Caterpillar (CAT) Dividend Stock Analysis

Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company is a member of the dividend achievers index, and has boosted distributions for 19 years in a row.

The company’s last dividend increase was in June 2012 when the Board of Directors approved a 13% increase to 52 cents/share. The company’s largest competitors include Joy Global (JOYG), Terex (TEX) and Komatsu (KMTUY).

Over the past decade this dividend growth stock has delivered an annualized total return of 19.30% to its shareholders.

The company has managed to deliver a 23% average increase in annual EPS since 2002. Analysts expect Caterpillar to earn $9.62 per share in 2012 and $10.51 per share in 2013. In comparison, the company earned $7.40/share in 2011.

In emerging markets in Asia and South America, demand for equipment to install power lines and bulldozers for infrastructure remains vibrant. Over 70% of the company’s revenues are derived from outside North America. It’s machines are essentially building the infrastructure of the world. The key factors behind Caterpillar’s long term growth include construction activity in the world’s emerging economies, government spending on infrastructure, as well as growth in the global economy. Strategic acquisitions, such as the purchase of Bucyrus are expected to bring massive synergies in terms of purchasing and engineering as well as the potential to bring in more business.

The return on equity has increased from 14.40% in 2002 to 41.60% 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.

The annual dividend payment has increased by 10.10% per year over the past decade, which is lower than the growth in EPS.

A 10% growth in distributions translates into the dividend payment doubling almost every seven years. If we look at historical data, going as far back as 1993 we see that Caterpillar has actually managed to double its dividend every four years on average.

The dividend payout ratio has been decreasing over the past decade, falling from almost 61% in 2002 to 24% in 2011. 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 Caterpillar is attractively valued, trading at 8.60 times earnings and yielding 2.50%. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: None

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Buy and Hold means Buy and Monitor

There are many misconceptions regarding dividend investing. One other misconception revolves around the fact that dividend investors simply buy stocks and forget about them. According to this theory, investors tend to purchase stocks just for the dividend, and then enjoying the stream of dividend payments, while losing focus of the underlying fundamentals of their investment until it is too late.

In reality, few dividend investors actually purchase income stocks purely for their dividends. Experienced dividend investors have learned, mostly through practice, that successful dividend investing is focused on continuous analysis of new or existing investments. Some of the greatest dividend growth stocks today, could become the pariash on Wall Street within a few short years, if it runs into financial trouble. As a result, serious dividend investors should keep a close tab on their portfolios of income securities.

In general, dividend investors in both the accumulation or distribution phases, need to pay close attention to their investments. Investors in the accumulation stage, need to analyze existing positions in order to determine whether it is worth it to put new capital to work. Investors in both stages should asses the fundamental picture of their stocks in order to determine whether it makes sense for them to keep holding on or whether it makes sense to sell. During an average investor’s timespan, I expect that they would have to deal with hundreds of investment decisions.

I typically end up selling dividend stocks when one of these four scenarios occurs. I do however perform plenty of work on the companies I own, in order to determine whether I should buy, hold or sell a given position. I try to analyze income stocks I own at least once per year. In addition, I also keep abreast of major developments such as mergers and acquisitions, spin-offs, dividend announcements and annual reports releases. I also scan the market for stocks that are attractively valued, since I tend to allocate a certain amount each month to my dividend portfolio. In addition, I do not automatically reinvest dividends, but tend to reinvest distributions when they reach a certain threshold in the same or different dividend stock.

While this sounds like a lot of work, in reality, once an investor has done the initial level of prep work related to a new investment, there should not be as much to be done in future years. After all, a company such as Coca-Cola (KO), Chevron (CVX) or Procter & Gamble (PG) are not going to significantly change their business models every year or so. In reality, even a detailed qualitative analysis of either of these wide-moat stocks from 5 years ago would be valuable today, and only has to be updated for the most recent financial performance in order to determine what investment action needs to be taken. It is typically the qualitative factors that might lead to deterioration in financial conditions of otherwise strong companies.

Investors should therefore try to assess the viability of their stocks ability to produce a dependent stream of dividends in order to protect their total dividend income and protect their principal. For example, many financial stocks such a Bank of America (BAC) were favored amongst dividend growth investors for their reliable dividend increases, as well as above average yields. Unfortunately, as the US economy worsened in 2008, and the number of delinquent borrowers increased, the stock prices and dividend payments in financial companies dropped significantly. However, investors who sold when dividends were cut, and invested proceeds in other quality dividend payers, fared well despite the turbulence. Selling Bank of America stock around $30/share was a prudent decision back in October 2008, when it cut dividends by 50% to 32 cents/share.

Full Disclosure:

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Why dividend investors should never touch principal

I recently read an article from Forbes about generating income in retirement. While I disagree with the portfolio constructed by the editorial staff, what grabbed my attention was the following quote from Lord Greystoke in the movie “Tarzan”:

“Someday, he says to the young man from the jungle, this will all be yours: Live off the income from the land, but don’t sell any of it.”

