Tuesday, September 30, 2008

Which Bank will be next? Follow the dividend cuts

I received a lot of e-mails from subscribers on Monday after the collapse of Wachovia, asking me which bank I believe will be the next to fail. Most investors are afraid they will wake up next Monday morning with a worthless financial stock, whose deposits have been sold to another institution.

I think that the answer to that question is to simply follow the money. Most of the financial institutions which ended up with stock prices rapidly approaching gravity were in terrible financial condition and as a result their management scrambled to find ways to fund the ongoing operations and cut expenses to the bone. One of the most difficult decisions that most boards had to make was cut the dividends.

Typically most US companies pride themselves for having an uninterrupted record of paying dividends or even better, a long period of uninterrupted increases in their annual payments to stockholders. Thus cutting the dividends to shareholders is usually one of the last resorts to action.

If you look at the records of the financial institutions in the S&P 500 that cut their payments this year, you will find an interesting pattern of dividend cuts and then massive failures. Examples like this include FNM, FRE, LEH, WB and WM. In most cases the dividend cut gave shareholders a warning signal at least several months before the failure. Just for the record this strategy isn’t foolproof so don’t bet the bank on it – there will surely be financials which cut their dividends and most probably prosper in the coming good times. It would be interesting to note how the companies in this list perform over the next few years.


So should you be worried about the next bank failure? I think that as long as your portfolio is well diversified you shouldn’t worry too much about day to day news but focus on the big picture and your long term financial goals. Historically it has paid off well to pick up distressed assets at bargain prices during bear markets. In addition to that dollar cost averaging your way into a position is the perfect strategy in a bear market. Check this chart out for the average durations of previous bear markets for reference as well.

Full Disclosure: I do not have any positions in the companies mentioned in this article.

Relevant Articles:

- Dollar Cost Averaging
- Average Durations of Previous Bear Markets
- My Dividend Growth Plan - Diversification
- When to sell your dividend stocks? Part 2
- GET FREE MAGAZINE SUBSCRIPTIONS

Monday, September 29, 2008

Dividend Stocks in the news over the past week

The past several months have been characterized by tremendous volatility and a lot of negative news regarding the state of the economy as a whole. Given the uncertainties in the global economy, investors are wondering whether they should cash out their portfolios and simply wait for the storm to end.

I think that this would not be a good move, especially for the dividend investor who already has a diversified portfolio of income producing stocks. Such an investor will be more focused on the dividend raises that his or her stocks deliver.

Investors focusing on every tick of the market might miss some rare investment opportunities when there is a disconnect between fundamentals and price. Don’t forget that even during a crisis people will continue to eat, shave, take showers, purchase beverages, smoke and eat out. Thus it always pays to not lose track of the big picture, even during the most challenging times for your portfolio.

Several stocks had some major dividend increases over the past week. Others didn’t deliver such exciting news but reaffirmed their payments to shareholders.

McDonalds increased its annual dividend by 33% to $2.00 share. The company has increased its dividends for over 32 consecutive years. Annual dividend payments have increased over the past 10 years by an average of 25%. The current yield stands at 2.40%. The new dividend increases the yield to 3.16%

Microsoft increased its annual dividend by 18% to $0.52 share. The company has increased its dividends since 2003. MSFT has recorded double digit annual dividend payment increases over the past 5 years. The current yield stands at 2.00%.

Accenture increased its annual dividend by 19% to $0.5 share. The company has increased its dividends since 2005. ACN has recorded double digit annual dividend payment increases over the past three years. The current yield stands at 1.26%.

Campbell Soup increased its annual dividend by 14% to $1.00 share. The company has increased its dividends every year since 2004. CPB has recorded double digit annual dividend payment increases over the past 4 years. The current yield stands at 2.30%. The new dividend increases the yield to 2.66%

Lockheed Martin increased its annual dividend by 36% to $2.28 share. The company has consistently increased its dividends every year since 2003. LMT has recorded double digit annual dividend payment increases over the past 5 years. The current yield stands at 1.50%. The new dividend increases the yield to 2.03%

Of these stocks MCD only fits my criteria for purchase. The rest of the stocks have been added to my watchlist for further investigation.

Full Disclosure: Long MCD

Sunday, September 28, 2008

Carnivals, Festivals and Blogs - September 28

Carnivals and Festivals

Here are the carnivals I participated in over the past two weeks.

Investing Carnival # 13: hosted by Triaging My Way To Financial Success

Carnival of Personal Finance #170 hosted by The Personal Financier.

Carnival of Personal Finance #171 hosted by Sound Money Matters.

