Dividend Growth Investor

Consolidated Edison (ED) Dividend Stock Analysis

noreply@blogger.com (Dividend Growth Investor) — Fri, 20 Nov 2009 02:30:00 PST

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. It provides electric service to approximately 3.3 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County, as well as provides steam service to office buildings, apartment houses, and hospitals in parts of Manhattan.

Consolidated Edison is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 35 consecutive years. For the past decade this dividend stock has delivered an annual average total return of 6.30 % to its shareholders.

At the same time the company has managed to deliver a 0.80% average annual increase in its EPS since 1999. For the next two years analysts expect EPS to increase to $3.11 and $3.30 respectively. The main problem for utility companies is that they are very capital intensive and are highly regulated. In order for utilities companies to increase rates, they have to seek regulatory approval. In addition to that investing in such projects such as the smart grid is subsidized through federal programs, although companies like Con Ed typically put in at least a portion of the needed amount.

The return on equity has declined slightly over the past decade, although it is at 10% currently.
Annual dividend payments have increased by an average of 1.00% annually over the past 10 years, which is higher than the growth in EPS. The company has increased the amount of the stock outstanding by an average of 2.6% per year over the past decade. Despite the slow dividend growth, the company might be a good pick for investors who are seeking current retirement income.

A 1% growth in dividends translates into the dividend payment doubling almost every 72 years. If we look at historical data, going as far back as 1975, we would see that Con Edison has actually managed to double its dividend payment every eleven years on average. The current dividend payment is double what it was in 1985 however.

Over the past decade the dividend payout ratio has ranged between a low of 57% and a high of 97%. Currently the dividend payout ratio is at 69.6%. While this would be high for a company like McDonald’s (MCD) or Procter & Gamble (PG), a payout ratio of 70% is not uncommon for utilities. Utilities typically pay out a large portion of their earnings as dividends, which explains their slow dividend growth and high dividend yields. Most utilities operate as natural monopolies, which guarantee almost no competition in their specific geographic areas. It would be very costly to run two separate electrical grids, and such investment could take many decades to pay off. Thus utilities tend to generate stable earnings and revenues in any economic conditions, as people keep using water, gas and electricity in their daily lives no matter what.

I believe that Consolidated Edison is attractively valued with its low price/earnings multiple of 14, as well as an above average dividend yield at 5.60%. The high dividend payout should not be a concern because of the industry the company is in. Because of the slow dividend growth of the stock however, I would only invest in it for current income within the next decade. I do own ED mainly for diversification within the utility industry and for a current yield boost to my dividend income.

Disclosure: Long ED

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- Where are the original Dividend Aristocrats now?

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What are your dividend investing goals?

noreply@blogger.com (Dividend Growth Investor) — Wed, 18 Nov 2009 04:30:00 PST

Great investors have goals and strategies are only the tools that help them accomplish their targets. My goal is to generate a rising stream of dividend income, which would allow me to leave the rat race and spend my time doing worthwhile things like education and charity and self-development.
By focusing on dividend growth, I am trying to pick the stocks, which have solid competitive advantages, whose revenues are relatively recession proof but could still grow earnings by innovation, acquisitions, and buybacks. Historical inflation rates have been around 3% for the US over the past one century. Thus, by focusing on companies, which have a long history of dividend increases of over 3%, I would create an inflation proof source of income.
In addition to that, if my stock picks raise dividends faster than the rate of inflation, I would be able to achieve very good yields on cost in the process. A company, which yields only 3% or 4%, might be scoffed at by yield chasing gurus, who wouldn’t even consider a stock unless it yields 8% or 10%. Those yield chasers might get the 10% yield now, but the cost of dividend cuts or no dividend increases makes chasing high yielding stocks a dangerous exercise with negative effects on wealth building.

At the same time a company that yields only 3% or 4% now, but grows its dividend payments at 12% annually, could generate a yield on cost of 6% to 8% in 6 years and yields on cost of 12% to 16% in 12 years. These companies exist in the market. It only takes an attentive dividend investor to uncover them. Examples of such companies are

Johnson & Johnson (JNJ) has regularly hiked dividends for 47 years in a row. The ten-year average dividend growth for the producer of Neutrogena, Tylenol and Remicade is an impressive 13.30% annually. (analysis)

Procter & Gamble (PG) has rewarded shareholders with dividend raises for 53 consecutive years. This consumer good juggernaut has managed to increase distributions at a rate of 10.70% annually over the past decade. (analysis)

Pepsi Co (PEP) has increased its dividends for 37 consecutive years. The producer of Pepsi Cola, Mountain Dew, Lays and Doritos has delivered a 12.80% average dividend growth annually over the past decade. (analysis)

McDonald’ s (MCD) has increased its dividends for 32 consecutive years. The worlds largest fast food chain has boosted dividends by an average of 27.30%/year over the past decade. (analysis)

I believe that even in 20 years people would still have a need to eat, drink, shower, shave and take pills. I would bet that even in 20 years people would still shop at McDonald’s – if not for their burgers then for the salads or whatever food sells the best.

Over time a portfolio of carefully selected dividend growth stocks could not only deliver a consistently increasing stream of dividend income which increases faster than inflation, but could also deliver outstanding total returns. Over the past fifteen, ten, five, three or one years, the dividend achievers index has outperformed the S&P 500. (source Mergent's)

The dividend achievers index consists of US stocks traded on NYSE, NASDAQ or AMEX, which have increased annual regular dividends for at least the past ten consecutive years. This index is a great shopping list for novice dividend investors. Even Peter Lynch, the famous manager of the Fidelity Magellan Fund, which outperformed the S&P 500 by a significant margin in the 1980’s, said : "The Dividend Achievers Handbook is one of my favorite bedside thrillers. Here's a simple way to succeed in Wall Street: Buy the stocks on Mergent's list and stick with them as long as they stay on the list"

As a dividend growth investor my primary objective is growth in dividend income without losing too much of my capital in the process. Capital appreciation is second of importance. I believe that if my portfolio generates enough dividend income for me, I would not have to rely on selling 4% of my portfolio at depressed prices in order to live off my investments.

Full disclosure: Long MCD, JNJ, PG and PEP

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Eight Companies Rewarding investors with higher payments

noreply@blogger.com (Dividend Growth Investor) — Mon, 16 Nov 2009 02:07:00 PST

Most investors believe that successful dividend investing consists of identifying the highest yielding stocks in the market and then generating double digit returns on investment each year. The problem with this strategy it that it often overlooks the fact that such dividend yields are most often unsustainable in the long run. A much better strategy that could eventually produce double digit yield on cost to investors is dividend growth investing. Using this strategy a patient investor accumulates a diversified portfolio of stocks which have a long history of consistently growing dividends. The positive factor is that any investor can implement this strategy, especially now that brokerage commissions are almost zero.

As long as an investor is willing search for the best stocks that fit their criteria and do the work, focusing on dividend growth stocks should pay off in the long run. I identified the following dividend raisers for the past week.

Automatic Data Processing, Inc. (ADP), which provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers, increased its quarterly dividend by 3% to 34 cents per share. The increased cash dividend marks the 35th consecutive year in which this dividend aristocrat has raised its dividend. . The stock currently yields 3.10%. (analysis)

MDU Resources Group (MDU) operates in six segments: Electric, Natural Gas and Oil Production, Construction Services, Pipeline and Energy Services, Construction Materials and Contracting, and Other. The company increased its quarterly dividend by 1.60% to 15.75 cents per share. MDU Resources Group is a dividend achiever, which has raised distributions for 19 years in a row. The company also boasts 72 consecutive years of uninterrupted quarterly common stock dividend payments. The stock currently yields 2.80%.

Tennant Company (TNC), which engages in the design, manufacture, and marketing of cleaning solutions, increased its quarterly dividend by 6% to 14 cents per share. Tennant Companyis a dividend champion, which has raised distributions for 38 years in a row. The stock currently yields 1.90%.

Vodafone Group (VOD), which is engaged in providing service, such as voice, messaging, data and fixed line and others, increased its interim dividend by 3.5% to 2.66 pence per share. The final dividend for 2009 was 5.2 pence/share. Vodafone Group is an international dividend achiever, which has raised distributions for over one decade. The stock currently yields 5.80%.

DeVry Inc. (DV), which owns and operates DeVry University, Advanced Academics, Ross University, Chamberlain College of Nursing, and Becker Professional Review, increased its annual dividend by 25% to 20 cents per share. DeVry Inc. started paying dividends in 2006 and has been raising distributions consistently ever since. The stock currently yields only 0.30% however."The dividend increase and continuation of the share repurchase program reflect our strong financial position and outlook for the future," said Daniel Hamburger, DeVry’s president and chief executive officer. "We will continue to put our students first and invest in academic quality, which we believe leads to sustainable, long term growth and increased shareholder value.”

Span-America Medical Systems, Inc. (SPAN), which engages in the manufacture and distribution of various polyurethane foam products for the medical, consumer, and industrial markets in the United States and Canada, increased its quarterly dividend by 2.2% to 47 cents per share. Span-America Medical Systems doesn’t have a consistent history of raising distributions however. The stock currently yields 2.20%.

Baxter International Inc. (BAX), which develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions., increased its quarterly dividend by 12% to 29 cents per share. Baxter International Inc. has only started raising distributions since 2007. The stock currently yields 2.00%.

AmerisourceBergen Corporation (ABC), a pharmaceutical services company, offers drug distribution and related services to healthcare providers and pharmaceutical manufacturers in the United States, the United Kingdom, and Canada, increased its quarterly dividend by 33% to 8 cents per share. AmerisourceBergen Corporation has raised distributions since 2005. The stock currently yields only 1.00%.

Checking the weekly pulse of dividend growers is an important part of the dividend investor’s routine. It is generally a bullish sign when a company which has raised distributions for over 3 decades keeps raising them even through a recession. It also might help investors in identifying any future dividend growth stories, before they become mainstream holdings.

Full Disclosure: Long ADP

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Dividend Grouping for Dividend Income

noreply@blogger.com (Dividend Growth Investor) — Fri, 13 Nov 2009 03:32:00 PST

Most dividend investors are influenced by the current yield when they enter a particular stock investment. Dividend growth investors are no different either. It is hard to blame either of these groups, as there is no point in a company that strongly raises its dividend payments, yet it might take up to two decades for the yield on cost to reach any meaningful level. Add in to that the fact that a double digit dividend growth could only be supported by a double digit earnings growth only for so long. If the dividend payout ratio was low at the beginning this could extend the strong dividend growth by a few years after earnings growth slows down to a more reasonable level.