Living off investments has been something that the rich have done for generations. Living off land income, or income from bonds was widely accepted in 19th and early 20th centuries. The so called “rentier class” has been able to pay for their everyday expenses from income generated by investments in government bonds and land income. Of course, this was during a period of time when inflation did not run at 3% per year.

As a dividend investor, I follow the same principle of accumulating income generating assets, which generate regular streams of income. I focus on dividend stocks which regularly raise distributions. This ensures that my income keeps its purchasing power over time. The companies I purchase make products that are used in the everyday lives of billions of consumers worldwide. In essence, these companies have built personal relationships with these individuals, which regularly purchase the same brands for decades to come. These consistent streams of income allow these companies to generate stable earnings that are not affected by recessions. In addition, by building a lasting relationship with customers based on quality, these companies are able to pass on cost increases to them, while maintaining and even increasing profitability over time.

These companies manage to reinvest a portion of their earnings into maintaining and growing their market share. This could include building plants, acquiring competitors, spending money on advertising, innovating or looking for ways to become more efficient in their operations. At the end of the day however, it is not economically feasible for companies to retain all of their earnings. If you run McDonald’s Corporation (MCD), you should not expect to double sales simply by doubling the number of restaurants in the US. If you have two McDonald’s locations in a town with a population of 30,000 people, adding a third store would likely cannibalize sales, thus leading to subpar returns due to law of diminishing returns. Adding a new product like salads could lead to higher foot traffic from health conscious customers, who might have previously avoided your store. Introducing a new product does take time however, and so does building a new store or a new distribution center that will lead to a reduction in inventory and thus reduce costs. Situations like these are the reason why companies cannot realistically invest all of their earnings back into the business over the course of an year for example.

As a result, the companies I typically invest in are able to generate excess cash. They typically decide to distribute it to shareholders. By reinvesting a portion of their earnings back into the business, these companies maintain their competitive edge and provide a solid foundation for earnings growth over time that leads to higher dividends down the road. As a result, the shareholder not only enjoys a higher stream of dividends each year, but their stake in the business is worth more over time. Dividend investors do not sell shares in the companies they own, since this will reduce their dividend income.

An investor with 1,000 shares of Phillip Morris International (PM) will generate $850/quarter. In order for them to generate the same amount of cash if Phillip Morris didn't pay a dividend, they would have to sell 10 shares/quarter. Over time, this leads to depletion in the asset base. If share prices of Phillip Morris International stock remained flat for the next decade, our investor would have sold 360 shares and would have only 640 left. In addition, by selling of stock in the companies they own, investors are exposing themselves to market fluctuations. Over the past four years, prices of Phillip Morris International have ranged between a low of $33 in 2009 to a high of $94 in 2012. If we get another recession over the next five years, chances are the stock prices will decline. At lower prices, our investor would have to sell higher amounts of stock in order to generate the same level of cashflow. At $35/share, our investor would have to sell 20 shares/quarter and would have funds for 12.50 years until his wealth is gone.

I have argued that dividends provide a return that is more stable than capital gains. As a result, an investor who spends only income, without touching principal has a much better chance of staying retired. An investors who generates $850/quarter with shares of PMI, will likely ignore market fluctuations, as long as his dividends are still paid. In addition, chances are that in a diversified portfolio of blue chip stocks, your income will continue to go up even during bear markets. For example, during 2008 – 2009 bear market, many companies raised distributions, despite the recession and overall negative sentiment in the economy:

Procter & Gamble (PG) raised dividends by 14.30% in 2008 and 10% in 2009. Since 2007, the quarterly distribution has been increased by 60.60%. The company earned $3.12/share in 2012. Analysts expect it to earn $3.95/share in 2013 and $4.30/share in 2014. It is trading at 18.70 times earnings,yields 3.40% and has a sustainable dividend. (analysis)

Johnson & Johnson (JNJ) raised dividends by 10.80% in 2008 and 6.50% in 2009. Since 2007, the quarterly distribution has been increased by 47%. The company earned $3.49/share in 2011. Analysts expect it to earn $5.10/share in 2012 and $5.50/share in 2013. It is trading at 14.50 times earnings,yields 3.50% and has a sustainable dividend.(analysis)

McDonald's (MCD) raised dividends by 33.30% in 2008 and 10% in 2009. Since 2007, the quarterly distribution has been increased by 105.30%. The company earned $5.27/share in 2011. Analysts expect it to earn $5.31/share in 2012 and $5.81/share in 2013. It is trading at 16 times earnings,yields 3.60% and has a sustainable dividend. (analysis)

Chevron (CVX) raised dividends by 12.10% in 2008 and 4.60% in 2009. Since 2007, the quarterly distribution has been increased by 55.10%. The company earned $13.44/share in 2011. Analysts expect it to earn $12.81/share in 2012 and $12.78/share in 2013. It is trading at 8.70 times earnings,yields 3.40% and has a sustainable dividend. (analysis)

PepsiCo (PEP) raised dividends by 13.30% in 2008 and 5.90% in 2009. Since 2007, the quarterly distribution has been increased by 43.50%. The company earned $4.03/share in 2011. Analysts expect it to earn $4.07/share in 2012 and $4.41/share in 2013. It is trading at 18.30 times earnings,yields 3.10% and has a sustainable dividend. (analysis)

