the generation, transmission, and distribution of energy and other energy-related businesses in the United States and Canada. The company raised its quarterly dividends by 5.50% to 29 cents/share. The company has raised dividends for 10 years in a row. Yield: 4.60%

Owens & Minor, Inc. (OMI), together with its subsidiaries, provides distribution, third-party logistics, and other supply-chain management services to healthcare providers and suppliers of medical and surgical products, as well as distributes medical and surgical supplies to the acute-care market. The company raised its quarterly dividends by 10% to 22 cents/share. The company has raised dividends for 15 years in a row. Yield: 2.90%

PartnerRe Ltd. (PRE) , through its subsidiaries, provides reinsurance services worldwide. The company raised its quarterly dividends by 3.30% to 62 cents/share. The company has raised dividends for 19 years in a row. Yield: 3.90%

L-3 Communications Holdings, Inc. (LLL)provides command, control, communications, intelligence, surveillance, and reconnaissance (C3ISR) systems; aircraft modernization and maintenance; and government services in the United States and internationally. This dividend achiever raised its quarterly dividends by 11.10% to 50 cents/share. The company has raised dividends for 19 years in a row. Yield: 2.90%

Occidental Petroleum Corporation (OXY), together with its subsidiaries, operates as an oil and gas exploration and production company primarily in the United States. The company raised its quarterly dividends by 17.40% to 54 cents/share. The company has raised dividends for 10 years in a row. Yield: 2.20%

Full disclosure: Long MMM

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- We are not in a Dividend Bubble

Johnson & Johnson (JNJ) - A Reliable Dividend Growth 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. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1944 and increased payments to common shareholders every for 49 consecutive years. One of the largest shareholders is no other but Warren Buffett’s Berkshire Hathaway (BRK.B).

The company’s last dividend increase was in when the Board of Directors approved a 5.60% increase to 57 cents/share. Johnson & Johnson's major competitors include Abbott Laboratories (ABT), Bristol Myers Squibb (BMY) and Novartis (NVS).

Over the past decade this dividend growth stock has delivered an annualized total return of 3.50% to its shareholders.

The company has managed to deliver an 11.20% annual increase in EPS since 2001. Analysts expect Johnson & Johnson to earn $4.97 per share in 2011 and $5.23 per share in 2012. In comparison Johnson & Johnson earned $4.78 /share in 2010. The company has managed to consistently repurchase 1.40% of its outstanding shares on average in each year over the past decade.

Johnson & Johnson has a diversified product line across medical devices, consumer products and drugs, which should serve it well in the future. In addition ot that Johnson & Johnson is expanding into new long term opportunities such as vaccines business of Crucell NV. Emerging market growth and opportunities for cost restructurings should further help the company in squeezing out extra profits in the long run. Sales in drugs like Simponi, Stelara, Zytiga, Edurant, Incivek, Xaralto and Prezista should more than offset the generic erosion from older drugs which are losing their patent protection. The acquisition of Synthes, which is expected to be completed

by the first half of 2012, is expected to generate significant synergies for Johnson & Johnson.

The company’s return on equity has remained between 25% and 30% over the past decade.

Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 13% per year since 2002, which is higher than to 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 1971 we see that Johnson & Johnson has actually managed to double its dividend every five years on average.

The dividend payout ratio has increased from 38% in 2001 to 44% in 2010. 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 Johnson & Johnson is attractively valued at 14.50 times earnings, has a sustainable dividend payout and yields 3.50%. The current EPS of $4.53 used to calculate the P/E ratio is derived by adding back one time charges of $2.90 Billion ($1.05/share). I recently added to my position in the stock.

Full Disclosure: Long ABT and JNJ

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Dividend investing for monthly income

Investors spend a large portion of their working lives accumulating wealth. When a person is in the workforce, they tend to get accustomed to generating income on a consistent basis either every two weeks or once a month. The only investment vehicles which could provide investment income on a consistent basis without too much maintenance include dividend stocks and bonds.