Festival of Stocks #106 hosted by Qovax

Festival of Stocks #107 hosted by Stock Market Prognosticator

The Div-Net

The Div Guy presented Dividend Stock Review: Corning (GLW)

Disciplined Approach to Investing presented Should You Stick With Stocks

Dividends4Life presented Stock Analysis: V.F. Corp. (VFC)

The Dividend Guy presented The Market Goes Down but I Still Receive My Dividends

the moneygardener presented Microsoft Raises Dividend 18%

The Stock Market Prognosticator presented Leverage is Suddenly A Dirty Word

The Div Guy presented One of the toughest decisions: When to Sell

Disciplined Approach to Investing presented Stock And Economic Data Sites Across The Web

Dividends4Life presented Stock Analysis: Colgate Palmolive (CL)

Nurseb911 presented 15 Simple Solutions

The Dividend Guy presented Speculating on a Falling Knife

the moneygardener presented The Battle For Longs

Saj Karsan presented Markets Efficient?

The Stock Market Prognosticator presented Bank Capital Ratios

Blogs

Dividends4Life posted Microsoft (MSFT) Raises Qtr. Dividend 18% (2.00% yield) and Others

The Dividend Guy bought GE at bargain prices.

the moneygardener presented this is what i wish i had bought

The Div Guy posted Dividend Stock Review: J&J Fairly Earns Its Premium

Disciplined Investing posted Index Changes: S&P and the Dow Jones Industrial Average

Compounding Dividends posted Buy Low, Sell High….I’d Rather Collect the Dividend

passivefamilyincome posted Wachovia Covered Call Contracts

Friday, September 26, 2008

“The Top 40 Dividend Stocks for 2008 – How and Why to Build a Cash Machine of Dividend Stocks”, Book Review

This article originally appeared on The DIV-Net September 19, 2008.

Recently I received an interesting book on dividend investing, titled “The top 40 Dividend Stocks for 2008 – how and why to build a cash machine of Dividend Stocks”, written by David P. Van Knapp. The author, who also maintains the site sensiblestocks.com, decided to skip the publishers altogether and has his book available to readers online in a PDF format. That made it easier for him to provide an up to date edition in order for his readers to stay competitive in the markets.

The book is very well written and is organized in 8 chapters, starting with an overview of dividend stocks in general, characteristics of the best dividend stocks, creating and managing a dividend portfolio and ending with the system that the author has created which has helped him identify the top 40 dividend stocks that he recommends. This book should be appealing not only to novice dividend investors but also to more seasoned stock pickers with its wealth of information on dividends. Almost everything you ever wanted to know about dividends could be found in it.

The author starts the book by giving an introduction of what dividends are and why investors should buy stocks which produce increasing streams of dividend income. He also discusses the pros and cons of dividends versus share buybacks, and proves that it pays to own the “boring” dividend stocks which provide the most efficient stream of income from a tax perspective right now. I especially enjoyed reading about his discussion on managing portfolios consisting of the best dividend stocks. I also liked his ideas on portfolio management where he set clear goals and objectives as well as strategies for achieving them. I also found the idea of avoiding to catch falling knives, and instead wait for the stock price to turn before accumulating shares particularly intriguing.

Another section focused on certain types of companies which are organized specifically to pay high dividends such as business development companies, real estate investment trusts as well as master limited partnerships.

Many investment services will sell you a cheap book which describes a system which is pre-sold throughout the book. Not this one – this author sells a buy one get one free type of deal as he not only shares his stock picking system but also provides specific picks as well as the reasoning behind selecting those picks. The last half of the book was specifically dedicated to analyzing the top 40 dividend stocks for 2008 in more detail, thirteen of which were non-US companies.

There were several items that the author might have to provide some clarity to readers in future editions of the book. A mention that unless the current tax code is extended beyond 2010, the tax rate on dividend income for the highest income brackets would be much more than 15%, would have been informative.

I also think that future editions of the book should mention something about holding dividend stocks in a tax-deferred account such as an IRA, ROTH IRA or a 401k. Most investors who are in the accumulations stage would be better off in the long run without having to pay taxes on their annual dividend income.

I enjoyed his writings on the BDC, REITS and MLP’s. I believe however that most investors overlook these vehicles because the distributions from the three types of firms are taxed somewhat differently compared to distributions from common stocks. I would have also enjoyed reading more about taxation on MLP’s from his own experience. Most other yield hungry investors would probably enjoy a small section on Canadian Income Trusts as well as tanker stocks such as NAT, FRO, DSX.

I personally disagree with him that dividend payout ratios are not important in individual stocks selection. In fact avoiding stocks with unreasonable payouts has prevented me from purchasing any stocks that were caught in the most recent financial turmoil, which had to cut their dividends in order to conserve cash.