Abbott Laboratories (ABT) raised dividends by 10.80% in 2008 and 11.10% in 2009. Since 2007, the quarterly distribution has been increased by 56.90%. While Abbott is splitting in two companies, the diverse product bases and strong customer demand would help drive earnings higher, which would be beneficial for dividend growth. It is trading at 15.90 times earnings,yields 3.20% and has a sustainable dividend. (analysis)

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7 dividend stocks boosting distribution to their thankful shareholders

It is thanksgiving, and it is the time of year to say what one is thankful for. Common things include being thankful for good health, family or relationships. The shareholders of the following companies are also thankful for the fact that their board of directors committees approved dividend increases over the past week. I have outlined the companies which looked interesting at first glance, and then provided my brief commentary behind each dividend hike.

While it may seem that just a few of these companies look like good candidates for further research, all was hopefully not a waste of time. By familiarizing themselves with as many companies as possible, income investors are developing a better judgment, which would allow them to spot div growers on the rise, and avoid dividend stocks on the decline. The companies include:

Automatic Data Processing, Inc. (ADP) provides business outsourcing solutions. The company operates in three segments: Employer Services, Professional Employer Organization (PEO) Services, and Dealer Services. The company raised its quarterly dividend by 10.10% to 43.50 cents/share. This marked the 38th consecutive annual dividend increase for this dividend aristocrat. Yield: 3.20% (analysis)

The stock priced at 19.30 times earnings and yields 3.20%. ADP is trading at close to the 20 times earnings mark, which is at the high range of what I am willing to pay for a quality income stock. In addition, the dividend payout ratio is at 61.50%, which is at the top of the range for me. That being said, I do like the recurring nature of the business and plan on adding to my position subject to availability of funds.

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 2.40% to 42.50 cents/share. This marked the 10th consecutive annual dividend increase for this dividend achiever. Yield: 4.50%

The company has managed to boost distributions at a rate of only 1.90%/year. The company is attractively valued at 14.20 times earnings and has a low dividend payout ratio for a utility company of only 63%. However, the slow growth in earnings and dividends makes it a hold at best.

National Bankshares, Inc. (NKSH) operates as the bank holding company for the National Bank of Blacksburg, which 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 2.40% to 53 cents/share. This dividend achiever has raised distributions for 11 years in a row. Yield: 3.90% (analysis)

The stock is attractively valued at 11.30 times earnings, yields 3.90% and has an adequately covered distribution. National Bankshares has managed to boost dividends by 8.80%/year over the past decade. While it is cheap, and has a very good yield plus room for future dividend growth, I do not see a lot of catalysts that would propel EPS higher over the next few years. I would consider initiating a position in the stock subject to availability of funds.

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 3.70% to 28 cents/share. This marked the 43rd consecutive annual dividend increase for this dividend champion. Yield: 3.70% (analysis)

Over the past five years, Sysco has managed to boost distributions by 8.90%/year. Earnings per share have increased from $1.20 in 2003 to $1.91 by 2012. Analysts are expecting a moderate increase in earnings to $1.94/share in 2013 and $2.12/share by 2014. Currently, the shares at attractively priced at 15.90 times earnings, and the dividend yield of 3.70% is adequately covered from net income. Unfortunately, without a strong growth in earnings, future dividend growth will be limited as well. I would monitor the situation, but for not I would likely refrain from adding any new funds to this position.

Brown-Forman Corporation (BF-B) engages in manufacturing, bottling, importing, exporting, and marketing alcoholic beverages. The company raised its quarterly dividend by 9.30% to 25.50 cents/share. This marked the 29th consecutive annual dividend increase for this dividend champion. Yield: 1.60% (analysis)

The company has a ten year annual dividend growth rate of 9.50%. The company’s prospects to deliver future dividend growth are promising and supported by growth in earnings. Unfortunately, the company is trading at 25.90 times earnings and yields only 1.60%. I would consider adding to my position in the stock at much lower levels than todays.

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% to 17.25 cents/share. This marked the 22nd consecutive annual dividend increase for this dividend champion. Yield: 3.50%

The company has a ten year annual dividend growth rate of 5.10%. The stock is trading at 17.20 times forward earnings, and has a dividend payout ratio of 59.50%. Unfortunately, given the slow growth in earnings over the past decade, I do not expect dividend growth to be above the rate of inflation. As a result, the dividend yield is not sufficient to compensate for the fact that your dividend dollars will be losing purchasing power because of inflation. I would consider the stock a hold.

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 15% to 69 cents/share. This marked the 7th consecutive annual dividend increase for this dividend stock. Yield: 2.40%

The company has a ten year annual dividend growth rate of 17%. The company is attractively priced at 14.50 times earnings, and is close to yielding my minimum yield of 2.50%. I like the prospects for future earnings and dividend growth for Union Pacific.