Some of the best dividend growth stocks however would always spot a low current yield, coupled with strong dividend growth for many years to come. As some might typically yield 1% or 2 %, they would be completely ignored by most investors. The trick here is that a company that yields 2% today and raises its dividend by 12% every year would double your yield on cost in just 6 years. In most cases such companies stock prices also tend to follow the changes in the dividend payment, which could lead to strong capital gains over time. Thus, if the stock increased distributions by 12%, it is very likely that the stock price might increase by about 12% as well. This leaves the dividend yield unchanged at 2%, which doesn’t matter much for original investors, who purchased the stock 6 years earlier.

In my experience as a dividend investor I have always implemented a minimum yield criterion of between 2% to 3% when screening for dividend growth stocks. I implemented this control in order to protect myself in the event that the company I am heavily invested in stops raising distributions. That way I could at least receive some return on my investment until I try to unload my position above my breakeven price.

Looking back at the best dividend growth stories of Wal-Mart (WMT) and McDonald’s (MCD) however, my minimum criteria would have prevented me from getting aboard on these success stories. Other investors who are currently seeking high current income might also have missed out on these plays, which are delivering double-digit yields on cost for anyone who purchased Wal-Mart of McDonald’s in the 1980s.

I recently came out with a way to tweak my entry criteria of 3% minimum initial yield by grouping higher yielding and lower yielding investments with my purchase. At the end of the date, one could easily create a dividend portfolio which consists both of high yielders with slow to no dividend growth and low dividend yielders, which have the potential for strong dividend growth. If one manages to allocate the varying dividend components in their portfolio carefully, they would be able to achieve a target initial yield on cost for their stock holdings as a whole.
For example I recently added to my position in Wal-Mart Stores (WMT), which I consider of the best run companies in USA, with a strong position in the retail market and good opportunities for growth. The low current yield of 2.20% however was too low in comparison to the 3% entry criteria I apply for new and existing investments. I do believe however that the strong dividend growth would more than compensate for the low current yield, and I see the yield on cost on an investment in Wal-Mart today doubling to 4.5%-5% by the end of the next decade. That’s why I added the high dividend stock AT&T (T) to my portfolio. For every two shares of Wal-Mart (WMT) stock, I bought one share of AT&T (T). At the current prices this mix yields 3% right now.

I view AT&T (T) as a slow grower, which might end up cutting distributions sometime in the future due to its high payout and stagnant earnings in the highly competitive telecom market. The strong dividend growth at Wal-Mart (WMT) however should more than compensate for any potential dividend cuts at AT&T (T). If AT&T (T) cuts its dividends by 50% to 82cents/share, but Wal-Mart (WMT) managed to raise its distributions by 36%, my total dividend income would be unchanged. I believe that Wal-Mart (WMT) would be able to raise distributions by 36% over the next 3-4 years, assuming that it follows the most recent path of dividend growth.

Other stocks that I could use in dividend grouping for income could be high yielding triple net lease real estate investment trust Realty Income (O) or pipeline operator Kinder Morgan (KMP).

Full Disclosure: Long T, KMR, MCD, O and WMT

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Where are the original Dividend Aristocrats now?

noreply@blogger.com (Dividend Growth Investor) — Wed, 11 Nov 2009 03:20:00 PST

The Dividend Aristocrats index measures the performance of S&P 500 index members that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. (Source: S&P)

Since its inception 20 years ago, the dividend aristocrat’s index has outperformed the S&P 500.

The number of components in the index has ranged between 26 in 1989 to 64 in 2001. I used this list as a primary tool for identifying companies with strong brands, which have raised distributions through both good and bad economic conditions. Check this post Historical changes of the S&P Dividend Aristocrats Index for reference.

Some investors believe that the reason why the index has outperformed the S&P 500 is because of new stocks that have later been added to the index. In a previous post I discussed how the list of original S&P 500 components in 1957 outperformed the index over the next 50 years.

It would be interesting to note what happened to the original Dividend Aristocrats. Here’s a list with 26 of them from 1989. Next to each symbol is a brief outline of the events over the past 20 years, associated with each stock.

American Home Products (AHP) became Wyeth (WYE) in 2002. The company was removed from the index in 2001 when it failed to increase dividends for 2 consecutive years in a row. The company began raising its distributions again in 2005. Currently it is in the process of being acquired by drug giant Pfizer (PFE). One dollar invested in AHP in 1989 would have turned out to $5.80 with dividends reinvested by June 2009. Yield on cost is 8.9%.

Fuse Maker AMP Inc (AMP) was acquired by Tyco in 1998.

Baxter International (BAX) was part of the index until 1997. The company spun off Allegiance Healthcare Corporation in 1996, issuing a certain amount of stock in the new company to existing shareholders. As a result its distributions fell slightly for the past three quarters of 1997 in comparison to the same period in 1996. One dollar invested in BAX in 1989 would have turned out to $8.03 with dividends reinvested. The yield on 1989 cost is 8.3%.

Colgate Palmolive (CL) was deleted in the index in 1990 for no apparent reason. According to yahoo finance the company increased its distributions in 1989. In addition to that the company’s own web page claims that it has increased payments to common shareholders every year for 46 years. One dollar invested in CL in 1989 would have turned out to $16.94 with dividends reinvested. The yield on cost is 27.70%. (analysis)

CSR was deleted from the index in 1998. I couldn’t find any additional information on this stock.

Dover (DOV), which recently announced its 54th consecutive annual dividend increase, is still part of the index. A dollar invested in DOV in 1989 would have turned out to $5.45 with dividends reinvested. The yield on cost is 11.6%. (analysis)

Emerson Electric (EMR) is still part of the index. The company has increased its dividends for 52 years in a row. One dollar invested in EMR in 1989 would have turned out to $8.17 with dividends reinvested. The yield on cost is 17.7%. (analysis)

FPL Group (FPL) was deleted from the index in 1995, after the Florida Utility cut its distributions by one third, ending a 48-year streak of dividend increases. The company resumed its policy of regular dividend increases in 1995. One dollar invested in FPL in 1989 would have turned out to $7.56 with dividends reinvested. The yield on cost is 10.4%.

Genuine Parts Co (GPC) was removed from the index in 2002. It is unclear as to why the company was booted out, since both yahoo finance and the company’s website show no interruptions to the dividend increases. The company’s most recent dividend increase marked 53rd consecutive years of increased dividends paid to our shareholders. A dollar invested in GPC in 1989 would have turned out to $5.20 with dividends reinvested. The yield on cost is 12%.

(HI) was acquired by HSBC in 2002. I couldn’t find any information about this component.

International Flavors and Fragrances (IFF) was removed from the index in 2001, after the company cut its dividends by 60% in 2000. While International Flavors and Fragrances started raising dividends in 2003, its current distribution rate is still lower than what it was in 2000. A dollar invested in IFF in 1989 would have turned out to $3.52 with dividends reinvested. The yield on cost is 6%.

Johnson & Johnson (JNJ), which recently announced its 47th consecutive annual dividend increase, is still part of the index. A dollar invested in JNJ in 1989 would have turned out to $10.84 with dividends reinvested. The yield on cost is 26.4%. (analysis)

Kellogg (K) was removed from the index in 2003 after the company failed to raise its quarterly dividend for 2.5 years in a row. Since 2005 the company has started to increase dividends once again. A dollar invested in K in 1989 would have turned out to $4.59 with dividends reinvested. The yield on cost is 8.9%.

Coca Cola (KO) is still a member of the dividend aristocrat’s index. The company has increased its dividends for 47 consecutive years. A dollar invested in KO in 1989 would have turned out to $7.15 with dividends reinvested. The yield on cost is 17%. (analysis)

(LDG) was booted out of the index in 1995. I couldn’t find any information about this component.

Lowe’s Companies (LOW) is still a component of the index after 20 years. The company has increased its dividends for 47 consecutive years. A dollar invested in MAS in 1989 would have turned out to $25.40 with dividends reinvested. The yield on cost is 39%.

Masco Corp (MAS) was booted out of the index in 1996. It is unclear as to why the company was booted out, since both yahoo finance and the company’s website show no interruptions to the dividend increases. A dollar invested in MAS in 1989 would have turned out to $1.31 with dividends reinvested. The yield on cost is 2.5% after the recent dividend cut; it went up to 7.7% in 2008.

3M (MMM) is one of seven original components still part of this elite dividend index. The company has consistently increased its dividends for 51 consecutive years.
A dollar invested in MMM in 1989 would have turned out to $5.33 with dividends reinvested. The yield on cost is 10.3%. (analysis)

NSI Company (NSI) was kicked out of the index in 1998. I couldn’t find any information about this component.

Procter & Gamble (PG) is one of the original 26 members still present in the index. The company has raised dividends for over 53 consecutive years. A dollar invested in PG in 1989 would have turned out to $9.05 with dividends reinvested. The yield on cost is 20%. (analysis)

Parker-Hannifin (PH) only stayed in the index for one year. The company failed to increase its dividend in 1989, which is why it was kicked out of the index in the first place. A dollar invested in PH in 1989 would have turned out to $11.13 with dividends reinvested. The yield on cost is 17%.

Rubbermaid (RBD) was acquired by Newell to become Newell-Rubbermaid in 1999.

Torchmark (TMK) was booted out of the index in 1996. It is unclear as to why the company was booted out, since yahoo finance shows dividend increases in 1995 and 1996. A dollar invested in TMK in 1989 would have turned out to $5.64 with dividends reinvested. The yield on cost is 4.3%.

Texas Utilities Company (TXU) was a member of the index until 1994 it failed to increase its dividend for a second year in a row in 1994. The company consequently cut its distributions the next year and after a brief increase it cut them again in 2002. The dividend payments briefly returned to 1994 levels in 2005, before an investor group led by Kohlberg Kravis Roberts & Co., TPG and Goldman Sachs Capital Partners bought out the company.

(WIN) was a member of the index until it filed for chapter 11 bankruptcy in 1999.

Warner Lambert (WLA) was a component until Pfizer acquired it in 1999.

Seven of the original 26 components in the dividend aristocrat index are still part of it. The seven survivors have managed to outperform the index average over the past twenty years.
It seems that most of the companies that leave the index as a result of mergers and acquisitions. Sometimes companies take on too much debt in an acquisition, which proves costly over time, leading to freezing or cutting of the dividend payments. Blogger Yielder notes that:

“Regardless of whether a company has a long history of dividend growth, a large acquisition financed by debt is cause for alarm bells to go off. Excessive debt can choke the company especially if the new asset requires "fixing". Unless a company has a great deal of experience with acquisitions, a quick & successful integration can be a problem especially if the company being acquired involves new areas of expertise.”