Last but not least, despite the fact that Mr. Van Knapp shared the top 40 picks from his system, it seemed to me that his initial list of around 700 dividend paying stocks needed more clarification about the methodology in compiling it. Don’t get me wrong – the top 40 dividend paying stocks in his book are representative of what every dividend growth investors looks for. I wonder however if he compiled his initial list of stocks from other sources whether he would have arrived with different stock picks in the end.

Overall I enjoyed reading the book, and would recommend it to any serious dividend investor who wants to succeed in his or her endeavors. It is easy to read, well organized and provides a wealth of information not only for the novice investor but also for the seasoned pro!

This article originally appeared on TheDiv-Net.

Thursday, September 25, 2008

Unlimited Free Trades at Zecco in October!

My Money Blog originally reported this, and a recent e-mail from Zecco confirmed it. Here's more information, directly from the announcement:

October will be a 100% unlimited free trading month for current Zecco Trading customers
Thanks for hanging in there. To show our appreciation for your loyalty, we have decided to make October a 100% unlimited free trading month. This means that between October 1st and October 31st you can make unlimited equity and options trades commission-free. As far as I know, this has never been done in the history of the brokerage industry, until now. But then again, we are seeing things in the market we never would have believed, until now.


If you are not a customer at Zecco, consider opening an account with them.

Eligibility for the October Promotion

- The no-commission stock and options trade offer applies to all Zecco Trading accounts in good standing.

- The offer applies to equity and options trades, including multi-legged options orders and all options contracts.

- Mutual fund trades are not eligible for the offer.

- There is no minimum equity balance requirement or minimum trade volume restriction.
All account types are eligible, including IRA.


- The offer is effective for equity and option trades placed and executed 10/1/08 through 10/31/08. The standard free trading program and options pricing will resume 11/1/08.

Even without this promotion, any Zecco account that has a total value exceeding $2,500 receives 10 free stock trades per month. After that you get charged for your stock trades a small $4.50 commission per trade.

I think that if you open an account now, you would be able to use the no-commissions trading October promotion to build your dividend portfolio.

Wednesday, September 24, 2008

Nordic American Tanker (NAT) Dividend Stock Analysis

Nordic American Tanker Shipping, Ltd. owns and operates crude oil tankers. The company operates its vessels in the spot market, on time charters, or on bareboat charters. As of December 31, 2007, it owned 12 double hull Suezmax tankers averaging approximately 155,000 deadweight tons each. The company was founded in 1995 and is headquartered in Hamilton, Bermuda.
Nordic American Tanker is not a dividend achiever but a component of the NYSE Composite and Zacks Yield Hog index. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 29.10 % to its shareholders. The stock gained 19 % value so far in 2008.



At the same time company has managed to deliver a 6.40% average annual increase in its EPS since 1998.















The average cash breakeven for the trading fleet of 12 vessels is about $9,000 per day per vessel. The company has stated in their 2Q earnings and dividends announcement that when the freight market is above that level, the company will pay a dividend. The good news is that the average daily spot rate for the type of ships NAT holds has not fallen below $20,000 since 2000.















Only one of the twelve vessels is under contract to ship goods at fixed prices; the rest are on the spot market, which explains the great variability in the quarterly and annual financials.

The ROE has fluctuated greatly; rising from 4% in late 1990’s to over 38% in 2004 before falling to 7% at the end of our study period.














Annual dividend payments have increased by an average of 11.90% annually over the past 10 years, which is higher than the growth in EPS. A 12% growth in dividends translates into the dividend payment doubling almost every six years. The problem is that even though the company is committed to paying a large amount of its cash flows to shareholders, it hasn’t committed to paying stable dividend payments. Because of this fact do not be surprised if the annual dividend payments in six years are not double what they were in 2008.
41.2% of the 2007 dividends were distributed from current earnings while 58.8% were a return of capital.














If we invested $100,000 in NAT on December 31, 1998 we would have been able to purchase 8696 shares. In early 1999 your quarterly dividend check would have been for $2939. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $58,000 by August 2008. For a period of 10 years, your quarterly dividend income would have increased by 373%. If you reinvested it though, your quarterly dividend income would have increased by 1873%.













The dividend payout ratio has remained between 90% and 250% since 1998. Once again the reason why the payout is above the EPS is because NAT’s management pays out distributions out of the operating cash flows, which includes certain non cash items such as depreciation expense (which is excluded from the EPS calculation).














Overall the wild fluctuations in dividends and earnings per share are something my method is not accustomed to. The tanker business is very competitive and capacity has been increased faster than demand over the past couple of years. Having the majority of the fleet on the spot market could definitely boost profitability in good years, but could also lead to poor operating performance in bad years.

