This month I will turn 47. That means I am a few years past the mid-point of my career.  It seems that with each birthday, I think about and plan for retirement a little more.  I have long since resolved that social security will not provide for my needs in retirement (nor was it ever intended to).  I am one of an ever-shrinking group that is still covered by a defined benefit pension plan. So, how should a pension fund figure into my retirement?

A recent CNN Money article asked the question, ’Can you count on those monthly pension checks from your former employer?’ and provided the following five things you need to know:

1. Many pension plans are underfunded.
   By law, company plans must have on hand most of the money promised to employees. This wasn’t an problem until the market turned down.
2. But underfunded doesn’t mean “can’t pay.”
   You’re not necessarily on the hook for the plan’s underfunding. Employers must cover their plans’ deficits.
3. It may, however, mean some changes in how much you’ll get.
   If the plan is less than 80% funded, you won’t have the option of taking the benefit as a full lump-sum payment. And if your plan is less than 60% funded, your company may be forced to freeze it
4. You’re at greater risk of losing your job than your pension.
   A company “can dip into cash reserves to fund its pension,” but if there are no reserves, the firm must cut costs, which may mean layoffs. So, ironically, your pension may be safe at the expense of your job.
5. Still, you ought to have a backup plan.
   While you’re fairly safe on benefits accrued, don’t count on future ones. Your goal should be to save enough for retirement to fill the gap between your estimated expenses and what you’ve earned in your pension.

Up until the Delta pension ran into problems, I (naively) assumed what I was owed from my company’s pension plan was an automatic entitlement. However, events over the last five years have shown that when things go wrong, you may only receive a small portion of what was promised in glossy HR pamphlet.

Looking at number 5. above, “you ought to have a backup plan”, I would go one step further and say, “You ought to have a primary plan.” My retirement plan relies primarily on what I have invested and control, such as my 401(k), IRA  and taxable portfolio. I realize that will likely get something out of my pension plan even if a ‘worse case scenario’ occurs, so I count that portion. As for social security, I don’t even consider it in my retirement plan. If I receive anything from social security, I will just treat it as a bonus.

To achieve my retirement goals, I am investing with a defined asset allocation model looks at all my investments in total. In retirement, your portfolio shifts from an investing mode to an income mode by either selling appreciated (hopefully) assets and/or withdrawing dividends for living expenses. My plan is to build an ever-increasing income stream from bonds and dividend stocks such as:

• iShares Barclays 20+ Year Treas Bond (TLT) – Yield: 4.16%
• Vanguard Short-Term Bond ETF (BSV) – Yield: 3.40%
• Abbott Laboratories (ABT) – Yield: 3.50% – Analysis
• Genuine Parts Co. (GPC) – Yield: 4.80% – Analysis
• Procter & Gamble Co. (PG) – Yield: 3.40% – Analysis

As the old adage goes, ‘Everyone has a plan – failing to plan is planning to fail.’  Retirement planning does not have to be complicated, but not doing it will complicate your retirement.

Full Disclosure: Long ABT, GPC, PG. See a list of all my income holdings here.

Related Posts:

1. 3 Simple Steps For A Successful Retirement
2. Underfunded Pension Plans: The Next Shoe To Drop?
3. What’s Your Retirement Vision?

This article originally appeared on The DIV-Net July 6, 2009.

Linked here is a detailed quantitative analysis of Chubb Corp. (CB). Below are some highlights from the above linked analysis:

Company Description: Chubb Corp. is one of the largest U.S. property-casualty insurers, Chubb has carved out a number of niches, including high-end personal lines and specialty liability lines coverage.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

CB is trading at a discount to 1.) and 4.) above. CB is trading at a 10.1% discount to its calculated fair value of $43.18. CB earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

CB earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. CB earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CB earned a Star for having an acceptable score in at least two of the four Key Metrics measured. CB has paid a cash dividend to shareholders every year since 1902 and has increased its dividend payments for 45 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

CB earned a Star in this section for its NPV MMA Diff. of the $739. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as CB has. If CB grows its dividend at 6.1% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 4.06%. CB earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.