It would have been next to impossible to predict which ones were to remain the index back in 1989. It would be almost impossible to predict which ones would remain in the index 20 years from now as well. However, by diversifying your risk by spreading your bets to several stocks from as many market sectors as possible, investors would have a higher chance of finding the best dividend stocks, which would generate the most returns for them for the future.

Full Disclosure: Long PG, JNJ, MMM, EMR, KO

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Four Dividend Raisers in the news

noreply@blogger.com (Dividend Growth Investor) — Mon, 09 Nov 2009 03:30:00 PST

Many investors are being sold on the idea of generating income in retirement by solely focusing on fixed income securities. That way they would have a stable income pretty much for life and there is a high likelihood that the principle would be returned intact after the bond matures. The main problem with this strategy is that while the income would remain unchanged over time, its real purchasing power would decline. If however investors purchased a diversified list of dividend growth stocks, they would be able to generate enough income and also enjoy the growing stream of distributions over time. That way investors would not have to worry too much about inflation eroding the purchasing power of their passive income. By focusing on such lists as dividend aristocrats, dividend achievers and checking the list of dividend increases regularly, investors could find the right dividend picks for their portfolios.

The following companies announced dividend increases last week:

Universal Corporation (UVV), which operates as the leaf tobacco merchants and processors worldwide, increased its quarterly dividend by 2.2% to 47 cents per share. Universal Corporation is a dividend champion, which has raised distributions for 39 years in a row. In addition to that the company’s Board of Directors approved a program for the repurchase of up to $150 million of the company’s common stock, which represents approximately 3% of its outstanding shares issued at current prices.The stock currently yields 4.50%.

Kimco Realty Corporation (KIM), which engages in acquisitions, development, and management of real estate properties, increased its quarterly distributions to 16 cents per share. Kimco Realty Corporation cut its dividends in 2009 from 44 to 6 cents/share after 16 years of consistent increases. The stock currently yields 5.40% based off the new distribution amount.

Microchip Technology (MCHP), which develops and manufactures semiconductor products for
various embedded control applications, increased its quarterly dividend by a nominal amount from 33.9 to 34cents per share. Microchip Technology has raised distributions since 2002. Despite the appealing yield of 5.60% and the possibility for gaining diversification in the technology sector, the high payout ratio is a red flag at the moment.

Aaron's, Inc. (AAN) which operates operates as a specialty retailer of consumer electronics, computers, residential and office furniture, household appliances, and accessories, increased its quarterly dividend by 5.9% to 1.8 cents per share. Aaron's, Inc has only raised distributions since 2003. In addition to that the stock currently yields only 0.30%. With EPS of $1.58 in 2008, the company could definitely afford to set up its dividend payments to shareholders a notch.

Of all the stocks raising dividends last week, only Universal Corporation (UVV) looks like an interesting and attractively valued stock that I will consider for further research. Thus do not margin your way into the stock. One problem is that since I already have an allocation to tobacco stocks like Altria (MO) as well as Philip Morris International (PM) however, I do not want to be over allocated to tobacco stocks in general.

Full Disclosure: Long PM and MO

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Estimating future Dividend Growth

noreply@blogger.com (Dividend Growth Investor) — Fri, 06 Nov 2009 03:12:00 PST

Estimating future dividend growth is difficult if not impossible. Companies which might have had a long history of consistent double digit increases might stop raising dividends and might even cut them. It is easy to predict whether or not a company’s dividend is sustainable in the short run, by evaluating EPS trends, dividend payout ratios and cash flows. It is difficult to forecast however whether the dividend won’t be cut several years down the road.

Financial companies such as Bank of America (BAC) and US Bancorp (USB) are two prime examples of this. After raising distributions for several decades, and always spotting above average dividend yields, the companies had to cut dividends amidst the global financial crisis of 2007-2009. The stocks were often priced attractively before 2006-2007, with adequately covered dividends, attractive valuations and very good current yields at the time. Fast forward two years and these former dividend darlings have cut their dividends sending retiree’s alternative incomes into a tailspin.

While it is somewhat easier to predict short term movements in dividends, based off the actions in recent years, astute dividend investors need to be aware of the warning signs of a potential dividend cut or freeze.

First, if a company stops producing earnings growth, then chances are that dividend growth would be limited.

Second, if the company has taken on too much debt, it might end up cutting dividends in order to free some cash flows to repay creditors and avoid going under. If the company is already spotting an unsustainable dividend payout ratio out of earnings, chances are that dividends are due for a cut.

Third, while sometimes companies fall on hard times, management could keep raising distributions. This could be due to management’s vision that this setback in company’s fortunes is temporary. In such cases it might be unwise to sell your position, as long as the dividend is at least maintained. If management keeps borrowing money however for over 2 years in a row in order to finance the dividend, this is a warning sign.

And last but not least, while a company might look as a great promising addition for your dividend portfolio, remember to diversify across sectors, yield/growth characteristics and even countries, in order to reduce your portfolio’s systemic risk. Investors who were heavily invested in the financial sector in 2007 and 2008 suffered huge drops in income; investors who held a more balanced mixture of stocks from a variety of industries suffered lower drops in dividend income.

I recently added to my positions in the following stocks, which have recently raised distributions, trade at attractive valuations and have a long history of dividend growth.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company, which has rewarded shareholders with consistent dividend raises for 47 years, currently yields 3.20%. Using the ten year dividend growth rate for the company at 13.3%, yield on cost on an investment today would double almost every five and a half years on average. (analysis)

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has raised distributions for 53 years in a row, and currently yields 3.10%. Using the ten year dividend growth rate for the company at 10.7%, yield on cost on an investment today would double almost every seven years on average. (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has raised dividends for 33 consecutive years and currently yields 3.90%. Using the ten year dividend growth rate for the company at 27.4%, yield on cost on an investment today would double every two and a half years on average. (analysis)

Emerson Electric Co. (EMR), is a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. Emerson, which currently yields 3.40%, has raised distributions for 52 years in a row. Using the ten year dividend growth rate for the company at 6.3%, yield on cost on an investment today would double every eleven and a half years on average. (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. Pepsi has raised distributions for 37 years in a row, and currently yields 2.90%. I would consider adding to my position there on dips below $60. Using the ten year dividend growth rate for the company at 12.8%, yield on cost on an investment today would double every five and a half years on average. (analysis)

Full Disclosure: Long JNJ, PG, MCD, EMR and PEP

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The Dividend Investment Journey

noreply@blogger.com (Dividend Growth Investor) — Wed, 04 Nov 2009 01:58:00 PST

Most investors have specific goals in mind they pick a certain strategy to utilize. They then get to pick strategies that could help them achieve those goals. The end result from this exercise is that too often investors end up bailing out on strategies at the worst possible times. The reason for that is that they weren’t prepared for the rocky rides that would ultimately lead them to reach their goals later.

Some investors are comfortable utilizing strategies that deliver small positive results to them in a consistent manner. Dividend investing is one such strategy, where investors are frequently rewarded for holding a portfolio of the best dividend stocks, by receiving dividends. Selling covered calls is another example of a strategy where investors are rewarded frequently with small gains.

Other investors however are more comfortable to shoot for the big payout coupled with a lot of small losses. The big payout could erase any small losses previously incurred. Purchasing out of the money call or put options, which is what Nassim Taleb does, or purchasing speculative biotech stocks hoping for a positive FDA announcement are two examples of such approaches.

It is important to understand your strategy very well in order to make sure that it fits your investor profile. Dividend investing is a pretty slow and sometimes boring process of selecting companies that have raised distributions for a define set of years, provided that they are trading at attractive valuations. It involves a little bit of work when dollar cost averaging at regular intervals, rebalancing portfolio weightings and reinvesting dividends selectively. Other than that however it is nothing “exciting” to talk about in the first few years of employing this strategy. Only after a few years later however, as the stream of dividend income becomes larger and exceeds what you could be making at a part time job, does the enterprising dividend investor begin to see a material effect of employing this strategy.

In the meantime the boredom could play mind tricks on dividend investors, which are constantly bombarded with news about the stock market and the economy. Sometimes the information overload could generate intense urge for meaningless action, which would be disastrous to investment returns over time.

For example, some investors consider yields on cost of 10% as a pretty good thing. The way that most novice investors deal in attaining this goal however is by purchasing companies yielding 10% or more, without checking the fundamentals and sustainability behind this dividend payment. Back in the summer of 2008 Bank of America (BAC) was yielding over 10% on several occasions. Investors hoped that the dividend won’t get cut and that a rise in the stock price would bring the yield back to normal levels. Little did they know that the company would cut dividends twice in 6 months and end up yielding less than 0.25%.

The strategy that has worked best for many dividend growth investors is to purchase stocks in strong brand names such as Procter & Gamble (PG), Johnson & Johnson (JNJ), Wal-Mart (WMT) and Pepsi Co (PEP). Such stocks have the ability to generate strong earnings growth, which then trickles back to increased dividend payments. Some investors still ignore such investments however, since they have dividend yields of 3% - 4%. What these investors fail to see is that if these companies could grow their distributions at least at a rate of 7% annually, they would end up doubling their distributions every decade. A 4% yielder with sustainable dividend payout ratio today would likely generate an 8% yield on cost after ten years.

The followin dividend aristocrats are good starting positions for many dividend investors:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has increased distributions for 47 years in a row. (analysis)

PepsiCo, Inc.(PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. This dividend aristocrat has increased distributions for 37 consecutive years. (analysis)

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. This dividend aristocrat has increased distributions for over 53 consecutive years. (analysis)

Wal-Mart Stores, Inc. (WMT) operates the largest chain of retail stores in various formats worldwide. This dividend aristocrat has consistently increased distributions for 35 years. (analysis)

At the end of the day, what truly matters is that you reach your financial goals, not when you started investing or how fast you were going. There truly aren’t any short cuts to investing other than the fact that slow and steady always wins the race, while the hare would most likely spend most of their time catching up.