One positive is that the company has low amounts of long term debt relative to its assets. I also liked the fact that the tangible book value of the stock was at $22.42 at the end of 2007.
One positive is that Nordic American Tanker has never paid a quarterly dividend per share which was lower than 30 cents/share. If I were a holder of NAT I would treat any quarterly payment as if it were only 30 cents and putting the rest in a savings account in order to smooth my dividend income.




I plan on initiating a small position in NAT on dips below 30 or close to the tangible book values.

Disclosure: I do not own shares of NAT

Monday, September 22, 2008

Toronto-Dominion Bank (TD) Dividend Stock Analysis

The Toronto-Dominion Bank and its subsidiaries provides financial services in North America. It operates through four segments: Canadian Personal and Commercial Banking, Wealth Management, U.S. Personal and Commercial Banking, and Wholesale Banking.



The Toronto-Dominion Bank is an international dividend achiever as well as a component of the TSX 300 index. It has been increasing its dividends for the past 14 consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 17.90 % to its shareholders. The stock has lost 10 % of its value so far in 2008.
At the same time company has managed to deliver a 16.80% average annual increase in its EPS since 1998.















The ROE has fluctuated greatly; falling from 30% in late 1990’s to zero in 2002 before recovering to 30% again at the end of our study period.
















Annual dividend payments have increased by an average of 13.70% annually over the past 10 years, which is higher than the growth in EPS. A 14% growth in dividends translates into the dividend payment doubling almost every five years. If we look at historical data, going as far back as 1996, TD has actually managed to double its dividend payment every five years on average.
















If we invested $100,000 in TD on December 31, 1998 we would have been able to purchase 5919 shares (Adjusted for a 2:1 split in August 1999). In early 1999 your quarterly dividend check would have been for $1006. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $4871 by July 2008. For a period of 10 years, your quarterly dividend income would have increased by 242%. If you reinvested it though, your quarterly dividend income would have increased by 384%.
















The dividend payout ratio has remained over 50% for the majority of the time over our study period. Over the past two years this ratio has remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
















TD does look attractively valued with its low price/earnings multiple of 13, low DPR as well as attractive yield at 4 %. The current yield is pretty attractive based off historical standards as well.


Canadian banks have not been affected by the sub-prime mortgage crisis like their related banks in the US. It would be interesting to follow developments on the strength of the Canadian financial sector for any signs of trouble.
In the meantime I will put this stock on my watch list.

Disclosure: I do not own shares of TD
Relevant Articles:

Friday, September 19, 2008

My biggest weakness as a dividend investor

This article originally appeared on The DIV-Net September 12, 2008.

All investors have weaknesses that prevent them from achieving their long term goals. Some like to chase hot technology stocks while others tend to use excessive leverage in order to magnify their expected risks and returns. My biggest weakness as a dividend investor is that I am easily attracted by higher yielding instruments stocks, bonds and mutual funds.

In our society of instant gratification where you can get movies on demand and skip through commercials on your Tivo when watching your favorite TV show most investors don’t feel like waiting for one or two decades before achieving a double digit yield on cost. Most investors want to achieve above average returns, and they want to achieve them fast. It is very easy to open a brokerage account and actively trade stocks, options, futures and commodities. With the computerization of markets commission costs have decreased thus significantly decreasing the cost of entry for new market participants.

Many forget that markets are a reflection of what our lives are in general. It takes years of learning, investment and commitment before one can become a good doctor, lawyer and accountant. So why should a small investment in a stock or trading system bring a significant return right away? It’s not rational to expect that. Many will remind me that lottery winners make a great return on their investment when they hit the jackpot. The truth however is that this easy money is usually given away, gambled away or spent in its entirety.

In order for me to overcome my weakness, I have chosen for myself a system for picking stocks based off several parameters such as price earnings, dividend payout, minimum yield, history consistent dividend increases and solid dividend growth.

I am always reminding myself that a stock has an above average current yield for two reasons- either the stock has lost a lot of ground or the dividend is unsustainable and will be cut pretty soon. This happened with many of the wall street banks this year such as WB, FITB, KEY, C as well as with giants like GM.

Relevant Articles:

- My Dividend Growth Plan - Strategy
- My Dividend Growth Plan - Stock Selection
- My Dividend Growth Plan - Diversification
- My Dividend Growth Plan - Money Management

Thursday, September 18, 2008

High yield stocks for current income

The typical stocks that I currently focus on and own are ones that spot current low dividend yields which are pretty close to what I would get right now if I bought one of the most popular ETF’s such as SPY or DIA. The main difference is that based off the recent history of the stocks that I analyze, I have concluded that my selections have a chance of increasing their dividends above the rate of inflation, effectively doubling my yield on cost after a maximum period of 10 years. This sounds even more exciting as most of the dividend stocks I follow tend to increase their stock prices over time as well, thus effectively keeping their current yield low. At the end of the day this provides for a great total return experience as well as a stable and increasing dividend income.