Other: CB is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. CB is a well-managed company that has exhibited sound capital and risk management practices and offers an attractive mix of products. Given its strong balance sheet, CB should command a premium compared to its peers. Risks include a prolonged economic slowdown, competitive pricing pressures and exposure to catastrophe and professional liability claims.

Conclusion: CB earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CB as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $43.18 before CB’s NPV MMA Differential fell to the $500 that I like to see for a stock with 45 consecutive years of dividend increases. At that price the stock would yield 3.24%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.0%. This dividend growth rate is below the 6.1% used in this analysis, thus providing a margin of safety. CB has a risk rating of 1.75 which classifies it as a medium risk stock.

If I were not over-allocated in the financial services sector, CB would be a stock I would give strong consideration to. It  is trading below its buy price of $43.18 and its 3.61% dividend yield would provide excellent near-term cash flow. My one concern is that free cash flow per share peaked in 2004  and has been on a steady decline ever since. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in CB (0.0% of my Income Portfolio).

What are your thoughts on CB?

Related Posts:

1. United Technologies Corp. (UTX) Dividend Stock Analysis
2. Sysco Corp. (SYY) Dividend Stock Analysis
3. Nucor Corp. (NUE) Dividend Stock Analysis
4. Brady Corp (BRC) Dividend Stock Analysis
5. McDonald’s Corp. (MCD) Dividend Stock Analysis

Each Sunday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it’s where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al.

Below are the carnivals that I participated in this week, along with a link to my article:

• Festival of Stocks published: Cardinal Health Inc. (CAH) Dividend Stock Analysis
• Carnival of Financial Planning published: Four Stocks With Strong Dividend Growth Metrics
• Carnival of Money Hacks published: Four Stocks With Strong Dividend Growth Metrics

Articles I enjoyed reading included (in no particular order):

The DIV-Net Featured Articles

• Dividends4Life presented Stock Analysis: Chubb Corp. (CB)
• The Dividend Guy presented Four Signs of Dividend Safety
• Barel Karsan presented Scared Of Debt
• Dividend Tree presented ADM – Stock Analysis for Dividend Growth Portfolio
• Dividend Growth Investor presented Learning from the Young Buffett
• Buying Value presented Proximity and Profits

Articles From DIV-Net Members

• The Dividend Guy presented Dividend Stocks in My Portfolio that Have Raised Dividends
• Dividend Growth Investor presented 12 Dividend Stocks to own in this market
• Barel Karsan presented Building Profits One Site At A Time
• Dividend Tree presented Which High Do You Prefer?
• Buy Value presented Does Stock Price Matter?
• moneygardener presented Walgreen nearly doubles dividend since 2006
• Stock Market Prognosticator presented What Will The End of Newspapers Mean For Blogging?
• Disciplined Approach to Investing presented A Green Shoot That Is Not Less Bad But Actually Good
• Old School Value presented Investment Spreadsheet: How to Use Tutorial
• Triaging My Way To Financial Success presented The Competitive Analysis
• Everyday Finance presented Is Goldman Sachs Responsible for Every Bubble?
• Dividend Basket presented Colgate-Palmolive (CL) sets $0.44 cent quarterly dividend,Paid Dividends Since 1895 uninterrupted!
• BuyLikeBuffett.com presented Lower S&P 500
• 40percent 20years presented The Millionaire Next Door
• Value Investing Pro presented Stocks On The Move 7.6.09

Other Articles

• Morningstar presented Four Investment ‘Rules’ to Ignore
• Oregonlive.com presented 5 tips for picking dividend stocks that won’t fade
• Forbes presented It’s Not Just Buffett Buying Utilities
• SmartMoney presented Dividends at a Discount: 3 Cheap Bond Funds
• The Smart profits Report presented Six Tips For Picking Dividend-Yielding Stocks
• Globe and Mail presented Time is still right to build high-income portfolio

There are some really good articles here, please take time and read a few of them.

(Photo: Sachin Ghodke)

Related Posts:

1. Dividend Stocks In the News: July 24, 2008

Once again it is time for a goals/progress update. I am pleased to report that annualized dividend income rose in June, extending the streak to 4 months after February’s decline. Since I began publicly tracking annualized dividend income in November 2007, it has increased in 18 of the last 19 months.