Full Disclosure: Long JNJ, PEP, PG and WMT

Relevant Articles:

- What Dividend Growth Investing is all about?
- 10 by 10: A New Way to Look at Yield and Dividend Growth
- Why do I like Dividend Aristocrats?
- Dollar Cost Averaging

Nine stocks with increasing distributions

noreply@blogger.com (Dividend Growth Investor) — Mon, 02 Nov 2009 03:19:00 PST

I typically try to summarize each week’s dividend increases in the news by outlining the company that raised distributions and whether it is an achiever or not. Just because I list a stock in an article however does not mean I am recommending it. Identifying the dividend raisers each week however helps me in finding out quality dividend stocks which either should be bought on dips or after they have raised distributions for at least a decade. Even if a list contains some interesting stock ideas however, this does not mean that one should blindly enter a position in such securities. Only after one understands whether such a stock could grow earnings into the future in order to support a growing dividend, should they start accumulating a position over time.

Questar Corp (STR), which engages in gas and oil exploration and production, midstream field services, energy marketing, interstate gas transportation, and retail gas distribution businesses, increased its quarterly dividend by 4% to 13 cents per share. Questar Corp is a dividend aristocrat, which has raised distributions for 30 consecutive years in a row. The stock currently yields only 1.30%.

Stryker Corporation (SYK), which operates as a medical technology company worldwide, has declared a cash transition dividend of $0.10 per share, payable December 16, 2009, to shareholders of record at the close of business on November 18, 2009. The transition dividend will increase the total dividends paid in 2009 to $0.50 per share, up 52% from the $0.33 per share paid in 2008. Subject to further action by the Company's Board of Directors, the Company anticipates the first quarterly dividend to be paid in January 2010 at a targeted quarterly rate of $0.15 per share. Stryker Corporation is a dividend achiever, which has raised distributions for 16 consecutive years in a row. The stock yields 1.30%, based off its new quarterly rate of 15 cents/share.

Middlesex Water Company (MSEX), which operates as a food company in North America and internationally, increased its quarterly dividend by 2.5% to 20.50 cents per share. Middlesex Water Company is a dividend champion, which has raised distributions for 36 consecutive years in a row. The stock currently yields 4.60%.

Inergy Holdings GP LLC (NRGP), the general partner of propane supplier Inergy LP, on Monday said it will increase its quarterly cash distribution 9 percent for the three-month period ended Sept. 30. The company will raise its distribution to 85 cents per limited partner unit, up from the previous quarter's distribution of 78 cents per limited partner unit. Separately, Inergy GP LLC (NRGY), managing general partner of Inergy LP, said its board of directors increased its quarterly cash distribution to 67.5 cents per limited partner unit for the quarter ended Sept. 30. This represents the 32nd consecutive quarterly increase and an approximate 6.3% increase over the distribution for the same quarter of the prior year. Inergy, L.P., with headquarters in Kansas City, Mo., is among the fastest growing master limited partnerships in the country. The company’s operations include the retail marketing, sale, and distribution of propane to residential, commercial, industrial, and agricultural customers. Inergy Holdings GP LLC (NRGP), currently yields 7% , while Inergy GP LLC (NRGY) yields 8.80%.

The following stocks announced their intent to raise distributions to shareholders:
Visa, Inc. (V) which operates retail electronic payments network worldwide increased its quarterly dividend by 19% to 12.50 cents per share. The stock currently yields 0.70%.

Strayer Education Inc. (STRA), which provides various academic programs in traditional classroom courses and online via the Internet, increased its annual dividend by 50% to $3 per share. Strayer Education Inc. has consistently raised distributions since 2005. The stock currently yields 0.90%.

SouthWest Water Company (SWWC), which provides water and wastewater related services principally in the United States, doubled its quarterly dividend to 5 cents per share. SouthWest Water Company is a dividend achiever. The weird part here is that the previous dividend of 2.5 cents/share was below the quarterly dividend of 6 cents/share paid in 2008. The stock currently yields 3.70%.

American Financial Group (AFG), which engages in property and casualty insurance business in the United States, increased its quarterly dividend by 5.8% to 13.75 cents per share. American Financial Group has consistently raised distributions only since 2006. The stock currently yields 2.10%.

Full Disclosure: None

Relevant Articles:

- Another aristocrat raising distributions
- Four Notable Dividend Increasers in the news
- The return of the financial dividends
- Best Dividend Picks for 2009, 3Q update

The Best Trades could be the ones not entered

noreply@blogger.com (Dividend Growth Investor) — Thu, 29 Oct 2009 03:13:00 PDT

I often analyze individual stocks on the dividend growth blog. Some if not most of the times however, after guiding readers through the company story I end up stating that the stock is either a hold or sometimes even a sell. This irritates most investors, who see the practice of reviewing a stock which results in a negative or neutral recommendation as a waste of their time.

I definitely understand the frustration for those readers. Most investors typically want to be told what to buy, when to buy it and how much they would make when selling. This strategy always works in get rich quick books, but it seldom generates any profit in the real world. The reason why so many investors lose money on a consistent basis is because they fail to educate themselves and instead end up following gurus which don’t even trade the ideas they are pitching to their followers.

The value of a stock analysis is that it should give investors ideas about what they want to see in a stock, versus what they don’t want to see in a stock. A prime example is my analysis of Paychex (PAYX), which is overvalued relative to its competitor Automatic Data Processing (ADP). In addition to being overvalued, Paychex currently distributed most of its earnings out as dividends, which is clearly unsustainable in the long run. Thus, the relatively higher dividends yield of 4% on PAYX versus 3.3% for ADP is not enough to compensate the risk of a potential dividend cut.

Another reason why a neutral stock analysis is beneficial is that it provides investors with some insight into a company which could be temporarily overpriced. Since entry price matters to some extent, it would be unwise to pay top dollar for stocks, when there are companies with similar characteristics that are priced attractively. An investor, who does his or her homework early in the game, would be well prepared from reading the analysis to enter a position on dips, should the stock fall on general market weakness or on negative news.

The urge for constant action and the inability to wait for the best entry setups might be the difference between making money and losing money in the long run. Jesse Livermore, a famous trader from the 1920’s is known for his saying that “The big money is made by sitting, not thinking. Men who can both be right and sit tight are uncommon”

I completely agree with this assertion. Investors who purchased stocks in the late 1990’s when dividend yields were at their lowest have suffered inferior returns over the past decade. Other investors who finally saw some gains in their portfolios in 2009 might have been quick to take a profit too early, thus missing out on the majority of the rally off the March 2009 lows.

Even if you purchased great stocks such as Johnson & Johnson (JNJ) or Procter & Gamble (PG) while their yields were at multi year lows, you would have seen no capital growth at best, although your dividend income would be higher than it was a decade ago.

At the end of the day what truly matters is that investors develop a sound strategy that fits their personality and go with it. The strategy should incorporate entry and exit rules, diversification and hopefully some sort of position sizing methods such as dollar cost averaging.

This blog post was included in the Carnival of Personal Finance #230 – New Site Edition

Full Disclosure: Long ADP, JNJ and PG

-Paychex (PAYX) Dividend Stock Analysis
-Automatic Data Processing (ADP) Dividend Stock Analysis
-Emotionless Dividend Investing
-Are High Dividend Stocks worth it?

Five Dividend Stocks for long-term dividend growth

noreply@blogger.com (Dividend Growth Investor) — Tue, 27 Oct 2009 03:00:00 PDT

In Six Dividend Stocks for current income I provided a list of higher yielding dividend stocks, which investors could use for current income. With a high current yield, the stock list could provide a decent stream of dividend income for retired individuals. There lies another problem however.

Most younger investors tend to ignore dividend stocks, which typically are mature, slower growing companies with dependable cashflows a portion of which are distributed back to investors. Younger investors view these dependable income stocks as boring and too slow moving, which don’t have anything better to do with their cashflows but send them back to owners in the form of dividends. Instead these investors prefer investing in growth stocks with high price earnings ratios and high expectations for growth. While most companies that distribute a portion of their profits in the form of dividends realize that double-digit growth cannot last forever, most growth stocks sell at rich valuations, supported by analysts who have perfected the art of predicting high growth rates for decades to come. As soon as the music stops, these growths stocks stumble, dragging investors fortunes with them.

On the other hand the dividend stocks would have kept growing, albeit at a slower pace, and would have kept sending a higher stream of dividend income to shareholders, to be used at their own discretion. Many investors do not realize that unlike capital gains, dividends are real cash that bolsters your return. Dividends have also accounted for 40% of the annual average total returns of the S&P 500 over the past century. A company, which grows its dividend year after year, could end up paying a double-digit yield on cost to long-term investors over time.

Companies that regularly pay dividends impose a discipline on managers to treat cash very carefully and thus make better decisions by adopting projects, which would generally improve the bottom line, without sacrificing return on equity.
Thus dividend stocks, which consistently grow their payments, should be in every investor’s portfolio, irrespective of their age. A stock that regularly grows its distributions provides an inflation proof source of income, which is much more reliable than the Consumer Price Index, on which TIPs (TIP) rely on.

A stock could afford to consistently raise distributions by selling products, which have a strong brand image, and thus are not easily substituted by others. Examples of such companies include Procter & Gamble (PG), Clorox (CLX), Pepsi Co (PEP), Wal-Mart (WMT) and Emerson Electric (EMR).

The Clorox Company (CLX) manufactures and markets a range of consumer products such as bleaches; cleaning products; water-filtration systems and filters; auto-care products; plastic bags, wraps, and containers; Over the past decade the company has managed to boost earnings per share at a rate of 13.60% annually. Clorox has paid uninterrupted dividends increased payments to common shareholders every year for 31 years. Dividends have increased at an average rate of 8.60% annually since 1999. Check my analysis of the The Clorox Company (CLX).

Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. The company operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. The company has been able to increase earnings at an average rate of 8.40% annually over the past decade. Emerson Electric Co. has increased payments to stockholders for 52 consecutive years. The ten-year dividend growth rate is 7% per annum over the past decade. Check my analysis of Emerson Electric Co. (EMR).

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. The company manufactures, sells, and distributes Pepsi-cola beverages and is enhancing its distribution channels through its acquisition of key bottlers. The company has been able to increase earnings at an average rate of 9.90% annually over the past decade. PepsiCo has been consistently increasing its dividends for 36 consecutive years. Dividend payments have increased by an average rate of 13.50% annually since 1999. Check my analysis of PepsiCo, Inc. (PEP).

The Procter & Gamble Company (P&G), together with its subsidiaries, provides branded consumer goods products worldwide. The company operates in three global business units (GBU): Beauty, Health and Well-Being, and Household Care. The company has been able to increase earnings at an average rate of 12.20% annually over the past decade. Procter & Gamble has been increasing its dividends for the past 53 consecutive years. Dividend payments have increased by an average of 10.90% annually over the past 10 years. Check my analysis of Procter & Gamble (PG).