Many readers of my column on my blog as well as seekingalpha have concluded that low current yields are not enough for them to live off of, and that the likelihood of future dividend increases does not seem as likely to them as it looks to me.

The yield hungry investors find refuge in high-yielding special treatment entities such as Real Estate Investment Trusts, Business Development Companies, Canadian Income Trusts, Master Limited Partnerships as well as some of the oil tanker stocks. The current yields on most of these stocks ranges from 4-5% for some REIT’s to over 20% for some BDC’s and tanker companies.
The reason why most of these companies are able to pay such a high dividend is because they use their cash flows rather than earnings per share in order to determine the payout to shareholders. Thus they add certain items like depreciation expense back to the earnings per share number and are able to increase the payout. Depreciation expense is basically an accounting term which means that the company is recognizing a charge to its fixed assets based off an amortization schedule. Thus if a building had a useful life of 30 years depreciated using a straight line method, and it sold for 30 million dollars, then for this example the company would have an annual depreciation expense of 1 million/year. The main problem is that on year 30 the building is no longer useful, and could be sold for a very small amount relative to what the REIT paid for it 30 years earlier.

In my understanding of this procedure, it seems that what most of these companies reward their stockholders is a return of capital, as opposed to a return on capital. That’s why most of the above mentioned typed of entities need to constantly sell more stock to investors or increase their leverage exposure in order to grow. As long as these stocks also have the ability to generate earnings however, which are directly proportionate to the returns on assets that the company typically generates, there shouldn’t be a worry for investors.

If that type of company stops growing however by issuing stocks and fixed income to investors, then the end result is that investors would not get a good total return at the end of the day.
Another risk with those entities mentioned in the second paragraph is that the government could change the regulations that govern certain aspects of these special entities like taxation for example. I tried explaining this in my article on Canroys several months ago.

So should investors invest in these higher yielding instruments? I would say go for it if you really need the high yield now, but remember that bad diversification and extreme concentration to the financial sector would have been detrimental to your portfolios in 2008. Thus, in order to maintain a balanced stream of income, one needs to have a diversified portfolio of stocks which includes as many industries as possible, without being overly exposed to any. If you can afford to wait for several years before needing the dividend income stream, then I would strongly suggest investing in stock with moderate current yields but good dividend growth potential.

And last but not least, even though dividend growth policies could always change, the dividend payments could always be cut. Thus always try to understand the business of the stock you plan on investing in as well as the reason behind the above average yield.

Relevant Articles:

- The price of higher current yield -Canadian Royalty Trusts
- The number one reason why i don't chase high-yielding stocks.
- The Rule of 72
- My Dividend Growth Plan - Stock Selection

Wednesday, September 17, 2008

Nokia (NOK) Stock Dividend Analysis

Nokia Corporation designs, manufactures, and sells a range of mobile devices and networks with services and software worldwide. The company offers mobile phones and devices based on the GSM/EDGE, 3G/WCDMA, and CDMA global cellular standards under the Nokia brand, including the Nokia Nseries, the Nokia Eseries, and Vertu sub-brands. It also provides non-cellular technologies, such as Bluetooth, WLAN, and GPS


Nokia is an international dividend achiever. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 5.00 % to its shareholders. Nokia’s share price has not recovered yet form its all time highs in the early 2000. The stock has lost over 45% of its value so far in 2008. In addition the company recently gave a warning that its third quarter market share will be negatively affected by the global slowdown.

At the same time company has managed to deliver a 22.30% average annual increase in its EPS since 1998.

The ROE has recovered in recent years from its lower levels around 20% to rise over 60% in 2007.

Annual dividend payments have increased by an average of 23.40% annually since 1999, which is almost the same as the growth in EPS. A 23% growth in dividends translates into the dividend payment doubling almost every three years.

If we invested $100,000 in NOK on December 31, 1998 we would have been able to purchase 6642 shares (Adjusted for 2:1 and 4:1 stock splits). In March 1999 your annual dividend income would have been $764. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $5947 by May 2008. For a period of 10 years, your quarterly dividend income would have increased by 578%. If you reinvested it though, your quarterly dividend income would have increased by 678%.


The dividend payout has largely remained under 50% over our study period with the exception of the short spike in 2001. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.



NOK does appear attractively valued with its low price/earnings multiple of 10 and low DPR as well as attractive yield at 3.80%. The current yield is pretty attractive based off historical standards. The current P/E is also attractive relative to what it has been over the past decade. One thing that bothers me however is that the dividend does fluctuate a lot and there is a larger possibility like in 2002 that the payment could be lowered if troubled times were to come again. Other than that Nokia is a great brand that should continue to do well in the future.