Full disclosure: Long ADP, SYY, BF-B

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NextEra Energy (NEE) Dividend Stock Analysis

NextEra Energy, Inc. (NEE), through its subsidiaries, engages in the generation, transmission, distribution, and sale of electric energy in the United States and Canada. The company is a member of the dividend achievers index, and has boosted distributions for 18 years in a row.

The company’s last dividend increase was in February 2012 when the Board of Directors approved a 9.10% increase to 60 cents/share. The company’s peer group includes Entergy (ETR), Northeast Utilities (NU) and PPL Corp (PPL).

Over the past decade this dividend growth stock has delivered an annualized total return of 14.10% to its shareholders.

The company has managed to deliver an 8% average increase in annual EPS since 2003. Analysts expect NextEra Energy to earn $4.54 per share in 2012 and $4.95 per share in 2013. In comparison, the company earned $4.59/share in 2011. The company has been able to generate a high growth on earnings, which is something very rare for a utility.

Long-term growth will be driven by increases in its rate base due to investment in new assets. Continued increase in customers should further aid profitability amid expansion in the Florida economy. Growth will also be aided by the company’s unregulated electric wholesaler Nexterra Energy, which keeps increasing capacity through building green energy projects in Wind and Solar.

The return on equity has increased from 10.70% in 2002 to 13.10% 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.

The annual dividend payment has increased by 7% per year over the past decade, which is lower than the growth in EPS.

A 7% growth in distributions translates into the dividend payment doubling almost every decade years. The company’s current annual distribution is double what it was nine years ago.

The dividend payout ratio has been decreasing over the past decade, falling from almost 58% in 2002 to 48% in 2011. NextEra Energy has the lowest dividend payout ratios for a utility company. 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 NextEra Energy is attractively valued, trading at 13.10 times earnings and yielding 3.60%. I like the above average dividend growth potential as well as the low dividend payout ratio. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: None

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Dividend Growth Strategy for Retirement Income

Dividend growth investing is a simple strategy that allows investors to generate a sustainable stream of income in retirement that will outpace inflation. In this article I will provide a high level overview of the complete strategy I follow in my personal investments.

The most important starting point is the entry criteria. Every month, I screen a database of 300 dividend achievers using several quantitative criteria such as dividend payout ratio, dividend yield, price/earnings ratio and dividend growth. This reduces the list of quality dividend stocks to just a handful. It is important to keep repeating this process every so often, as different dividend stocks will be attractively valued at different periods during your investment criteria. Procter & Gamble (PG) and McDonald’s (MCD) are two companies that frequently pop up on my screen.

After the initial screening process, I end up analyzing each of the candidates in detail. I look at the trends in earnings, dividends, returns on equity and dividend payout ratio. I also read company annual reports, analysts estimates, research articles and press releases in order to gain a perspective on whether the company has any competitive advantages and try to assess whether its success will continue in the future. You can read my analysis of Procter & Gamble (PG) and my analysis of McDonald’s (MCD) in the links above.

After I have determined that I like certain companies, I note the maximum price I am willing to pay, given current fundamentals information. In the case of McDonald’s (MCD), the company earned $5.27 /share in 2011 and has an indicated annual dividend of $3.08/ share. This means that the highest price I am willing to pay is $105, which is equivalent to 20 times earnings. For Procter & Gamble the maximum price would be $71.80 /share. If the stock trades below these prices I buy, granted that I have the needed cash on hand, and the companies are not overweight in my portfolio.

I typically buy stock in $1000 increments. My broker used to offer free trades every month, which meant I could buy several stocks in $250 or $500 increments. Unfortunately, with $3 commissions, I have to spend a higher amount in order to make individual stock picking economically viable for me.

If I were just starting out, I would focus on slowly building a diversified dividend portfolio over time. The goal is to have at least 30 individual securities representative of the ten sectors that comprise the S&P 500. Some sectors are not very friendly for dividend investors due to the cyclical nature of their business. I try to avoid diversifying at all costs, as I try to get exposure to a certain sector but only if the individual stock pick is right. In addition, I try to maintain equal weights in my portfolio. Unfortunately, this is very difficult, since not all of the stocks I own are buys at all times. As I continuously add funds to my portfolio, the relative size of some positions keeps decreasing. Family Dollar (FDO) is a prime example of this trend, as is Yum! Brands (YUM). I try to not be overweight in certain positions however, and would prefer to buy a new stock, rather than have an above average allocation to the same five or ten stocks.

For example, McDonald’s (MCD) and Procter & Gamble (PG) have been attractively valued for me since 2008. That does not mean that I keep adding to both positions every month. I try to scour for rare opportunities such as market corrections to increase my exposure to stocks which are rarely on sale. But if MCD and PG are the only ones that are priced right, I might have to add to them. That is rarely a case though; as I usually have at least 10 -15 candidates ready to be invested into. Check this article on choosing between dividend stocks.

I rarely reinvest dividends automatically. I wait for dividends to accumulate to $1000, and then use the proceeds to purchase a stock position in a company meeting my criterion from above. I regularly monitor my positions, and note any dividend freezes and any major corporate actions which could affect long term prospects within the company. Just because the company missed Wall Street estimates by a penny however, would not make me want to sell a stock. If this was because the company’s business is deteriorating however, then this is a warning sign. When companies I own boost distributions, that keeps or even increases the purchasing power of my income.