By focusing on dividend growth stocks, investors could not only generate a consistent stream of income, but also effectively hedge their income against inflation. This is because many dividend growth stocks tend to regularly increase distributions every year.

Most dividend stocks like Coca Cola (KO) pay distributions quarterly. Some foreign stocks like Diageo (DEO) pay distributions semi-annually, while others like Nestle (NSRGY) pay distributions once per year. This makes budgeting for investors living off dividends somewhat difficult. As a result, some investors try to include monthly dividend stocks in their portfolios. However, the universe of monthly dividend payers which pay stable and rising distributions is very limited. Most monthly dividend payers tend to pay a fluctuating dividend, which makes it impossible to budget for recurring expenses.

One strategy that investors could implement is to find quality dividend stocks which pay dividends at different months. Thus, by laddering dividend stocks with differing payout dates, it is possible to generate a portfolio which pays a consistent monthly distribution without limiting one’s investment options strictly to monthly dividend stocks.

For example the following three companies pay dividends in January, April, July and October.

Kimberly-Clark (KMB) engages in the manufacture and marketing of health care products worldwide. Yield: 3.90% (analysis)

Automatic Data Processing (ADP) provides business outsourcing solutions. Yield: 2.90% (analysis)

Sysco (SYY) engages in the marketing and distribution of a range of food and related products primarily to the foodservice or food-away-from-home industry. Yield: 3.50% (analysis)

The following three companies pay distributions in February, May, August and November.

Abbott Labs (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. Yield: 3.50% (analysis)

Clorox (CLX) manufactures and markets consumer and institutional products worldwide. Yield: 3.50% (analysis)

Procter & Gamble (PG) provides consumer packaged goods in the United States and internationally. Yield: 3.30% (analysis)

These three corporations below pay dividends in March, June, September and December.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Yield: 3.50% (analysis)

McDonald's (MCD) franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, desserts, snacks, and other beverages, as well as full or limited breakfast menu. Yield: 2.80% (analysis)

Chevron (CVX) engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. Yield: 3.10% (analysis)

Investors could allocate funds in this sample list of stocks in different ways. They could either allocate the same amount to each of the nine companies. They could also allocate their funds based off the current yield at the time of purchase, in order to generate an income stream that is consistent from month to month at least in the first year.

The goal of the above list of stocks was simply to illustrate how laddering income stocks with different dividend payout dates can create a monthly income stream. Income investors should still focus on quality, diversification and valuation when constructing their dividend portfolios.

Full Disclosure: Long all companies listed in this article

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Dividend Investing in times of a Social Media Bubble

Last week, the icon of Social Media Facebook filed for its IPO. As a result, it was pretty hard to miss news articles proclaiming that it will have a $100 billion valuation. This is equivalent to 25 times revenues for 2011, and about 100 times earnings. In order to justify its valuation, the company needs to keep growing rapidly for the next few years.

Facebook might indeed deserve a big valuation if it manages to rapidly increase revenues. However, this looks like a highly speculative venture. As a dividend investor, I prefer the slow and steady approach for building wealth by investing in companies with proven business models and strong brands, which have a long history of delivering a product or service which consumers are in love with. The switching costs for consumers are typically very high for the products and services that most dividend champions offer. For example, if you care about your teeth, you would keep brushing them with Colgate (CL) toothpaste. This is what has allowed many dividend companies to enjoy steady increases in earnings, which have trickled down to result in years of dividend growth. The steady rise in earnings, coupled with the compounding effect of growing dividends create much better odds of building wealth than the heads I win tails I lose type mentality that investors in highly speculative Internet IPO’s seem to have.

Every week, I focus on consistent dividend paying companies, as identified by a record of at least five years of consecutive dividend increases. While not all might be good additions at the time of my weekly review, I end up uncovering hidden gems in the process and begin studying the story of companies. This enables me to be ready to pull the trigger whenever a certain stock that is overpriced today reaches my buy territory.