Disclosure: I do not own shares of NOK

Tuesday, September 16, 2008

Which candidate is better for dividend investors – Obama or McCain?

This blog rarely discusses political issues, as my goal for writing posts is to mainly educate people on investing, without trying to influence them how to spend their money or live their lives. I recently stumbled a NY Times article, which summarized the candidates’ views on dividend taxation. Most of you might remember that prior to the 2003 tax law change, which made qualified dividends taxable at the top rate of 15%, dividend income was taxed at the top marginal rate for ordinary income. The current preferential treatment of dividends is set to expire at the end of 2010. The article from Gregory Mankiw summarizes both candidates’ opinions on the subject of future taxation of dividends:

“But for dividend income, Senator Obama has proposed only a modest increase in the top tax rate, to 20 percent from 15 percent. That is, the personal income tax would continue to tax dividends at a far lower rate than ordinary income. This decision must surprise many of his Congressional supporters. But it should be making President Bush smile.


In light of Senator Obama’s stand, the politics of dividend taxation may take some surprising twists. Senator John McCain wants to maintain the current tax rate of 15 percent on dividends (while cutting the corporate tax), but it is a good bet that if Senator McCain is elected president, while Congress remains Democratic, Congress won’t give the Republican president what he wants. They would instead let the Bush tax cuts expire, returning the dividend tax for high-income taxpayers to about 40 percent.

This leads to one of the great ironies of the political season. On the issue of dividend taxation, Barack Obama may be the candidate with the best chance of preserving George Bush’s legacy."

Another positive fact if Democrats win is that the Stock Market has historically performed well under their reign according to this article from Jeremy Siegel.



To summarize it seems that the best candidate for the president post would be Obama, if you look into it from a dividend stock investor’s perspective.


Full Disclosure: I am long SPY

Monday, September 15, 2008

Archer Daniels Midland (ADM) Dividend Stock Analysis

Archer Daniels Midland Company procures, transports, stores, processes, and merchandises agricultural commodities and products primarily in the United States. It operates in three segments: Oilseeds Processing, Corn Processing, and Agricultural Services.


Archer Daniels Midland is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 33 consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 6.50 % to its shareholders. The stock has lost over half its value so far in 2008.


At the same time company has managed to deliver a 24.40% average annual increase in its EPS since 1999.















The ROE increased from 5% in 1999 to over 20 % before falling down slightly to 15% in 2008.
















Annual dividend payments have increased over the past 10 years by an average of 12.10% annually, which is higher than the growth in EPS. Using the rule of 72 a 12% growth in dividends translates into the dividend payment doubling almost every six years. If we look at historical data, going as far back as 1988, ADM has actually managed to double its dividend payment every five years on average.
















If we invested $100,000 in ADM on December 31, 1997 we would have been able to purchase 5949 shares (Adjusted several 5% stock dividends). In February 1999 your quarterly dividend income would have been $257. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1031 by August 2008. For a period of 10 years, your quarterly dividend income would have increased by 201%. If you reinvested it though, your quarterly dividend income would have increased by 301%.
















The dividend payout ratio has largely decreased from over 45% to less than 20% over our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.













ADM does look attractively valued with its low price/earnings multiple of 9, low DPR as well as attractive yield at 2.20%. The current yield is pretty attractive based off historical standards. The current P/E is also attractive relative to what it has been over the past decade. In order to protect principal I would look into dollar cost averaging into the stock.

Disclosure: I own shares of ADM
Relevant Articles:

Sunday, September 14, 2008

Carnivals, Festivals and Blogs- September 14, 2008

Carnivals and Festivals

Investing Carnival published Diageo (DEO) Dividend analysis:

Festival of Stocks published SYSCO (SYY) Dividend Stock Analysis

Carnival of Personal Finance published Introduction to Currency ETFs

The Div-Net

The Div Guy presented Stock Screen: Warren Buffett Picks

Disciplined Approach to Investing presented Dividend Investment Possibilities

Dividends4Life presented Stock Analysis: McGraw-Hill Companies Inc (MHP)

The Dividend Guy presented Socially Responsible Investing

the moneygardener presented CDN Banks Still Raising Dividends

The Stock Market Prognosticator presented Is Your Bank Next?

Competitions

This week I have found two competitions worthy of mentioning.

Compounding Dividends posted If You build it, they will come - Giving away over $250 - Competition. The prize for First Place is $200.

Also do not forget to check out The Great Subscriber Giveaway: from Triaging My Way To Financial Success.