I only sell stocks if one of these events occurs. Otherwise, I simply hold on to stocks that are no longer buys. I do not add any funds to them, and over time these positions shrink in significance. Once I sell a stock however, I try to replace it with another candidate from the same sector. For example, when I sold State Street (STT) in 2009, I purchased shares in Aflac (AFL). When I sold General Electric (GE) however, I purchased shares of Kinder Morgan (KMR)(KMP), because it made logical sense.

I do not chase yield, and I do look to make sure the dividends I receive are sustainable. I believe that it is possible to create a portfolio paying 3%- 4% in today’s environment, which will double distributions every 10 – 12 years. I do not expect on selling shares in order to fund my retirement. I expect to live off the income from the portfolio. I do try to select companies which will increase earnings over time, which will help them in affording a higher dividend payment over time. These types of stocks will likely generate capital gains over time, which will maintain the purchasing power of my portfolio over time. I would not panic however, if the stocks I owned decline by 40%- 50%, as long as the fundamentals are still intact. I do expect capital gains from my income stocks however, as historically 60% of total returns have come from appreciation.

Full Disclosure: Long KMR, AFL, PG, MCD, YUM, FDO

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Seven Dividend Stocks Boosting Distributions

Every week I screen the list of companies that announced dividend hikes. I typically look at the strength and consistency of dividend increases either from stocks I might be interested in researching further or from dividend growth stocks that I am noticing for the first time. There were 52 companies announcing dividend increases over the past week. I have highlighted companies which have raised distributions for nine years, and yielded close to my 2.50% entry yield requirement. In addition to that, I have added my commentary behind each dividend increase.

Emerson Electric Co. (EMR) operates as a diversified technology company worldwide. The company raised its quarterly dividend by 2.50% to 41 cents/share. This dividend king has raised distributions for 56 years in a row. Yield: 3.30% (analysis)

Over the past decade, the company has managed to raise distributions by 6.40%/year. The company is attractively valued, as it is trading at 14 times 2013 earnings. I was planning on adding to my position there, but the slow rate of distribution increases over the past few years are making me to reconsider that. I would rate the company as a hold right now.

AT&T Inc. (T), together with its subsidiaries, provides telecommunications services to consumers, businesses, and other providers worldwide. The company raised its quarterly dividend by 2.30% to 45 cents/share. This dividend champion has raised distributions for 29 years in a row. Yield: 5.40% (analysis)

Over the past decade, the company has managed to raise distributions by 5.30%/year. In most recent years however, the rate of dividend growth has slowed to 2%/year. Given the slow growth in earnings and high dividend payout ratio, I do not foresee much in future dividend growth going forward. Many retired investors are holding on to AT&T due to its high yield. The stock has also been bid up in the current low interest rate environment, mostly from yield-hungry investors. I would rate the company as a hold for now.

Universal Corporation (UVV), through its subsidiaries, operates as a leaf tobacco merchant and processor worldwide. The company raised its quarterly dividend by 2% to 50 cents/share. This dividend champion has raised distributions for 42 years in a row. Yield: 4.20% (analysis)

Over the past decade, the company has managed to raise distributions by 4.10%/year. It is attractively valued at 9.10 times earnings and the dividend payout ratio is only 38%. The big concern is that company’s business is deteriorating, as I had outlined in an earlier article. Given the grim prospects for Universal’s future profitability, it is no wonder shares are trading at such a discount.

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 raised its quarterly dividend by 1.40% to 35.50 cents/share. This dividend champion has raised distributions for 53 years in a row. Yield: 4.90%

Over the past decade, the company has managed to raise distributions by 3%/year. This is mostly due to the fact that EPS have been stuck in a range over the past decade, without much in sustainable growth. As a result, future dividend increases would likely be contained at a rate of 2%/year for the foreseeable future. While the high yield is appealing now, the wealth destroying powers of inflation would reduce purchasing power of this income stream over time. This stock is a decent hold however, and the dividend payout of 71% is in the low range for a utility.

Microchip Technology Incorporated (MCHP) engages in the development, manufacture, and sale of semiconductor products for embedded control applications. The company raised its quarterly dividend to 35.20 cents/share. This dividend achiever has raised distributions for 11 years in a row. Yield: 4.60%

Microchip is overvalued at 29 times earnings, and has a dividend payout ratio above 100%. I would stay away from this company for now.

Utah Medical Products, Inc. (UTMD) produces medical devices for the healthcare industry primarily in the United States and Europe. The company raised its quarterly dividend by 2.10% to 24.50 cents/share. This dividend stock has raised distributions for 9 years in a row. Yield: 2.80%

Over the past five years, the company has managed to raise distributions by 3.90%/year. Utah Medical Products is attractively valued at 13.20 times earnings, has a sustainable dividend payment and has managed to increase earnings over the past decade at a nice clip. I like the company’s prospects for future growth, and the only thing that puts me off the stock is the low dividend growth. I would continue monitoring the situation.