My goals were defined in this December 1, 2007 Investing Goals post and updated in my 2009 Investing Goals post. Below is an updated version of the table found in the original post.

The above information covers the current month and year-to-date through the current month.

Click here for a Detailed Historical Progress Table.

For the month, annualized dividend income increased $114, and Yield on Cost (YOC) increased 0.01%. These changes were a net of new purchases, dividend changes and sales. Let’s examine each of the these categories:

Purchases: The $224 increase in annual dividend income and (0.10%) decrease in YOC related to the following purchases (yield at the time of purchase):

• $59 Johnson & Johnson (JNJ) 3.50%
• $72 Pepsico, Inc. (PEP) 3.39%
• $93 iShares Investment Grade Corp. Bond (LQD) 5.77%

All the purchases, except LQD, lowered my YOC. As noted in earlier updates, I generally expect YOC to drop each month since most new investments will yield less than my current YOC, and dividend increases will not be sufficient to offset it.

Dividend Changes: The $44 decrease in annual dividend income and (0.03%) decrease in YOC related to the following dividend changes (a=dividend stated in annual terms, q=quarterly, m=monthly):

• $3 Johnson & Johnson (JNJ) $0.46q>$0.49q 0.00%
• $3 Pepsico, Inc. (PEP) $0.425q>$0.45q 0.01%
• ($18) Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) $1.84m>$1.78m -0.01%
• ($4) Vanguard Dividend Appreciation ETF (VIG) $1.08a>$1.03a 0.00%
• ($20) Vanguard REIT Index ETF (VNQ) $2.98a>$2.67a -0.02%
• ($8) Vanguard High Dividend Yield Indx ETF (VYM) $1.38a>$1.29a -0.01%

Sales: The ($66) decrease in annual dividend income and 0.08% increase in YOC related to the following sale:

• ($66) Vanguard Financials ETF (VFH)  0.08%

Looking at the Dividend Changes section above, it is easy to see why holding ETFs/CEFs in my income portfolio does not align with the portfolio’s goal of consistently growing income – 2 individual stocks increased dividends, while 4 ETFs decreased. In June I continued the process of trimming back my ETFs/CEFs income holdings with the sale of VFH. I will continue to reduce my holdings in this area each month.

Based on year-to-date results, I believe my revised estimate of $6,300 of annualized dividend income on December 31, 2009 is still obtainable.

That’s it for this time. The next monthly progress update will be on Saturday, August 8th.

(Photo: sanja gjenero)

Related Posts:

1. iStar Financial Inc. (SFI) Update
2. 2009 June Vacation – San Antonio, TX

A person’s character is defined not in the good times, but how they react in the time of a crisis. History is littered with examples of ordinary people doing extraordinary things at a critical time. Names like Rosa Parks (civil rights), Frank Fong (WW II fighter pilot) and James A. Lovell (astronaut) will forever be remembered as a result of  their actions in a time of crisis. In much the same way, dividend investors in the future will look back at the 2008-2009 economic crisis and judge the character of dividend companies by how they reacted.

Wednesday, Walgreen (WAG) showed its character by increasing in its quarterly dividend 22% to $0.1375/share. This is the 35th consecutive year WAG has increased its dividend. The dividend is payable Sept. 12, 2009, to shareholders of record Aug. 21, 2009. The company is the largest U.S. retail drug chain in terms of revenues. It operates about 6,500 drug stores throughout the U.S. and Puerto Rico.  The current yield with the new dividend is 1.87%.

Other than WAG, it has been a quite week for dividend increases. There will be other companies stepping up with dividend increases in the coming weeks. For stocks with a long string of consecutive dividend increases, see this list.

Full Disclosure: No position in the aforementioned stock. See a list of all my income holdings here.