Blogs

Compounding Dividends posted The Single Best Investment by Lowell Miller - Review.

Online Dividends posted Passive Income as of 08/31/2008

FatPitchFinancials posted Winners and Losers of the Fannie Mae, Freddie Mac Bailout

Old School Value posted Profit From Special Situations - Stock Tenders

LivingOffDividends posted Passive Income Update For August 2008

Million Dollar Journey posted Give Yourself a Financial Checkup

Cash Money Life posted Tax Extension Filing Deadline - October 15 »

Friday, September 12, 2008

BP (BP) Stock Dividend Analysis

BP p.l.c. provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. It operates in two segments, Exploration and Production, and Refining and Marketing.

BP is an international dividend achiever as well as a component of the British FTSE 100 index. It has been increasing its stock dividends for the past 9 consecutive years. From the end of 1997 up until August 2008 this dividend growth stock has delivered an annual average total return of 6.90 % to its shareholders.

At the same time company has managed to deliver an 22.80% average annual increase in its EPS since 1998, helped by a massive rise in commodities.

The ROE has ranged between 10% and 29% over the past 10 years.

Annual dividend payments have increased over the past 10 years by an average of 7.00% annually, which is equal to the growth in EPS. A 7% growth in dividends translates into the dividend payment doubling almost every ten years. The current annual dividend payment is double what it was in 1999.

If we invested $100,000 in BP on December 31, 1997 we would have bought 2510 shares (Adjusted for a 2:1 stock split in October 1999). In February 1998 your quarterly dividend income would have been $883.52. If you kept reinvesting the dividends though instead of spending them, this dividend stock would have produced a quarterly dividend income of $2974.44 by August 2008. For a period of 10 years, your quarterly dividend payment would have increased by 139%. If you reinvested it though, your quarterly dividend income would have increased by 237%.

The dividend payout ratio has decreased from over 100% in 1998 to hover around 40% in recent years. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that BP is attractively valued with its low price/earnings multiple of 8 and low dividend payout ratio as well as the above average dividend yield of 5.8%. The dividend yield and P/E ratio at the moment are much lower than what they have been over the past decade.

Disclosure: I do not own shares of BP

Relevant Articles:

Wednesday, September 10, 2008

20 Top High Dividend Growth Stocks

One of my favorite stock lists that includes quality dividend stocks is the Dividend Aristocrats list, maintained by Standard & Poors. In order for a company to qualify for membership in this elite group it has to have increased its dividend payments to shareholders for at least 25 consecutive years.

The typical dividend aristocrat is a mature company that has weathered the storms of many boom and bust cycles while continuing to increase dividend payments to shareholders. These companies as well as the dividend champions are the cornerstone to my dividend growth strategy. Although the list as a whole yields a little bit better than the overall market represented by the S&P 500, there are some hidden gems which have consistently achieved an above average dividend growth rate. A company which has a 12% dividend growth would double its dividend payment in 6 years. Thus if this stock has a dividend yield of 2% right now, 6 years from now the yield on cost would be 4%. If the dividend payment keeps growing at the same growth rate, the yield on cost would be close to 12% in twelve years after the initial investment. In order to find such stocks, I researched the dividend aristocrats and selected the 20 stocks with the highest dividend growth for the past 10 years. (Period ending in 2007). You could also open the spreadsheet from here.

Just because the dividend growth rate for a particular stock is not in the double digits does not automatically mean that the stock is not a buy and vice versa. It all depends on your investing goals and experience. If you are a retiree looking for another source of income then the higher yielding slower growing dividend stocks like ED or TEG would constitute the majority of your portfolio. However if you are not going to tap your dividend income for one or two decades then the lower yielding high dividend growth stocks will have a higher weight in your income portfolio.
The only thing that is constant of course if change, thus a company which is rapidly growing its dividends might not grow them at such a fast rate in the future or might even consider cutting the payments to shareholders and vice versa. Thus, a successful dividend investor would construct a portfolio that is a blend of higher yielding and lower yielding dividend stocks, growing their payments at varying rates.

Full Disclosure: Long MCD, WMT, MTB ,ADP, JNJ, SHW, ED

Relevant Articles:

- The Rule of 72
- Why do I like Dividend Aristocrats?
- Long term returns of S&P high-yield aristocrats
- Dividend Conspiracies

Tuesday, September 9, 2008

UDR Dividend Stock Analysis

UDR, Inc. formerly United Dominion Realty Trust, Inc., operates as a self-administered equity real estate investment trust (REIT). It owns, acquires, renovates, develops, and manages middle-market apartment communities. The company targets young professionals, blue-collar families, single parent households, older singles, immigrants, and non related parties.