Atmos Energy Corporation (ATO), together with its subsidiaries, engages in the distribution, transmission, and storage of natural gas in the United States. The company raised its quarterly dividend by 1.40% to 35 cents/share. This dividend champion has raised distributions for 25 years in a row. Yield: 4.10%

Over the past decade, the company has managed to raise distributions by 1.60%/year. The dividend growth at Atmos Energy is not sufficient to even compensate shareowners for the effects of inflation. This is particularly interesting, given the fact that earnings per share increased from $1.45 in 2002 to $2.11 in 2012. The dividend payout ratio is at 59%, which is low for a utility. The company is attractively valued, trading at 15.10 times earnings. I would research the company further in a future stock analysis.

The list was dominated by companies which boosted dividends at a very slow pace. Nevertheless, this is an important exercise for me, as I was able to identify a company where I might end up refraining from adding to my position (EMR). In addition, I uncovered a position where I might even end up liquidating my position, as I do not foresee much growth in EPS or distributions (UVV). I also uncovered two stocks ((ATO) and (UTMD)), where companies have the ability to boost distributions, but for some reason have not done so. These require further research and monitoring on my part.

Full Disclosure: Long EMR and UVV

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Johnson & Johnson is undervalued –Here’s why

In a previous article I discussed whether we are in a dividend bubble or not. The search for yield has made shares in some companies in the REIT and utilities sectors overvalued. There are also some companies that currently “look overvalued” to the naked eye. Companies like Johnson & Johnson (JNJ) appear to be trading at a P/E ratio above 20. Before you dismiss the stock and move on to the next candidate, it might be a good idea to spend a few short minutes for further research.

The reason behind this perceived overvaluation of Johnson & Johnson is the fact that there were a few one-time charges against earnings, which decreased them. However, I have long argued that dividend investors should focus on recurring earnings, while ignoring one-time charge-offs that do not affect recurring earnings.

For example, back in the fourth quarter of 2011, Johnson & Johnson (JNJ) earned only 8 cents/share. Adding the earnings for the next three quarters totals $3.04/share. At current prices, this equates to a P/E of 23.30. If one takes the time to read the 4th quarter earnings release, they could see the following:

Fourth-quarter 2011 net earnings reflect after-tax charges of $2.9 billion, which include product liability expenses, the net impact of litigation settlements, costs associated with the DePuy ASR™ Hip recall program, and an adjustment to the value of a currency option and costs related to the planned acquisition of Synthes, Inc. Fourth-quarter 2010 net earnings included after-tax charges of $922 million representing product liability expenses, the net impact of litigation settlements, and costs associated with the DePuy ASR™ Hip recall program. Excluding these special items for both periods, net earnings for the current quarter were $3.1 billion and diluted earnings per share were $1.13, representing increases of 9.3% and 9.7%, respectively, as compared to the same period in 2010.

Adding back the $1.05/share, and EPS comes out to $4.09/share. But there was another one-time charge that JNJ recorded in Q2 2012:

Second-quarter 2012 net earnings include after-tax special items of $2.2 billion, consisting of non-cash charges primarily attributed to a partial write-down of in-process research and development and intangible assets related to the Crucell vaccines business, an increase in the accrual for the potential settlement of previously disclosed civil litigation matters, and transaction and integration costs related to the acquisition of Synthes, Inc. Second-quarter 2011 net earnings included after-tax special items of $772 million, consisting of net charges related to the restructuring by Cordis Corporation, the net impact of expenses related to litigation, DePuy ASR™ Hip recall costs, and a currency adjustment related to the acquisition of Synthes, Inc. Excluding these special items, net earnings for the current quarter were $3.6 billion and diluted earnings per share were $1.30, representing increases of 2.7% and 1.6%, respectively, as compared to the same period in 2011.

Without these one-time deals, earnings per share for Johnson & Johnson (JNJ) would have been 4.89/share, which makes current P/E ratio to be 14.50.

Overall, I like the fact that the company has managed to boost dividends for 50 years in a row. There are only a handful of companies which have managed to accomplish this in the US. Over the past decade, the company has managed to boost distributions at a rate of 12.40%/year.

The morale of the story is to always do a research that has some depth before throwing away any potential investment idea. I had the same conclusion for Abbott Laboratories (ABT) a few month ago as I am having now with Johnson & Johnson.

Full Disclosure: Long JNJ and ABT

Relevant Articles:

- Johnson & Johnson (JNJ) - A Reliable Dividend Grower
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Why am I obsessed with dividend growth stocks?

I have an obsession with dividend stocks. I log-on to my brokerage accounts every morning, in order to check the amount, timing and source of any dividends deposited. On certain days, such as the 15th of some months, the amount of dividends received is much higher than my salary. To me dividends represent financial freedom from a 9 to 5 (or typically later) job.

Dividends are an integral part of my retirement strategy. The point at which I will be able to retire will be when distributions exceed my monthly expenses by a sufficient margin of safety at the crossover point. I do not blindly invest in dividend stocks however. I follow a multi-step process, in order to ensure that unnecessary risks are not taken along the way.