Bemis Company, Inc. (BMS) manufactures and sells flexible packaging products and pressure sensitive materials in the United States, Canada, Mexico, South America, Europe, and Australasia. The company operates in two segments, Flexible Packaging and Pressure Sensitive Materials. The company raised quarterly distributions by 4.20% to 25 cents/share. This marked the 29th consecutive annual dividend increase for this dividend aristocrat. Yield: 3.20% (analysis)

Pitney Bowes Inc. (PBI) provides mail processing equipment and integrated mail solutions worldwide. The company raised quarterly distributions by 1.40% to 37.50 cents/share. This marked the 30th consecutive annual dividend increase for this dividend aristocrat. Yield: 7.80%

Polaris Industries Inc. (PII) designs, engineers, and manufactures off-road vehicles. The company raised quarterly distributions by 64.40% to 37 cents/share. This marked the 17th consecutive annual dividend increase for this dividend achiever. Yield: 2.30%

Sunoco Logistics Partners L.P. (SXL) engages in the transport, terminalling, and storage of refined products and crude oil, as well as the purchase and sale of crude oil in the United States. This master limited partnership raised quarterly distributions to 42 cents/unit. Sunoco Logistics Partners is a dividend achiever, which has raised distributions for 11 years in a row. Yield: 4.60%

Praxair, Inc. (PX) engages in the production, sale, and distribution of industrial gases primarily in North America, South America, Europe, and Asia. The company raised quarterly distributions by 10% to 55 cents/share. This marked the 20th consecutive annual dividend increase for this dividend achiever. Yield: 2.10%

Hasbro, Inc. (HAS) engages in the design, manufacture, and marketing of games and toys, and other entertainment offerings worldwide. The company raised quarterly distributions by 20% to 36 cents/share. This marked the 9th consecutive annual dividend increase for this dividend stock. Yield: 4.20%

J.B. Hunt Transport Services, Inc. (JBHT), together with its subsidiaries, operates as a surface transportation, delivery, and logistics company in North America. The company raised quarterly distributions by 7.70% to 14 cents/share. This marked the 9th consecutive annual dividend increase for this dividend stock. Yield: 1.10%

Microchip Technology Incorporated (MCHP) engages in the design, development, manufacture, and market of semiconductor products for embedded control applications. The company raised quarterly distributions to 34.90 cents/share. This marked the 10th consecutive annual dividend increase for this dividend achiever. Yield: 3.80%

Nu Skin Enterprises, Inc. (NUS) develops and distributes anti-aging personal care products and nutritional supplements worldwide. The company raised quarterly distributions by 25% to 20 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. Yield: 1.60%

TECO Energy, Inc. (TE), an electric and gas utility company, through its subsidiaries, engages in the generation, purchase, transmission, distribution, and sale of electric energy. The company raised quarterly distributions by 2.30% to 22 cents/share. This marked the 6th consecutive annual dividend increase for this dividend stock. Yield: 4.90%

National Instruments Corporation (NATI) manufactures and supplies measurement and automation products. The company raised quarterly distributions by 40% to 14 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Yield: 2.10%

Full Disclosure: Long CL

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Monthly Dividend Stocks

Most dividend stocks trading in the US pay dividends every quarter. A few pay dividends semi-annually, while a very small minority (mostly ADR’s) pay dividends once a year.

From a dividend investment standpoint, I have always focused on strong fundamentals, strong competitive advantages, potential for earnings and dividend growth, and adequate valuation. You could read more about my entry criteria in this article. I never really focused on the timing of the dividend cashflows. As it stands out, it could be beneficial to own stocks that pay dividends monthly.

The perfect monthly dividend stock is Realty Income (O) – The monthly dividend company. Although the company is trading at a rich valuation, I would consider adding to my position in the stock on dips below $29. Check my analysis of this REIT.