UDR is a dividend champion as well as a component of the S&P 1500 index. It has been increasing its stock dividends for the past 31 consecutive years. From the end of 1997 up until August 2008 this dividend stock has delivered an annual average total return of 15% to its shareholders.













At the same time company has managed to deliver a 4.70% average annual increase in its funds from operations (FFO) since 1998. FFO is a common measurement for a REIT. It is an alternative non-GAAP measure that is considered to be a good indicator of a company’s ability to pay dividends.

The ROE has increased from its low of 5% in 1998 to a little over 20% by 2007.















Annual dividend payments have increased over the past 10 years by an average of 2.50% annually, which is lower than the growth in FFO. Using the rule of 72 a 2.5% growth in dividends translates into the dividend payment doubling almost every 29 years! The last doubling of the annual dividends took 15 years from 1992 until 2007
















If we invested $100,000 in UDR on December 31, 1997 we would have bought 8772 shares. In January 1998 this dividend stock would have produced $2210.54 in quarterly dividend income. If you kept reinvesting the dividends though instead of spending them however, your quarterly dividend payment would have risen to $6136 by July 2008. For a period of 10 years, your quarterly dividend income would have increased by 31%. If you reinvested it though, your quarterly dividend payment would have increased by 177%.
















The FFO payout has decreased from over 100% in 1998 to a little over 70% in recent years. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. One thing to note is that in order to maintain their tax status for federal income tax purposes, REITs are required to distribute dividends to our stockholders aggregating annually at least 90% of their taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains), and are subject to income tax to the extent we distribute less than 100% of the REIT taxable income (including net capital gains). In addition to that, the fact that the company has managed to keep increasing its profits and dividends while keeping the payout form operations stable is a positive sign.
















Despite its good performance for dividend investors over the past decade as well as making it on my screen, there are several obstacles to UDR’s future dividend growth. One of it is that its annual revenues have remained flat over the past decade, increasing slightly from 482 to 500 million dollars.
















The other item is that the company is selling apartment units, which will decrease revenues in the future, but will also decrease the average age of the trust’s holdings. The dividend was not increased in April 2008, which was the case in prior years. The dividend is well covered, but the lack of dividend and revenues growth, coupled with a rising price to book ratio make this dividend stock a hold.

Disclosure: I do not own shares of UDR

Relevant Articles:

- National Retail Properties (NNN) Dividend Analysis
- Realty Income (O) Dividend Analisys
- Is Realty Income (O) a good stock to own?
- Alternative Streams of Income

Monday, September 8, 2008

Why did the market finish higher on Friday?

On Friday it was reported that unemployment hit 6.1 % the highest level in five years as employers cut 84K payrolls. The SPY, DIA and QQQQ’s all opened lower and proceeded to lose even more ground as selling accelerated. Oil declined as well, which was not a positive, as it dragged down oil related stocks like XOM, CVX and BP down with it. But somehow, despite all the gloom of the deepening of the recession and higher unemployment, the stock market finished the day in the black.

Sometimes fundamental investors like me forget that the market is a manic depressive individual who defies any logic. Most of the times the stock market is driven not by the cold blooded facts but by the expectations of its participants. Just because I believe that I shouldn’t pay more than 20 times earnings and that dividend paying stocks are superior investments to non dividend paying stocks doesn’t mean that I will be right all the time, or even half of the time. The stock market can continue going higher or lower for whatever amount of time it chooses to. The internet bubble of the late 1990’s serves a great example for that as many stocks defied gravity even when they had no real tangible value or any earnings generation ability behind them. In order to succeed at investing, one has to forget the speculative urge to “adjust” their exposure any time the market ticks up or down. The sentiment and expectations of the players is really what moves the stock market quotations every day not fundamentals.

That’s exactly what had happened Friday- most bearish speculators simply decided to keep selling because their interpretation of the 6.1% unemployment rate was ultra bearish. The market kept on falling, until there were no more weak hands – and the few buyers left at the time propped the market higher. Historically speaking this happened on a larger scale in September 2001, when the attacks on the World Trade Center lead to a massive sell off in equities around the globe on fear that terrorism will further shake the confidence in the economy. Incidentally this was one of the best times to purchase good quality stocks at bargain prices. Other good times to purchase stocks was after the 1987 crash and after the 1997 - 1998 Asian and Russian crisis. It pays to be a contrarian and not follow the crowds.

Successful investment requires that one has a sound investment strategy to identify attractively valued securities. The second component of this strategy however is that successful investors have to wait for the right moment when the crowd’s expectations about the future turn into panic selling in order to step in a purchase the attractively valued securities at bargain prices. The third component, holding for the long run is the toughest, as it is against the basic human instinct that doing nothing could actually be productive.

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