A long time ago, employees used to slave away for 3 – 4 decades, until they received the golden watch at their retirement party. Typically starting at the age of 55, retirees were able to draw upon their company’s defined benefit plan. A few years later, they were able to receive Social Security checks, and live comfortably for the rest of their lives. A few decades ago however, corporations started cutting retirement benefits, and instead offering optional defined contributions plans, such as 401K’s. There is much speculation that the age for receiving social security benefits will be increased going forward, and that the amount of the benefit might be reduced in the meantime. This means that employees should be relying on themselves for funding of their needs in retirement.

Many retirees are typically sold on traditional asset drawdown schemes such as the four percent rule. This rule was popularized by CFP William Bengen in his research studies. According to this strategy, investors would purchase bond and stock index funds, allocate them in their portfolios according to their risk preferences. Investors will then sell a portion of their portfolios each year, in order to pay for their lifestyle, while rebalancing their portfolios and paying their financial planners and mutual fund managers sizeable fees in the process. The issue with this strategy comes when retirees are experiencing prolonged flat or bear markets. People who retired in 1999 – 2000 or in 2007 have been selling off portions of their portfolios, while the investments in their portfolios have remained flat or declined in value. If the market keeps being flat for another decade, these people will certainly run out of money and enjoy a much lower standard of living in the process. To me, selling off a portion of my assets each year is akin to cutting the tree branch you are sitting on.

This is one of the primary reasons why I am sticking to a strategy, where my portfolio throws off a decent amount of cash every month, quarter or year. This way, I maintain ownership in the companies I hold, without risking selling stocks for income during flat or bear markets. No matter what the markets do, as long as I have selected fundamentally strong companies, my dividend checks will keep coming in the mail.

In order to ensure that my portfolio will generate a rising stream of dividends every year during my planned retirement, I need to follow several sound principles around diversification, entry criteria and stock analysis.

Diversification is important, because it ensures that I do not have all of my eggs in one basket. In my portfolio, I attempt to hold at least 30 individual securities, which are representative of as many sectors as practical. That way, if all the companies in a certain sector cut dividends all at once, the impact on my overall dividend income will be negligible.

Entry Criteria at which stocks are purchased is important as well. I am currently dollar cost averaging my way into attractively priced stocks every single month. I try not to pay over 20 times earnings, an attempt to buy companies that yield at least 2.50% these days. Once a stock I own sells at more than 20 times earnings or less than a 2.50% yield, I will hold on but would not add to the position. In addition, I purchase securities which have sustainable dividend payments, and which have established histories of consistent dividend increases.

Diversification and entry criteria are closely interwoven with my overall analysis of a security. There are always at least 15- 20 attractively priced dividend stocks to purchase each month, which is why I need to do a little work before determining which stocks to add. I would need to also analyze each company in detail, in order to determine whether it can provide dividend growth in the future. This is achieved by studying the business, reading financial statements, visiting locations, talking to suppliers and customers and staying up to date on major developments. While I am enjoying the rising stream of dividend checks, I also want to see my dividend stocks deliver capital gains over the long run as well.

I take a conservative view of dividend investing, because I do not want to learn how to greet customers in my late 70s or early 80s. Some companies which I have recently met my entry criteria include:

McDonald’'s Corporation (MCD) franchises and operates McDonald's restaurants in the global restaurant industry. The company has raised dividends for 36 years in a row. Over the past decade, this dividend champion has managed to boost distributions by 27.40% per year. McDonald’'s currently trades at 16.40 times earnings and yields 3.50%. (analysis)

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance. The company has raised dividends for 30 years in a row. Over the past decade, this dividend champion has managed to boost distributions by 20.40% per year. Aflac currently trades at 8.30 times earnings and yields 2.80%. (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has raised dividends for 25 years in a row. Over the past decade, this dividend champion has managed to boost distributions by 8.80% per year. Chevron currently trades at 8.90 times earnings and yields 3.30%. (analysis)

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. The company has raised dividends for 30 years in a row. Over the past decade, this dividend champion has managed to boost distributions by 11.10% per year. Air Products and Chemicals currently trades at 14.40 times earnings and yields 3.30%. (analysis)

Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. The company has raised dividends for 37 years in a row. Over the past decade, this dividend champion has managed to boost distributions by 18.90% per year. Walgreen currently trades at 14.40 times earnings and yields 3.20%. (analysis)

Full Disclosure: Long AFL, CVX, APD, WAG, MCD

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Dividend Stocks Deliver Returns Whether Market is Open or Not

As a dividend investor I purchase quality dividend stocks with the intention to hold them for the long run. Some of the most successful dividend investors have managed to accumulate sizeable fortunes simply by sitting and reinvesting dividends into more income producing assets. Warren Buffett is one of the most successful income investors that I outlined in an earlier article, who has managed to reinvest his money for long periods of time while achieving market beating returns.

One of my favorite quote from Warren Buffett deals with investing for the long –term:
"I never attempt to make money on the stock market. I buy on assumption they could close the market the next day and not re-open it for five years."