(Photo Credit)

Related Posts:

1. PepsiCo Sustains Its String Of Dividend Increases
2. Procter & Gamble (PG) Increases Dividend 10%
3. Ten Dividend Stocks With 50+ Years of Consecutive Increases
4. Masco (MAS) Increases Qtr. Dividend 2.2% (4.98% yield) and Other Increases
5. Stock Analysis: Walgreen Co (WAG)

Since its launch in 2007, Dividends Value has been a leading provider of relevant information for dividend investors. I am proud of the wealth of information made available free of charge to my readers. Beginning today, Dividends Value will offer some premium content for serious dividend investors. It is my intention not to alter the free information currently provided, but to supplement it with some premium content.

The D4L-Dashboard is my first premium service. For each stock that I track, I gather a significant amount of information – currently about 500 cells per stock. With the number of securities tracked approaching 100, this is just too much information to quickly and efficiently digest. So I developed a color coded dashboard that allows me to quickly absorb the information.

The dashboard includes a significant amount of information on all 86 stocks that I currently follow, including buy price, Star rating, risk rating, and much more. For the stocks that I own, the report shows the amount I own as a percentage of my income portfolio and annual dividend income.  Also, included is weekly commentary on what I am planning to buy, have bought and changes in the status of tracked stocks.

Even though I provide free detailed stock analysis on many dividend companies, the amount of preparation needed limits me to one analysis per week and I won’t review that company again for at least six months. As we have all learned, things change quickly in the market. A strong buy three weeks ago may not still be a strong buy today.

The D4L-Dashboard allows You to See What I See.

For more information on the D4L-Dashboard, including a sample report, pricing and subscription information, please see the Overview and Subscribe page. The premium section can always be accessed via the Premium menu option on the top-right of the menu bar above.

No related posts.

Over the last several weeks I have alluded to the fact that my stock analysis model was going through a major overhaul. Last week I put put the last piece of the puzzle in and began using the new model with the United Technologies Corp. (UTX) dividend stock analysis.

I would not say the old model was broke, but it had too many moving parts. It usually got to the right answer, but not always in a logical manner.  Sometimes the model did not get to the right answer and I would have to manually override it. So, what’s new in the updated model?

I. Five and Only Five Stars
In the old model a stock could end up with more than five stars or less than zero Stars, based on an elaborate system of adding and subtracting of Stars. In designing the new model, I eliminated the situations where a Star was deducted and focused on the four most important characteristics of a good dividend stock, each was worth a Star. I then rolled four lesser characteristics into the fifth Star. The following will now earn a Star:

1. Fair Value: I look at five measures of fair value: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price, 4.) Graham Number and 5.) NPV MMA Price. Of the first four, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. Then I compare it with the NPV MMA Price and use the lower of the two.
2. Free Cash Flow Payout: A Star is awarded if the Free Cash Flow Payout is less than 60% and there were no negative free cash flows during the last 10 years.
3. Debt To Total Capital: Having less debt provides a company more financial flexibility. A Star is awarded if the Debt To Total Capital is less than 45%.
4. NPV MMA Diff: The value calculated is the net present value (NPV) of the difference between the dividend earnings of this investment and the interest income from the MMA over 20 years.  A  Star is added for amounts in excess of the target amount.
5. Key Metrics: “Dividend Growth Rate”, “Years of Div. Growth”, “Rolling 4-yr Div. > 15%” and “Years to >MMA” are considered Key Metrics. A Star is awarded if 2 of the 4 Key Metrics are true.

II. A Sliding NPV MMA Diff Target
Previously there were three targets: $2,500 for companies that have raised dividends for 25 or more years, $7,500 for those between 10 and 25 years and $10,000 for those less than 10 years. This created cliffs. For example a company that has raised its dividend for 24 years had a target of $7,500 this year, then it would go to $2,500 after the next increase.  In the new model, I use annual dividends, not cumulative so the numbers are smaller. Also, I implemented a sliding target based on the number of consecutive dividend increases going from a low of $500 (for 30 or more years) to a high of  $3,500 (for no increases). Each year increase moves the scale by $100 between the low and high values above.

III. Other Relevant Information
In addition to the above, I added other relevant information for the readers consideration, such as the Risk Rating.