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International. The company has managed to deliver an impressive 11.60% average annual increase in its EPS. Wal-Mart Stores has consistently increased dividends every year for 35 years. Dividends have increased at an average rate of 18.90 % annually since 1999. Check my analysis of Wal-Mart Stores, Inc. (WMT).

While these companies are poised to deliver strong long-term dividend growth, don’t throw caution away. These stocks should be a part of a diversified dividend portfolio with at least 30 components in it.

Full Disclosure: Long CLX, EMR, PEP, PG and WMT

Relevant Articles:

- The Dividend Edge
- The case for dividend investing in retirement
- Clorox (CLX) Dividend Stock Analysis
- Reinvest Dividends Selectively

Is now the time to sell your dividend stocks?

noreply@blogger.com (Dividend Growth Investor) — Fri, 23 Oct 2009 01:57:00 PDT

The strong bullish move off of March 2009 lows has lifted many stocks, thus creating large unrealized paper gains for many dividend investors. While prices have enjoyed a steep run-up, dividend yields, which move inversely to prices, have declined in the process. Many dividend investors are now wondering if they should simply lock in their gains in stocks which are not yielding that much relative to others.

As a dividend investor, one of the items in my entry criteria is to require at least a 3% initial yield when purchasing a stock. Back in the first half of 2009, there were plenty of good quality dividend stocks that fit these criteria. Nowadays even some of my favorites such as PepsiCo (PEP) and Aflac (AFL) are yielding a little less than 3%. Now that those holdings are yielding less than my entry yield criteria, the question is whether I should hold on to them, or switch to stocks with higher current yields. If I were to do this, I would instantly increase my dividend income. If I didn’t however, that wouldn’t really hurt my income either.

First, the reason why I won’t do this is because I am a long term investor. I buy stocks and plan to hold on to them for the long run, or until a company cuts dividends. Over time I expect that a dividend grower would deliver a solid yield on cost. In other words if I purchased Johnson & Johnson (JNJ) at $50 in March, my yield on the original investment would have been 3.68%. After the company raised its annual dividend however to $1.96/year, my yield on cost increased to 3.92%. If JNJ raises distributions at 6% annually for the next 12 years, my yield on cost would double to 8%. More often than not however, the current yield on Johnson & Johnson (JNJ) would remain between 2% and 3% over the next decade. That is, if Johnson and Johnson pay a $4 dividend in one decade, and the stock yields 2%, the stock price would be $200. Most dividend yield chasers would be ignoring the stock simply because the yield is too low. At that moment however, my yield on cost would be 8%, and I wouldn’t care as much about the current yield, except when reinvesting distributions.

Therefore it is important to distinguish between yield on cost, and current yield. If you purchase a stock whose dividend payment increases over time, chances are that your yield on cost would be increasing. Thus, even if the current yield drops to 2%, one should not consider selling. Another example in this situation is Aflac (AFL), which could have been purchased around $12 at its lows in March, yielding about 10%. Despite the fact that the stock is up over 300% since that point and yielding 2.4% currently, this investment would still be yielding 10% on cost to the investor who bought at the time.

Second, you have to take into account the dividend yield and dividend growth characteristics in addition to evaluating the sustainability of the dividend. If you purchased Procter & Gamble (PG), at prices between $45 and $50, your yield on cost is somewhere between 3.50% and 3.90%, despite the fact that the stock currently yields 3.10%. The ten year dividend growth rate for this Cincinnati based manufacturer of consumer goods is 10.60%. Using the rule of 72, the company would double your yield on cost in 7 years. In addition to that the dividend payment is adequately covered from current earnings and cash flows per share.
Let’s assume that you decided to sell your Procter & Gamble (PG) stock today for a higher yielding company such as AT & T (T), which currently yields 6.30%. While you would essentially double your dividend income overnight, you would have to note that AT&T (T) has grown its distributions by 5.3% annually over the past decade. In addition to that, the payout ratio of the telecom company is approaching 80%, which puts the sustainability of the distribution in danger. Last but not least, by switching from Procter & Gamble (PG) into AT&T (T) would lead to your portfolio being overweight to the telecommunications sector and underweight the consumer staples sector.

At the end of the day it is important to understand that investing is more art than science. Thus, while a strategy might look good on paper, does not mean that it would stand the tests of the battle. It is also a balancing act between several known and unknown variables, such as dividend yield, dividend growth, dividend payout, diversification and dollar cost averaging. If your portfolio consists mainly of high yielding securities, there is a very high probability that the dividend payouts on your investments is high, which increases the likelihoods for a dividend cut, and the opportunities for income growth are limited. It is important to view stocks as ownership portions of businesses, and thus concentrate on selecting only those which the investor believes to have solid fundamentals over time.

Two such companies include Johnson & Johnson (JNJ) and Procter & Gamble (PG). Both companies are leaders in their own markets, and possess strong economic moats.

The Procter & Gamble Company engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has raised distributions for 53 years in a row. (analysis)

Johnson & Johnson engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company has raised distributions for 47 consecutive years. (analysis)

Both companies offer not only great dividend growth potential, but also strong capital gains potential as well for the enterprising long term investor. While investing in the short run is mostly affected by strong emotions such as fear and greed, long term dividend investing is all about evaluating long term business trends and then positioning accordingly.

Full Disclosure: Long AFL, JNJ, PEP, PG and T

Relevant Articles:

- Emotionless Dividend Investing
- Procter & Gamble (PG) Dividend Stock Analysis
- Johnson & Johnson (JNJ) Dividend Stock Analysis
- Should you re-invest your dividends?

Six Dividend Stocks for current income

noreply@blogger.com (Dividend Growth Investor) — Wed, 21 Oct 2009 04:30:00 PDT

Most novice dividend investors typically are under the impression that successful dividend investing entails finding and purchasing the highest yielding stocks. This strategy is flawed, because it does not take into account the sustainability of the dividend. A company, which yields 20%, might generate a much lower yield on cost over time.

I purchased American Capital (ACAS) in 2008 when this business development company was trading at $30 and was yielding 13%. Just a few months later the company suspended its dividend payment, and I sold it immediately. The thing to learn from this example is that investors have to check the sustainability of distributions in light of cash flows generated by the business, the amounts of debt relative to total assets and the amounts of interest expenses. If you find a high yielding stock, which generates enough cash flow growth and has limited amounts of debt, then it could be a buy on the next dip.

While companies are not contractually obligated to share profits with shareholders, it is nice to see when boards increase dividends and declare stock buybacks, This typically sends positive signals about management’s confidence in projected cashflows, generated by the business.
In my portfolios I like to hold stocks with different yield/dividend growth characteristics. I do tend to focus mostly on the sweet spot of dividend investing, where yields are somewhere between 3% and 5% and dividend growth is in the upper single digits or in the double digits.
I do realize however that some investors are interested mostly in current income generation, and not so much about future dividend growth. Thus recommending Wal-Mart with its 2% dividend yield to an investor who wants to generate as much income as possible now might sound ridiculous. Just because one wants to generate as much income as possible however, doesn’t mean that they should throw caution away with the wind. Sustainability of the dividend should be evaluated, in addition to sustainability of the dividend growth. A stock with a sustainable but unchanged dividend, which yields 9% on cost, would produce a lower inflation adjusted income level over time.

In addition to that, most studies of portfolio durability show that one should not spend more than 4% of their portfolio value each year. If you have a dividend portfolio valued at $1 million dollars, which generates $40,000/year in dividend income, and whose dividend growth closely matches the inflation rate, you are ok as long as you don’t spend more than 40,000/year. If you spend more than that, you could end up eating your principal.

Thus, even if you found the highest dividend stock, you should not be spending more than 4% of the starting value of your portfolio each year, adjusted for inflation. If you owned a 10% yielder on a $1 million portfolio, and you spend all your dividend income, you would be in trouble when one of two things happen:

1) The company cuts dividends
2) The company fails to increase dividends to compensate for the eroding value of inflation

I do have several ideas on stocks with sustainable dividends that could also afford to grow them over time.

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company has increased dividends for 15 consecutive years. Check my analysis of this REIT.

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. This dividend achiever has rewarded unitholders with regular distribution increases for 13 years in a row. Check my analysis of this MLP.

Consolidated Edison, Inc., (ED) through its subsidiaries, provides electric, gas, and steam utility services in the United States. This Dividend Aristocrat has raised dividends for 35 years in a row. Check my analysis of Con Ed.

Altria Group, Inc., (MO) through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in the United States. Philip Morris International Inc (PM) on the other hand manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. Before spinning off Kraft (KFT) and Philip Morris International (PM), Altria had an uninterrupted streak of 41 consecutive annual dividend increases. The spun out companies are also likely to return increasing amounts of profits back to shareholders in the form of share buybacks and dividend increases. I like both MO and PM for global exposure to tobacco. Check my analysis of both stocks.

BP p.l.c. (BP) provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. This international dividend achiever has rewarded shareholders with dividend raises for 16 consecutive years. Check my analysis of BP.

In order to increase portfolio longevity, I would also consider at least a 25% allocation to fixed income, which would provide some buffer during bear markets and deflationary environments. In addition to that, having an allocation to lower yielding stocks with higher dividend growth characteristics could also provide a buffer for dividend increases if you are lucky enough to spend more time in retirement. After all, the worlds oldest person on record was Jeanne Calment of France (1875–1997), who died at age 122 years. For a person retiring at the age of 60 or 70, this could mean planning for a 50 to 60 year retirement. Your goal should always be for your money to outlive you, no matter what.

Full Disclosure: Long PM, MO, ED, KMP, O, BP

- High yield stocks for current income
- Best High Yield Dividend Stocks for 2009
- Yield on Cost Matters
- The Sweet Spot of Dividend Investing

Another aristocrat raising distributions

noreply@blogger.com (Dividend Growth Investor) — Mon, 19 Oct 2009 02:43:00 PDT

With the market up strongly year to date after hitting a multiyear bottom in March, it is hard for investors to get excited about current dividend yields of 3%-4%. It is even harder to convince an investor that a 3% yielder which manages to raise distributions by 10% annually over the next 7 years would lead to a yield on cost which is twice the current yield right now. Just a few months ago however, most investors realized that dividend income is always positive, even in a bear, after stocks tumbled over 50% off their all time highs that were hit in 2007. It is a great to achieve at least some return on investment, even when it feels that the whole world is tearing apart. Companies which maintain and even increase dividends show their confidence in their ability to generate enough in future earnings in order to cover the dividend raises. An especially bullish sign is when a company which has rewarded shareholders with a dividend raise for 37 consecutive years, raises dividends.