Last week, the US market was closed for two whole days due to Hurricane Sandy. Dividend Investors however, kept receiving their dividend checks. In fact, most income investors could care less if the market is open or not, since they are investing for the long run. For these individuals, the consistent stream of rising dividend income provides them with the positive reinforcement to stick to their investments for the long run.

Over the past week, the following consistent dividend increases boosted their distributions:


Cardinal Health, Inc. (CAH), a healthcare services company, provides pharmaceutical and medical products and services in the United States and internationally. The company raised its quarterly dividend by 15.80% to 27.50 cents/share. This was the second dividend increase for Cardinal Health over the past year. This dividend achiever has raised distributions for 16 years in a row. Yield: 2.70% (analysis)

The company has managed to boost annual dividends by 28.90%/year over the past decade. In addition, the company trades at 13 times earnings and has an adequately covered distribution. While this is impressive, the company has been unable to increase earnings per share over the past decade. As a result, the rapid growth in dividends was possible due to the expansion in the dividend payout ratio. Analysts are expecting an increase in EPs by 10%/year over the next two years however. I would take another look at the company before committing any money however.


Alliance Resource Partners, L.P. (ARLP) engages in the production and marketing of coal primarily to utilities and industrial users in the United States. This master limited partnership (MLP) raised its quarterly distributions to $1.085/unit. This dividend achiever has raised distributions for ten years in a row. Yield: 6.70%

The partnership has managed to boost annual dividends by 13.80%/year over the past decade. Alliance Resource Partners has managed to boost profitability over the past decade, as well. I would consider this MLP on my list for further research.

Arrow Financial Corporation (AROW) provides various commercial and consumer banking, and financial products in the United States. The company raised its quarterly dividend by 2% to 25 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Yield: 4.10%

The company has managed to boost annual dividends by 6.50%/year over the past decade. At the same time earnings per share have increased by 20% in total since 2002. Because of the slow earnings growth, future dividend increases will be limited. I would view the stock as a hold.

Mercury General Corporation (MCY), together with its subsidiaries, engages in writing personal automobile insurance products. The company raised its quarterly dividend by 0.50% to 61.25 cents/share. This dividend champion has raised distributions for 26 years in a row. Yield: 6%

While over the past decade, Mercury General has managed to boost dividends by 8.70%/year, the rate of increases has fallen dramatically since 2008. Given the high dividend payout ratio and the decline in earnings per share over the past three years, it is no surprise that the dividend growth has been anemic. I would rate the stock as a hold at best.

Full Disclosure: None

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Lowe’s (LOW) Dividend Stock Analysis

Lowe’s Companies, Inc.(LOW), together with its subsidiaries, operates as a home improvement retailer. It offers a range of products for maintenance, repair, remodeling, and home decorating. The company is one of only 13 companies in the world which have increased dividends for at least 50 years in a row.

The company’s last dividend increase was in June 2012 when the Board of Directors approved a 14.30% increase to 16 cents/share. Home Depot (HD) is the company's largest competitor.

Over the past decade this dividend growth stock has delivered an annualized total return of 4.10% to its shareholders.

The company has managed to generate a 5% average increase in annual EPS since 2003. Analysts expect Lowe’s to earn $1.65 per share in 2013 and $2.01 per share in 2014. In comparison, the company earned $1.44/share in 2012.

The company has reduced its share count from 1562 million shares in 2003 to 1177 million in 2012.

The future growth for Lowe’s could come from international expansion, increased spending on home renovations, increase in number of US stores and aggressive share repurchases. It currently has 31 stores in Canada, and opened its first two stores in Mexico in 2011. In addition, it has a joint venture with Woolworths where it has 7 stores under the Masters brand. The venture plans to open 15- 20 new stores in 2012.

While the housing market still appears to be soft, the bottom has likely been hit. The market for home improvements is expected to grow by 5% annually over the next five years. With over 66% of US population owning their homes, which is above historical averages, there seems to be a lot of home projects that would see homeowners going to places like Lowe’s and Home Depot. Research shows that renovations tend to accelerate for homes older than 25 years. According to latest Census, 69% of homes in the US have been built more than 25 years ago. As a result, a strong demographic factor is the high level of homeownership in the US, coupled with aging of homes. In addition to that, people are much more likely to participate in do it yourself home renovation and upkeep projects during a crisis, in order to try to increase the value of their home, to make it more marketable or just to make it a better place to live.

The return on equity has decreased by half from 21.40% in 2006 to 10.60% in 2012. As earnings rebound over the next two years, I expect ROE to increase to upper teens. 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 29.60% per year over the past decade, which is much higher than the growth in EPS. This was achieved mainly through the rapid expansion in the dividend payout ratio.

A 30% growth in distributions translates into the dividend payment doubling almost every two and a half years. If we look at historical data, going as far back as 1983 we see that Lowe’s n has actually managed to double its dividend every five years on average.

The dividend payout ratio has increased from 5% in 2003 to 37% in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Lowe’s is slightly overvalued, trading at 19.70 times earnings and yielding 2.20%. I would consider adding to my position in the stock on dips below 25.60/share.

Full Disclosure: Long LOW

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