The first benefit would be that it would make budgeting for expenses much easier. Investors would not have to wait for three months before obtaining their distribution from a stock, only to split them in three and then allocate an equal portion to spend each month. Knowing that the dividend income is coming once a month , would make life easier for retirees living off dividends.

The second benefit of monthly dividend stocks is compounding. By reinvesting dividends, investors use the power of compounding to increase their wealth. By increasing the frequency of compounding however, investors have a higher chance of increasing their net worth.

The main disadvantage of monthly dividend stocks is that investors are limiting themselves to a very small universe of stocks. As a result it would be difficult to find a company that is a good fit in a dividend retirement portfolio. Basically I am looking for a company with a stable dividend payment that is also growing. Most monthly dividend stocks I found were funds which paid fluctuating distributions. In order to find a suitable monthly dividend stock for this article however, I had to lower my criteria to ignore companies with fluctuating dividends and focus on the ones paying stable distributions.

Realty Income Corporation (O) is The Monthly Dividend Company, which operates as an equity real estate investment trust (REIT). The Company’s primary business objective is to generate dependable monthly cash distributions from a consistent and predictable level of funds from operations (FFO) per share. Yield: 4.80% ( analysis )

Gas Natural Inc. (EGAS), is a natural gas utility with operations in Montana, Wyoming, North Carolina and Maine. The Company operates in four business segments: natural gas operations, marketing and production operations, pipeline operations, and corporate and other. Yield: 4.80%

Shaw Communications Inc. (SJR) is a diversified Canadian communications company. Shaw is engaged in the business of providing broadband cable television, Internet, Digital Phone, telecommunications services (through Shaw Business Solutions), satellite direct-to-home services (through Shaw Direct) and engaging programming content (through Shaw Media). Yield: 4.90%

Main Street Capital Corporation (MAIN) is a principal investment firm primarily focused on providing customized debt and equity financing to lower middle market (LMM) companies with annual revenues between $10 million and $100 million that operate in diverse industries. The Company invests primarily in secured debt instruments, equity investments, warrants and other securities of LMM companies based in the United States. Yield: 7.40%

Gladstone Commercial Corporation (GOOD) is a real estate investment trust (REIT). The Company invests in and owns net leased industrial and commercial real estate property and makes long-term industrial and commercial mortgage loans. Most of the properties that the Company owns are leased to tenants, including small businesses and public companies. Yield: 8.30%

Other than that, if we exclude funds, we are mostly left out with royalty trusts paying fluctuating distributions:

Enerplus Corporation (ERF) operates as an independent oil and gas producer. The company's property interests are located in western Canada in the provinces of Alberta, British Columbia, Saskatchewan, and Manitoba, as well as in Montana, North Dakota, Pennsylvania, Maryland, and Delaware in the United States. Yield: 9.10%

Pengrowth Energy Corporation (PGH) engages in the acquisition, exploration, development, and production of oil and natural gas reserves in the Western Canadian Sedimentary Basin. It primarily explores for crude oil, natural gas, and natural gas liquids in the provinces of Alberta, British Columbia, Saskatchewan, and Nova Scotia. Yield: 8.20%

Penn West Petroleum Ltd. (PWE) engages in acquiring, exploring, developing, exploiting, and holding interests in petroleum and natural gas properties and related assets in North America. The company produces light and medium crude oil, natural gas liquids, heavy oil, and natural gas. Yield: 4.90%

Provident Energy Ltd. (PVX) engages in the natural gas liquids (NGLs) infrastructure and marketing business in Canada and the United States. The company involves in the extraction, processing, storage, transportation, and marketing of NGLs, as well as offers these services to third party customers. Yield: 4.80%

While it feels great to receive a dividend from one stock every month, investors should not confuse feeling good with making a good investment. With the exception of Realty Income (O), and (EGAS), most other stocks are not suited for a retirement portfolio. It is much easier to generate monthly income, by stacking quality dividend paying stocks with different payout dates. This way one does not compromise investment quality for the benefits of questionable monthly dividend payers.

Full Disclosure: Long O

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