Several companies raised their distributions last week:

PPG Industries (PPG), which manufactures and supplies protective and decorative coatings, increased its quarterly dividend by 1.9% to 54 cents per share. PPG Industries is a dividend aristocrat, which has raised distributions for 38 consecutive years in a row. The stock currently yields 3.40%.

Duncan Energy Partners L.P. (DEP), which engages in gathering, transporting, marketing, and storing natural gas, as well as in transporting and storing natural gas liquids (NGLs) and petrochemicals in the United States, increased its quarterly dividend by 4.8% to 44 cents per unit. Duncan Energy Partners L.P. has raised distributions since 2007. The units currently yield 8.20%.

Enterprise GP Holdings L.P., (EPD), a midstream energy company, which provides services to producers and consumers of natural gas, natural gas liquids (NGL), crude oil, and petrochemicals in the continental United States, Canada, and Gulf of Mexico, raised its quarterly distributions to 51.5 cents/unit. This distribution represents a 13.2 percent increase from the $0.455 per unit distribution declared with respect to the third quarter of 2008. Enterprise GP Holdings L.P., is a dividend achiever, which has raised distributions since 2000. This MLP currently yields 7.40%.

Goodrich Corporation (GR), which engages in the supply of aerospace components, systems, and services worldwide, increased its quarterly dividend by 8% to 27 cents per share. Goodrich Corporation has only raised distributions since 2007. The stock currently yields 1.90%.

Full Disclosure: None

Relevant Articles:

- Four Notable Dividend Increasers in the news
- Emotionless Dividend Investing
- Debt coverage for sustainable dividends
- McDonald’s Delivers Strong Dividend Growth

Selling Options is no free lunch

noreply@blogger.com (Dividend Growth Investor) — Fri, 16 Oct 2009 04:00:00 PDT

Options are contracts that give their owners the right but not the obligation to buy (calls) or sell (puts) securities at a predetermined price (strike) at a predetermined period in the future.
If an investor is bullish on Microsoft (MSFT) when the stock is trading at $20/share, he/she could purchase calls and profit at options expirations week if the stock price increases above the strike price plus the price paid for the call. The options price consists of time value/time decay and an intrinsic value, which is the difference between the strike price and the current price of the security. Overall in quiet markets the time decay decreases the values of options. The time decay portion of the options price is sensitive to changes in volatility and could increase if volatility increases however.

Most investors believe that by selling covered calls or cash secured puts they could achieve additional income from the securities they own or plan to own. This additional return comes from taking on the additional risk of potentially exercising your options, which could hurt your total returns.

The S&P maintains two options indexes based off the S&P 500. One of them incorporates selling covered calls against the index, while the other incorporates selling naked puts against it.

The CBOE S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write (covered calls) strategy on the S&P 500 Index. The methodology of the BXM Index is based on (1) buying an S&P 500 index portfolio, and (2) writing the near-term S&P 500 "covered" call option, generally on the third Friday of each month. The call is held until it is cash-settled on the 3rd Friday of the following month, at which time a new one-month call option is written.

Ibbotson Associates tested the strategy of selling covered calls against S&P 500 for the 16-year period between 1988 and 2006. According to the findings, the buy write index returned 11.77%, versus 11.67% for the S&P 500 index. The buy-write strategy managed to slightly outperform the broad market with lower volatility, as defined by standard deviations. The standard deviation for the buy write index was 9.29%, which was much lower than the 13.89% volatility of the S&P 500.

Overall for the past 23 years ending in March 2009, the buy-write index did manage to slightly outperform the S&P 500.

The covered calls strategy typically outperforms the underlying in flat and weak markets, while under performing the underlying in strong bull markets.

The chart below shows that as a percentage of the underlying value, premium income on covered calls has ranged between 0.5% to 4.50% and averaged close to 1.70%/month. Investors who dabble in options often see that they could purchase a stock at $20 and then sell a covered call at the next strike for $0.50, which represents a nice 2.50% return. Investors then start projecting and annualizing these kinds of returns. As evidenced by the first chart, these premiums are simply a compensation for foregoing any gains beyond the strike price, while fully participating in any declines in the underlying prices. They did not lead to the generations of any excess returns with any consistency relative to the cumulative performance of the S&P 500.

There are several funds which employ covered call techniques on S&P 500 index. One of the longest standing ones is S&P 500 Covered Call Fund Inc. (BEP). Over the past 4 years it has had a total return of almost zero, despite the fact that it keeps distributing $2 in dividends every year.

Thus on average, it is safe to assume that unless investors possess above average timing skills, selling covered calls is no free lunch, despite what gurus and self proclaimed experts claim this “safe” technique to be.

Full Disclosure: None

- The pros and cons of selling covered calls on dividend paying stocks

- Covered Calls for additional income

- An alternative strategy to covered calls

- Covered Call Options Strategy for cutting losses on USB

Debt coverage for sustainable dividends

noreply@blogger.com (Dividend Growth Investor) — Wed, 14 Oct 2009 03:09:00 PDT

Most companies use debt for a variety of reasons in their operations. It could be either short term or long-term obligations. If there’s anything the 2007-2009 financial crisis has taught us, it is that excessively leveraged companies could easily blow up after a chain of negative events. Thus it pays to know what the debt situation for a particular company you are investing in actually is.

Some investors typically focus on debt to total assets to gain a perspective on the amount of the leverage the company has. While this method is widely accepted by some investors, I believe that it has some shortcomings, which might prevent investors from seeing the bigger picture. Most importantly comparing debt to total assets does not tell whether a company could service its debt obligations or not.

When you decide to get a loan from your bank, one of the most important questions they have is what your income has been, rather than provide a list of your assets and debts. Only when you provide a proof that you could service a new line of credit, would your banker provide you with a loan.

One method that I prefer is comparing annual earnings before interest and taxes to the amount of annual interest expense paid. While this ratio would vary for different types of enterprises, it should never the less provide an important glimpse to a company’s ability to service its debts when its trended over several years.

I highlighted the coverage ratios for the 51 components of the Dividend Aristocrats Index. Some of the members of this dividend basket have already cut distributions so I expect them to be booted out by the end of 2009. Here’s the list, which includes company name, ticker, industry, as well as the past 3 years worth of coverage ratios for each company:

Dividend investors should generally look for a higher coverage ratio of interest payments. A lower coverage indicates that a decline in earnings could generally make it difficult for the company to service its debt, which could not only jeopardize its dividend payments but also could lead to bankruptcy down the road.

Full Disclosure: I have a long position in most of the stocks mentioned in this list

Relevant Articles:

- Six things I learned from the financial crisis
- Dividend Aristocrats List for 2009
- Dividend Cuts - the worst nightmare for dividend investors.
- Dividend Investing Resources

Four Notable Dividend Increasers in the news

noreply@blogger.com (Dividend Growth Investor) — Mon, 12 Oct 2009 02:33:00 PDT

Investors have typically concerned themselves about maximizing total returns over time. Total returns are the sum of capital gains and dividends received. Over the past two years markets have produced negative total returns to investors, which is especially troublesome for those who were planning to retire in the coming few years. Instead of focusing on total returns however, future retirees could focus on generating sustainable dividend income from their portfolios, which is much less volatile that capital gains. In fact, over the past decade dividends represented the only income that investors have generated in the markets. In essence, stockholders are “paid for waiting” until their portfolios rebound. Especially valuable are those dividend stocks that not only pay reliable dividends, but also raise them regularly. I have highlighted four such companies, which announced their intentions to reward stockholders with dividend raises:

RPM International Inc. (RPM), which operates as a food company in North America and internationally, increased its quarterly dividend by 2.5% to 20.50 cents per share. RPM International Inc. is a dividend aristocrat, which has raised distributions for 36 consecutive years in a row. The stock currently yields 4.30%.

ConocoPhillips (COP), which is the fourth largest integrated oil and gas company in US, increased its quarterly dividend by 6% to 50 cents per share. This is the ninth consecutive annual dividend increase for ConocoPhillips. The stock currently yields 3.80%.

ONEOK Partners, L.P. (OKS) engages in the ownership and management of natural gas gathering, processing, storage, and interstate and intrastate pipeline assets, as well as natural gas liquids (NGLs) gathering and distribution pipelines. This Master Limited Partnership increased its quarterly distributions by 0.9% to $1.09 per unit. ONEOK Partners has consistently raised distributions only since 2006. The MLP’s units currently yield 8.10%.

"The distribution increase reflects the benefit of our recently completed growth projects, which have increased our fee-based earnings, as well as an improved capital market environment," said John W. Gibson, chairman and chief executive officer of the general partner of ONEOK Partners. "As volumes behind these projects continue to ramp up, we anticipate additional opportunities to increase our distributions in the future."

Reynolds American Inc. (RAI), which operates as a food company in North America and internationally, increased its quarterly dividend by 5.9% to 90 cents per share. Despite the fact that Reynolds American Inc. is not a consistent dividend raiser, it has increased distributions by 132% over the past decade. The stock currently yields 7.70%.

ConocoPhillips (COP) looks like an interesting candidate to add to my watchlist. I would keep current on any events in the company and would look to initiate a position there on dips, provided that such opportunities arise.

Full Disclosure: Long RPM

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- 29 stocks with sustainable dividends
- Dividend Aristocrats List for 2009
- Master Limited Partnerships (MLPs)
- Eight Dividend Increases in the news

SYSCO Corporation (SYY) Dividend Stock Analysis

noreply@blogger.com (Dividend Growth Investor) — Fri, 09 Oct 2009 01:34:00 PDT

SYSCO Corporation, through its subsidiaries, markets and distributes a range of food and related products primarily for foodservice industry.
SYSCO Corporation is a dividend champion as well as a component of the S&P 500 index. It has been increasing its dividends for the past 38 consecutive years. For the past decade this dividend growth stock has delivered an annual average total return of 6.20 % to its shareholders.

At the same time the company has managed to deliver an 11.20% average annual increase in its EPS since 2000. For the next two years analysts expect EPS to increase to $1.81 and $1.92 respectively. The main problem for the company right now is the slowdown in sales at US restaurants, which account for more than 60% of revenues for this food distributor. Other than that the growth prospects for the stocks exist not only through internal growth but also through acquisitions as well. Building regional distribution centers and better inventory management are two of several initiatives that the company is applying for internal growth. International expansion could also be another opportunity for Sysco.

The returns on equity have increased slightly over our study period to a very respectable 30.80% in 2009.

Annual dividend payments have increased by an average of 20.30% annually over the past 10 years, which is much higher than the growth in EPS. Some of it came from stock buybacks and some of it was a result of expansion in the dividend payout ratio.