The end result is a more streamlined model focusing on what is important when identifying stocks that could be great dividend investments. One additional benefits is that the new Star calculations can occur on the fly. Thus, I can always see an up to date Star rating on my dashboard for each of the stocks I follow.  At the time of this writing, the following stocks rated as 5-Star Strong Buys:

• Automatic Data Processing Inc (ADP) – Yield: 3.74% – Analysis
• AFLAC Inc (AFL) – Yield: 3.81% – Analysis
• Chubb Corp (CB) – Yield: 3.61%
• Dover Corp (EMR) – Yield: 3.10% – Analysis
• Emerson Electric Co (EMR) – Yield: 4.15% – Analysis
• Johnson & Johnson (JNJ) – Yield: 3.45% – Analysis
• McDonald’s Corp. (MCD) – Yield: 3.48% – Analysis
• Nucor Corp (NUE) – Yield: 3.32% – Analysis
• Paychex Inc (PAYX) – Yield: 4.83% – Analysis
• Procter & Gamble Co. (PG) – Yield: 3.13% – Analysis
• Sysco Corp (SYY) – Yield: 4.22% – Analysis
• United Technologies Corp (UTX) – Yield: 3.07% – Analysis

The ability to see updated ratings and key metrics on the 86 stocks that I currently follow allows me to more closely gauge the best time to buy (or sell). More on this tomorrow.

Full Disclosure: Long AFL, JNJ, MCD, NUE, PAYX, PG, SYY, UTX. See a list of all my income holdings here.

Related Posts:

1. Four Stocks With Strong Dividend Growth Metrics
2. Five Stocks With A Low Dividend Payout Ratio
3. Elite Dividend Stocks
4. Low-Debt Dividend Stocks
5. Refining Risk Measurement Of Dividend Stocks

When to buy a stock and at what price are very important decisions. However, serious investors will tell you the most important decision is how you allocate your assets. I have recently stepped back and took another look at my asset allocation with an eye toward how it will change as I approach retirement.

The first significant question you have to answer is how much do you allocate to equities and cash/fixed income. There are many approaches to answer this question, but the vast majority of investors use one of these two approaches:

I. Fixed Income % = Age
This approach by far is the most popular among conservative investors. One of its most prominent proponents is Vanguard Group’s founder Jack Bogle. It is very simple to implement. Each year year you increase your allocation to cash/fixed income one percentage point to match your age and decrease your equity allocation one percentage point.

II. Equity % = 120 – Age

Many of the more “aggressive conservative” investors choose this approach.  The theory here is that equities have out-performed fixed income historically and this formula keeps you in a higher percentage of equities over your life cycle. Using this formula, you would have no fixed income allocation until you are 21 years old. It too is easy to implement; simply subtract your age from 120 and the resulting amount is the percentage that is allocated to equities with the remainder going to cash/fixed income.

For my allocation, I have chosen to implement option II.  However, when I retire and begin to receive large lump sum distributions from various plans that I participate in, I will strongly consider shifting to option I.

After determining your equity/fixed income split. The next step is to decide what type of investments belong in the equity portion of your allocation.  Traditional splits are based on capitalization (large/mid/small cap), origin (domestic vs. international) and sectors such as financials, healthcare, energy, etc. I chose a mixture of all the above. I look at 12 sectors as defined by Morningstar, plus real estate. In addition, I look at origin and capitalization. I review my allocation on a quarterly basis (Q1/2009 review).

From the above link, you will notice the targets are not clearly defined.  After much modeling, I have recently finalized my allocation. As I am apt to do, I put together an Excel model (D4L-Calc-Asset-Allocation.xls) for illustrative purposes of modeling my asset allocation over time. You may want to use it as a starting point for developing your asset allocation.  Here is a quick overview of how to use the model:

Input Section

• Year of birth: What you were you born?
• Fixed/Cash Status: Enter 1 (age) or 2 (120-age) here to select one of the two fixed income options described above.
• Age Override: Let you see what your allocation looks like at any age.
• Equities-Domestic: Percentage of the equity portion allocated to Domestic Equity
• Equities-International: Percentage of the equity portion allocated to International Equity
• Employer Equity: Percentage of the equity portion allocated to Employer Equity
• Small/Mid-Cap: Percentage of the equity holdings allocated to Small/Mid-Cap Equity

The sum of Equities-Domestic, Equities-International and Employer Equity should equal 100%. The sections in the model below the Input section calculate the allocation percentages. For example, given that I am 47 years old, the Asset Allocation – Origin section calculates as follows: My allocation to equities is 73% (120-47), leaving 27% (100-73) to cash/fixed income.  Equities-Domestic is 39% (73% x 53.3%), Equities-International is 24% (73% x 33.3%) and Employer Equity is 10% (73% x 13.3%).