A 20% growth in dividends translates into the dividend payment doubling almost every 3 and a half years. If we look at historical data, going as far back as 1975, we would see that Sysco has indeed managed to double its dividend payment every three and a half years on average.

Over the past decade the dividend payout ratio has more than doubled to 65% in 2008. While the dividend is well covered based off current cash flow/share, the company would most probably have to slow down or stop dividend increases until earnings growth picks up again. The stock buyback program could also be put on hold as a result of this as well. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I believe that SYSCO Corporation is attractively valued with its low price/earnings multiple of 14, as well as an above average dividend yield at 3.80%. The high dividend payout ratio makes this otherwise great stock a hold for the time being however. I would only consider investing in Sysco at this time as part of a dividend reinvestment program.

Full Disclosure: Long SYY

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- Seven notable dividend increases
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Emotionless Dividend Investing

noreply@blogger.com (Dividend Growth Investor) — Wed, 07 Oct 2009 04:00:00 PDT

Investors often fall in love with stocks, which are synonymous with innovation, growth and have delivered strong total returns up to a point. It is easy to fall in love with a stock, which everyone else is touting as the next great thing, whose products you use or is one which has made many investors rich.

The main problem with such attitude however is that it could cause investors to throw their carefully researched strategies out of the window and engage in careless speculating. This could cause severe losses of capital over time.
Investors have suffered two major blows over the past decade – the tech stock crash in 2000-2002 and the financial meltdown in 2007-2008. The first occasion was a complete euphoria for anything related to technology or dot coms. College dropouts were selling stock of their money losing eyeballs attracting online ventures in IPOs, which were valued at billions by Mr. Market. Needless to say the tech boom turned into a bust that left millions of investors suffering tremendous losses. Even investors in great companies such as Microsoft (MSFT) and Intel (INTC), which were enjoying double digit revenues and earnings growth even after the meltdown, suffered huge losses because they overpaid for future growth.

The financial meltdown was characterized by investors who were holding on to safe income investments such as Bank of America (BAC), Citigroup (C) and General Electric (GE), which had a long history of consecutive dividend increases. As these stocks began their slide, they cut their distributions and had to take billions in aid from the federal government. Investors who kept a cool head and didn’t chase high yielding stocks blindly, right before they cut their dividends would have saved a lot of precious capital to be used for later.

The point being taken is that entry price paid for stocks does matter. If you mindlessly reinvest dividends or dollar cost average your way into an index fund you would end up paying top dollar for the inflated future income stream from these investments. Thus, having strict entry criteria might prevent you from chasing hot stocks and losing a lot in the process. This entry criteria could also prevent you from investing in companies, simply because you like their brand or your hope that their business would turn up for the better. Even great brands such as Johnson & Johnson (JNJ) or Procter & Gamble (PG) were not good buys when they traded at more than 20 times earnings and yielded only 1% in the early 2000s. There were other companies, which yielded much more than that and traded at lower price to earnings multiples that should have been on investors’ radars. It is better to sit in cash than overpay for stocks and then have to wait for a decade before you start generating any meaningful return on your investments.

One also needs to have a sell policy, which lets you out of a losing position no matter what. When one buys a stock because it pays a stable dividend, it does not make sense for them to hold onto the stock if the company eliminates its streak of 30 consecutive distribution increases while citing the weak economy. When you take the loss, you would start thinking more clearly. If you hope that it would turn better, you would lose money in the process. When Citigroup (C) cut its dividends for the first time on January 15, 2008 the stock closed at $26.94. Investors who sold at the time would have saved themselves from huge losses in the process.

At the end of the day, only the disciplined dividend growth investor who is careful not to overpay for stocks, and has the discipline to sell when some of his criteria are no longer intact, would be able to generate a sufficient income stream for their future needs.

Full Disclosure: Long JNJ and PG

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- General Electric (GE) Cuts the Dividend
- Bank of America (BAC) Dividend Analysis
- Reinvest Dividends Selectively
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The return of the financial dividends

noreply@blogger.com (Dividend Growth Investor) — Fri, 02 Oct 2009 01:30:00 PDT

The financial crisis lead to dividend cuts amongst several prominent dividend payers such as Bank of America (BAC), US Bancorp (USB) and BB&T Corp. (BBT). Over the past few weeks however, several financial companies announced that they might reconsider their current dividend policies and start raising distributions in the near future.

US Bancorp’s (USB) CEO is reviewing the company’s dividend payout, after it paid off $6.6 billion in TARP money back to the US Treasury."You will see us take action in the near-term that will be favorable," to the dividend, the company’s CEO said. The company cut dividends in March by 88% and is currently paying a quarterly dividend of 5 cents/share.

BB&T’s (BBT) President and CEO Kelly King informed shareholders the bank will "revist dividend level as soon as appropriate". The company cut its dividend by 68% in May 2009 in order to be able to repay the US Treasury. In addition to that the Winston-Salem, North Calorila based banking institution sold $1.5 billion in stock.

JP Morgan’s (JPM) CFO was a little less optimistic about the future dividend prospects of his company, citing that the company’s goal is to restore dividend only if economy doesn't "double dip". Despite the fact that he is still cautious on restoring the dividend, the CFO said the bank could raise its dividend to $0.75-$1.00/share. The company cut its dividend by 87% to 5 cents/share in February 2009.

Analysts are also expecting Pfizer (PFE) to increase dividends as well in the near future. Deutsche Bank analysts expect Pfizer Inc to increase its dividend in December. Deutsche Bank sees an increase of 15 percent to 25 percent. Pfizer cut its dividend by 50% in January in an effort to conserve cash in order to pay for its acquisition of Wyeth (WYE).

While I am generally very skeptical about companies which cut distributions, I view companies that begin raising distributions within a year of the cut very positively. It is too early to get excited about the companies listed above however. As long as they fail to actually increase distributions by sending bigger checks to shareholders, then the prospect of them raising dividends is a pure speculation.

Full disclosure: None

- BB&T Corporation (BBT) Stock Dividend Analysis
- Should you sell after a dividend cut?
- Is Pfizer (PFE) a value trap for investors?
- US Bancorp (USB) cuts its dividend by 88%

$50 Tradeking Promotion

noreply@blogger.com (Dividend Growth Investor) — Thu, 01 Oct 2009 06:38:00 PDT

Tradeking, which is one of the best rated online discount brokers in the US, is offering a $50 bonus to new customers who open an account with them by October 31. In order to be eligible for the bonus, you have to do the following things:

1) Use this link to access the special promotion, which would land you to a special page:Open a TradeKing account today and get a $50 signing bonus!

2) When you open and fund your account with at least $2,500 and make your first trade within 180 days of account opening, you will receive a $50 bonus deposited into your account.

3) You have to be a new client to participate in this offer.

Open a TradeKing account today and get a $50 signing bonus!

Here's what the offer page says:

"To qualify for this offer, new accounts must be opened and funded with $2,500 or more. Account funding must occur within 30 days of account opening, and one trade must be executed within 180 days of account opening, for account to qualify. Offer is not transferable or valid in conjunction with any other offer. Open to US residents only. One offer per household. TradeKing can modify or discontinue this offer at anytime without notice. The minimum funds of $2,500 must remain in the account (minus any trading losses) for a minimum of 6 months or the credit may be surrendered. Other restriction may apply."

Best Dividend Picks for 2009, 3Q update

noreply@blogger.com (Dividend Growth Investor) — Thu, 01 Oct 2009 01:53:00 PDT

Back at the end of 2008, I was invited to participate in a stock picking competition by selecting 4 stocks. At the time I simply included the highest yielding stocks in my portfolio – Con Edison (ED), Realty Income (O), Phillip Morris International (PM) and Kinder Morgan (KMP). I believe that as a whole, these stocks would provide dependable income for individuals seeking high current income today. These stocks also possess strong dividend growth characteristics as well, which is essential for investors to keep up with inflation if they spend all of their distributions in a given year.

You could find the reasons for my stock selections below:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company is widely held among dividend investors, and is known as the “Monthly Dividend Company”. Since Realty Income went public in 1994 it has raised dividends consistently, often more than three times per year. Some investors are concerned that Realty Income has a high dividend payout ratio, which stops them from purchasing its shares. The truth is that real-estate investment trusts have to distribute all of their earnings to shareholders in order to avoid being taxed by the IRS. Thus, a more useful gauge for Realty Income’s dividend coverage is its Funds from Operations, which includes earnings per share and certain non cash items such as depreciation expense for example.
This dividend achiever currently yields 6.5%, and is up 18.8% year to date.

Consolidated Edison, Inc., (ED) through its subsidiaries, provides electric, gas, and steam utility services in the United States. People still keep using electricity at the same rate even during recessions, as do businesses as well. This being said, Con Edison’s revenues so far this year have been lower, in comparison to their levels from last year due to the overall weakness in New York’s economy as a whole. The company also recently managed to receive a lower than anticipated increase in its rates to customers. In addition to that there is some uncertainly about the utilities sector as a whole and the smart grid project, which would turn out to be very costly, especially if government subsidies do not cover a major part of those projects. I do like the fact that Con Ed has raised dividends for 35 consecutive years, despite the fact that raises have come at a 1% annual rate as of recently. This dividend aristocrat also spots a healthy 5.7% yield, which a good compensation if you seek current income for the next 5 - 10 years. The stock is up 11.0% year to date.

Philip Morris International Inc (PM) manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. The company was spun out of Altria Group (MO) in 2008. While it does face declining demand in Western Europe, which accounted for a little less than 50% of its operating income, the company could benefit from growth in emerging markets such as China or India as well as from strategic acquisitions. Add in to that the strong shareholder focused culture of Altria Group, which has always tried to deliver strong and consistent dividend growth and buybacks, and you have a recipe for success. Tobacco usage is not going to stop just like that no matter how much taxes are being levied on the products. The stock currently yields 4.8%, and is up 16.4% year to date.

Kinder Morgan, L.P. (KMP) owns and manages energy transportation and storage assets in North America. The company’s business is all about transporting oil and natural gas in the US, and thus it is not as affected from the rise and fall of energy prices as major producers such as Exxon (XOM) or Chevron (CVX) typically are affected. MLP’s in general are mostly indifferent to fluctuations in commodity prices because they are paid to transport not produce commodities. MLP’s like Kinder Morgan (KMP) typically receive a fixed fee for moving a product over a certain distance through their pipelines. In addition to that there is little competition between pipeline companies for business, as they are almost monopoly like businesses. Thus, their revenues tend to be rather stable. Kinder Morgan is eyeing expansion, which would be accretive to distributable cash flows per unit for the near future.
Kinder Morgan has raised distributions for over a decade, and as such it has been included in the dividend achievers index. The company’s units currently yield 7.7%, and are up 25.7% year to date.