Looking at the Asset Allocation – Capitalization section, Cash/Fixed Income at 27% and Employer Equity at 10% are as calculated above.  Small/Mid-Cap at 15% is input, leaving Large-Cap as a plug to make the section total to 100%. Periodically, you will need to reevaluate the appropriateness of the Small/Mid-Cap allocation since it does not automatically adjust annually.

Let’s consider some sample investments that would fall into each of these categories:

Cash/Fixed Income:

• Money Market Accounts such as ING for your emergency fund
• Vanguard Long-Term Bond ETF (BLV)
• Vanguard Intermediate-Term Bond ETF (BIV)
• iShares Investment Grade Corp Bond ETF (LQD)

Equities-Domestic (U.S. for me):

• S&P Index ETF (SPY)
• Johnson & Johnson (JNJ) – Analysis
• The Coca-Cola Company (KO) – Analysis
• 3M Co. (MMM) – Analysis

Equities-International:

• iShares MSCI EAFE Index (EFA)
• Vanguard Emerging Markets Stock ETF (VWO)
• Vanguard FTSE All-World ex-US ETF (VEU)
• Vanguard Total World Stock Index ETF (VT)

Large-Cap:

The securities listed above under Equities-Domestic are all Large-Cap.

Small/Mid-Cap:

• Vanguard Small Cap ETF (VB)
• Vanguard Mid Cap ETF (VO)
• Genuine Parts Co. (GPC) – Analysis
• Clorox Corporation (CLX) – Analysis

Employer Equity:

Obviously, this would include stock in the company you work for. It would also include stock options, SOSARs (Stock Only Stock Appreciation Rights) restricted stock and company match stock in your 401(k).

As Charlie Munger, Warren Buffett ’s long-time friend and partner said, “Allocate assets wisely. Proper allocation of capital is an investor’s No. 1 job.”

Full Disclosure: Long BLV, CLX, EFA, GPC, JNJ, KO, LQD, MMM, VWO . See a list of all my income holdings here.

Related Posts:

1. Bogle Still Believes In Buy And Hold
2. Asset Allocation Model
3. Measuring Asset Allocation Across Your Entire Portfolio
4. Rev-up Your Portfolio With Asset Allocation
5. Process Overview and Asset Allocation

This article originally appeared on The DIV-Net June 29, 2009.

Linked here is a detailed quantitative analysis of United Technologies Corp. (UTX). It is important to note that this is the first week of using my updated analysis model, so you will see some changes from earlier analyses. Below are some highlights from the above linked analysis:

Company Description: United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

UTX is trading at a discount to 1.), 2.) and 3.) above. Since UTX’s tangible book value is not meaningful, a Graham number can not be calculated. UTX is trading at a 29.5% discount to its calculated fair value of $73.14. UTX earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

UTX earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. UTX earned a Star as a result of its most recent Debt to Total Capital being less than 45%. UTX earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. UTX has paid a cash dividend to shareholders every year since 1936 and has increased its dividend payments for 17 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

UTX earned a Star in this section for its NPV MMA Diff. of the $6,624. This amount is in excess of the $1,800 target I look for in a stock that has increased dividends as long as UTX has. If UTX grows its dividend at 15.0% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 4.06%. UTX earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.

Other: UTX is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. Over the last ten years, UTX has shown steady growth in both earnings and dividends. UTX has a strong balance sheet with 38% debt to total capital and an excellent free cash flow payout of 29%. UTX should benefit from large backlogs at Airbus and Boeing, moderate demand for global infrastructure, and strong demand for military helicopters. Future risks could include a prolonged downturn in U.S. residential housing market, slowing of growth in commercial construction markets, and prolonged global recession.

Conclusion: UTX earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks UTX as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $82.70 before UTX’s NPV MMA Differential fell to the $1,800 that I like to see for a stock with 17 consecutive years of dividend increases. At that price the stock would yield 1.86%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,800 NPV MMA Differential, the calculated rate is 10.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. UTX has a risk rating of 1.50 which classifies it as a low risk stock.

UTX is trading below its buy price of $73.14 and its 2.99% dividend yield is consistent with the 3.00% minimum that I am currently looking for. I would be very comfortable adding to my position at this price as my allocation allows. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

As noted above, this is the first week of using my updated analysis model, so you will see some problems or error, be sure to let me know.

Full Disclosure: At the time of this writing, I was long in UTX (3.2% of my Income Portfolio).

What are your thoughts on UTX?

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3. Brady Corp (BRC) Dividend Stock Analysis
4. United Technologies Corp (UTX) Boosts Dividend 20% and Other Increases
5. Stock Analysis: United Technologies Corp (UTX) A Buy At This Price

Each Sunday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it’s where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al.

Below are the carnivals that I participated in this week, along with a link to my article:

• Festival of Stocks published: Stock Analysis: Emerson Electric Co. (EMR)
• Carnival of Personal Finance published: 3 Simple Steps For A Successful Retirement
• Carnival of Financial Planning published: Manulife Financial Corp. (MFC) Under Investigation
• Carnival of Money Hacks published: Five Dividend Stocks Raising Their Dividends

Articles I enjoyed reading included (in no particular order):

The DIV-Net Featured Articles

• DIV-Net Celebrates Its First Anniversary
• Dividends4Life presented Stock Analysis: United Technologies Corp. (UTX)
• Barel Karsan presented Profits Are Profits
• Dividend Tree presented Which High Do You Prefer?
• Dividend Growth Investor presented Bemis Co (BMS) Stock Analysis
• Buying Value presented Understanding Goodwill

Articles From DIV-Net Members

• The Dividend Guy presented Dividend Income Lessons I Have Learned
• Dividend Growth Investor presented Best Yielding Stocks for 2009 2Q Update
• Barel Karsan presented Identifying Cheap
• Dividend Tree presented Diversification In the Context of Number of Stocks
• Buy Value presented Dividend Cuts – New Managment
• moneygardener presented happy Canada day!
• Stock Market Prognosticator presented So Much For Chinese Demand
• Disciplined Approach to Investing presented House Closer To Proposing Tax On Stock Trades?
• Living Off Dividends & Passive Income presented Interesting Libertarian Rant Of The Week
• Old School Value presented 2009 Top 40 Best Stocks to Retire On: Part 2
• Triaging My Way To Financial Success presented Capital Losses in the Tax-Free Savings Account (TFSA)
• Dividend Money presented Summer 2009 Stock Market Evaluation
• Everyday Finance presented Home Price ETF has Begun Trading
• Wide Moat Investing presented Invest Like a Dealmaker
• Dividend Basket presented 5 Things to Look for In Your ETFs Before Buying
• BuyLikeBuffett.com presented Seniors Most Affected by Financial Crisis
• 40percent 20years – All About Dividends presented Calculate The Future Dividends 20 Years – Excel Template
• Value Investing Pro presented Joel Greenblatt Answers Questions For Gurufocus Readers

Other Articles

• MSN MoneyCentral presented 8 dividend stocks for a dull market
• Canadian Business Online presented Dividend-growth stocks outperform
• Rising Dividend Investing presented Ten Principles of Dividend Growth Investing
• CNN Money presented Investment lessons from an 80-year-old legend
• Business Week presented Stocks: Is “Buy and Hold” Still Best?
• U.S. News and World Report presented When Does Old Age Begin?
• Wall Street Journal presented Warren Buffett’s Portfolio, Now Within Reach

There are some really good articles here, please take time and read a few of them.

(Photo: Sachin Ghodke)

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