Year to date the portfolio has produced a total return of 17.99%, which is not too bad for a conservative basket of stocks. The price return is only 12% however, which goes on to show that holding dividend stocks during a downturn could be especially rewarding if distributions get reinvested at lower prices.

Check out the performance of the other bloggers year to date returns in the table below:

Rank Return

Intelligent Speculator 73.05%

WildInvestor 56.78%

Four Pillars 44.26%

Wheredoesallmymoneygo 43.01%

The Financial Blogger 24.49%

Dividend Growth Investor 12.00%

Million Dollar Journey 8.49%

My Traders Journal -3.16%

ZachStocks -13.17%

I would like to emphasize the fact that successful dividend investing is a long-term process. I strongly doubt that a time frame of less than 15 years is indicative of whether the performance of the stock picks above is sustainable or not. Having a diversified portfolio of at least 30 individual companies from several sectors, sizes and locations is essential in order to be diversified and avoid taking unnecessary risks. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today's post.

This post was included in the Carnival of Personal Finance Edition #227

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Utility dividends for current income

noreply@blogger.com (Dividend Growth Investor) — Wed, 30 Sep 2009 04:30:00 PDT

Electric, Gas and Water utilities have always been traditionally regarded as income stocks by investors. Their high current yields, and the relative stability of their distributions made them a preferred choice for investors who are seeking current income from their assets.

Utilities typically pay out a large portion of their earnings as dividends, which explains their slow dividend growth and high dividend yields. Most utilities operate as natural monopolies, which guarantees almost no competition in their specific geographic areas. It would be very costly to run two separate electrical grids, and such investment could take many decades to pay off. Thus utilities tend to generate stable earnings and revenues in any economic conditions, as people keep using water, gas and electricity in their daily lives no matter what.

A main risk factor for many utilities is government legislation in regards to greenhouse gases, which could increase their costs over time. Such legislation could force utilities to purchase CO2 pollution allowances, which could cut into earnings. The heavy government regulation could be the driving force behind future growth however. A recent phenomenon has been the smart grid initiative.

The smart grid initiative integrates information and communication technology into electricity generation, delivery, and consumption, making systems cleaner, safer, and more reliable and efficient. While it would be costly to modernize electric grids, there is some stimulus available from the department of energy. The department of energy plans to distribute $3.9 billion in Recovery Act funds for smart grid projects through two funding opportunities. The first provides $3.3 billion for deploying and implementing smart grid technologies across the country. The second provides $615 million for smart grid pilot projects. (Source: Yahoo Finance)

Because of the stability of their cash flows, utilities could afford increasing their dividends for long periods of time. Most utilities that I have stumbled upon have had a history of dividend increases, followed by a steep dividend cut, which is then followed by another string of dividend increases. More often than not however, dividend cuts in the Utilities Sector are followed by dividend increases for several years until the dividend payment reaches or exceeds the previous levels. Because of this cyclical nature of utility dividends I view the sector as more suitable for current income generation that for solid dividend growth. Thus for a younger investor who has more than 2 decades until they plan on living off their dividend income in retirement, I would not recommend a high exposure to utilities.

While current yields on utilities tend to be higher than the yields on S&P 500, dividend growth is much slower, which could erode the purchasing power of your utility dividend income over time. I view utilities stocks similarly to fixed income, as they are very sensitive to interest rates and have stable distributions.

Utility stocks typically lag during strong bull markets as investors chase higher growth prospects. In flat or bear markets however utility stocks do not decline as much and they are further helped by their generous dividend yields.

While it is true that some utilities don’t have a strong history of raising distributions, there are several utilities, which have raised their distributions for more than 25 consecutive years, and thus are part of the dividend champion’s list:

It is important to look at the dividend payout ratios, the EPS trends and the EBIT to interest expense ratio in order to gauge the sustainability of the dividend payment over time. The EBIT to interest expense or coverage ratio is an important indicator which shows whether utilities could afford servicing their debt obligations. While some investors focus only on the debt to asset ratios, I view the ability to service interest payments as an important factor that shows how sustainable the company’s ability to operate as a going concern actually is.

Because of the slow dividend growth, I would not consider initiating a position in utilities stocks yielding less than 4% to 5%.

Full Disclosure: Long ED

This post was included in the :The Carnival of Personal Finance #226 – The AFM Turn’s 5 Edition

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McDonald’s Delivers Strong Dividend Growth

noreply@blogger.com (Dividend Growth Investor) — Mon, 28 Sep 2009 01:42:00 PDT

Several companies raised distributions last week. The most notable raiser was fast food chain McDonald’s (MCD), which surprised investors with a 10% dividend increase. This marked the 33rd consecutive annual dividend increase for this Oak Brook, Illinois based dividend aristocrat.

McDonald's Chief Executive Officer Jim Skinner said, "So far in 2009 we've returned nearly $4.0 billion to shareholders through dividends and share repurchases, bringing total cash returned since the beginning of 2007 to about $15.5 billion. With today's dividend increase, we expect to end the year near the high end of our three-year, $15 billion to $17 billion total cash return target."
Skinner continued, "This achievement reflects the success of our better, not just bigger strategy, which has helped drive sales, profits and, ultimately, cash from operations. Going forward, our philosophy on our use of capital remains unchanged. Our first priority is to reinvest to grow our business and enhance shareholder value. After these investment opportunities, we expect to return all of our free cash flow over the long term through dividends and share repurchases -- while maintaining a strong financial foundation. Today's dividend increase underscores our confidence in the long-term strength of our business and ongoing commitment to returning cash to shareholders."

The golden arches have definitely weathered the economic storm relatively unscattered, with monthly sales consistently marking comparable gains. I recently added to my position in McDonald’s (MCD), as I believe that the company posseses strong dividend growth characteristics. The company has more than doubled its dividends since 2006.

Several other companies announced increase in distributions:

Lockheed Martin Corporation (LMT), Lockheed Martin Corporation engages in the research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services in the United States and internationally., increased its quarterly dividend by 10.50% to 63 cents per share. Lockheed Martin Corporationi has increased its quarterly dividend in each of the past six years. The stock currently yields 2.90%.

Sanderson Farms, Inc. (SAFM), which Sanderson Farms, Inc., an integrated poultry processing company, engages in the production, processing, marketing, and distribution of fresh, frozen, processed, and prepared chicken products in the United States., increased its quarterly dividend by 7% to 15 cents per share. Sanderson Farms, Inc. doesn’t follow a path of regular annual dividend increases that I prefer in a dividend stock.

ConAgra Foods, Inc. (CAG), which operates as a food company in North America and internationally, increased its quarterly dividend by 5% to 20 cents per share. This is the third dividend increase for ConAgra Foods, Inc. since the company cut its distributions in 2006. The stock currently yields 3.50%.

Chimera Investment Corporation (CIM), which invests in residential mortgage backed securities (RMBS), residential mortgage loans, real estate-related securities, asset backed securities (ABS), increased its quarterly dividend by 50% to 12 cents per share. Chimera Investment Corporation is a relativelyshort dividend history, which started in 2007. The dividend payment seems to be fluctuating a lot, which is not something to have when you try to live off your income streams. The stock currently yields 11.80%.

Hatteras Financial Corp. (HTS), which invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed by a U.S. Government agency or issued by a U.S. Government-sponsored entity, increased its quarterly dividend by 4.5% to $1.15 per share. Despite the fact that Hatteras Financial Corp. has only been around since 2008, its dividends have been pretty stable. The stock currently yields 13.90%.

Triangle Capital Corporation (TCAP), which is a private equity and venture capital firm specializing in buyouts, change of control transactions, acquisitions, growth financing, and recapitalizations in lower middle market companies, announced that its board has approved a 2.5% increase in dividends to 41cents/share. Triangle Capital Corporation has increased quarterly dividends since ever since it went public in 2007. The stock currently yields 14.10%.

I would be careful with the last three stocks mentioned, as they distribute most of their earnings out to shareholders, and thus have to depend on stock sales in order to keep growing the business. More stock sales dilute existing shareholders’ interests and could spell trouble if the capital markets freeze for one reason or another. Successful dividend investing is more than just chasing the highest dividend stocks – it’s more about finding a stock that has adequately covered dividends, whose business model could support future dividend increases.

Full Disclosure: Long MCD

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Toronto-Dominion Bank (TD) Dividend Stock Analysis

noreply@blogger.com (Dividend Growth Investor) — Fri, 25 Sep 2009 03:30:00 PDT

Toronto-Dominion Bank, through its subsidiaries, engages in the provision of retail and commercial banking, wealth management, and wholesale banking products and services in North America and internationally. It operates through four segments: Canadian Personal and Commercial Banking, Wealth Management, U.S. Personal and Commercial Banking, and Wholesale Banking. This international dividend achiever and Canadian Dividend Aristocrat has raised dividends for 15 years in a row.

Over the past decade this dividend growth stock has delivered an average total return of 13.20% annually.

The company has managed to deliver a 5.60% average annual increase in its EPS between 1999 and 2008. Analysts expect Toronto-Dominion Bank to earn $4.98 share next year, followed by a 4% increase to $5.17/share in the year after that.

The Return on Equity has recovered from its 2003 lows of 26% and is at a very impressive level at 42%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 20.50% annually since 1999, which is higher than the growth in EPS. Most of the dividend growth came from the expansion in the dividend payout ratio, which more than tripled from 15% in 1999 to 48% in 2008.
A 20 % growth in dividends translates into the dividend payment doubling every three and a half years. If we look at historical data, going as far back as 1973, Toronto-Dominion Bank has actually managed to double its dividend payment every six years on average. The company last raised its dividends in 2008.

The dividend payout ratio has more than tripled from 15% in 1999 to 48% in 2008. In 2002 the company lost money, which is why it is at zero for the year. 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 the Toronto-Dominion Bank is attractively valued at 17 times earnings, yields 3.50% and has an adequately covered distribution. The main issue with this dividend investment is that it has failed to increase its distributions for five quarters in a row. The company has until the last quarter of 2010 to raise its dividend, or otherwise it would lose its dividend achiever status. In the meantime it is a solid hold for me. That is unless you are looking for some exposure to the financial sector for your dividend portfolio. As such TD could be a nice small starter position to consider.

Full Disclosure: Long TD

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