Tuesday, June 30, 2009
Successful dividend investing is much more than picking the highest yielding stocks however. Recent history has shown that in most cases, the stocks with the highest yields are the first to cut distributions when trouble arises. In order to be successful at long-term dividend investing, one needs to find the right balance between dividend growth and dividend yield.
There are several stocks, which offer tempting current high yields, which are less likely to be sustained. Most of the companies mentioned below are members of the elite S&P Dividend Aristocrats index for now.
Avery Dennison Corporation is engaged in the production of pressure-sensitive materials, office products and a variety of tickets, tags, labels and other converted products. The Company's segments are Pressure-sensitive Materials, Retail Information Services and Office and Consumer Products. The company last raised its dividend in 2007. Avery Dennison has been unable to cover its dividend payment over the past two quarters. Based off the past 4 quarterly earnings reports however Avery earned $2.16/share and paid out $1.64 in dividends per each unit of common stock. Avery ended its 32-year streak of consistent dividend increases in 2008.
M&T Bank Corporation (M&T) is a bank holding company. The Bank offers a range of commercial banking, trust and investment services to its customers. M&T Bank last raised its dividend in 2007 as well. M&T Bank paid out most of its earnings as dividends over the past 3 quarters and couldn’t cover its distribution in the latest quarter. The bank is also one of the financial institutions, which had taken funds from the US Treasury. M&T Bank took $600 million in TARP money back in December 2008. M&T Bank ended its 27-year streak of consistent dividend increases in 2008.
Leggett & Platt, Incorporated is a diversified manufacturer that conceives designs and produces a range of engineered components and products used in homes, offices, retail stores and automobiles. Leggett & Platt’s dividend was last raised in 2007, which ended the company’s 37-year streak of dividend increases. The company hasn’t been able to even cover its dividend payments by earnings for both 2007 and 2008 fiscal years.
Johnson Controls provides automotive interiors, products and services that optimize energy usage in buildings and batteries for automobiles and hybrid electric vehicles, along with related systems engineering, marketing and service expertise. The Company operates in three businesses: building efficiency, automotive experience and power solutions. The company last raised its dividend in 2007, ending its 33-year streak of consistent dividend raises. Even though Johnson Controls only yields 2.50%, which could hardly be justified as “high yield stock” per se, it has not been able to adequately cover its distributions from its earnings since Q4 2008.
This being said, due to the company’s diversification in location, products and clientele it should be able to withstand the current crisis in the automotive industry. The price of future growth could come at the expense of a dividend cut.
Just because companies have not been able to cover their dividends over the past few quarters doesn’t mean they would necessarily be cut; a rebound in corporate profits could push down payout ratios to more reasonable levels. The lack of dividend increases for more than one year however typically indicates that management does not see an improvement in the company financials over the next two years. Unless dividends are raised by the end of 2009 for the four companies mentioned above, they would certainly be dropped out of the Dividend Aristocrats indexes.
Full Disclosure: None
- Don’t chase High Yielding Stocks Blindly
- High yield stocks for current income
- Why do I like Dividend Aristocrats?
- Dividend Analysis of M&T Bank Corporation (MTB)
- Dividend Stocks to Avoid
Monday, June 29, 2009
Two of the companies that raised distributions, American Capital Agency Corp. and Hatteras Financial Corp. have fluctuating dividend payments. The other one, Prospect Capital has raised distributions for 19 consecutive quarters. Most of these distributions consist of earnings and returns of capital. Companies could only afford paying such distributions by selling additional stock and raising more money by selling additional debt in order to grow and sustain operations.
The double digit current yields, also show investors pricing in a high probability of a dividend cut.
Well let’s look at last weeks dividend increases first:
Hatteras Financial Corp. (HTS), which invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by the United States Government agency, or by the United States Government-sponsored entity, boosted its quarterly distributions to $1.10 per share. This represents a 4.8% increase for this real estate investment trust compared to its previous distribution. Hatteras Financial Corp. has a fluctuating dividend payment, which has ranged between $0.75 and $1.05 per share. The stock currently yields 15.90%.
Duke Energy (DUK), which operates as an energy company in the Americas, raised its quarterly dividend to 24 cents per share, which represented an increase of $0.01 over the previous level. It appears that Duke Energy has regularly increased its quarterly dividend since 2005, accounting for spinning off its natural gas transmission and storage business into Spectra Energy in 2007. The stock currently yields 6.60%.
American Capital Agency Corp. (AGNC), which invests in agency securities for which the principal and interest payments are guaranteed by a U.S. Government agency, increased its quarterly dividend to $1.50 per share, up from the previous distribution of $0.85/share. The stock currently yields 25.40%.
Prospect Capital Corporation (PSEC), which is a closed-end investment company that lends to and invests in private and microcap public businesses, increased its quarterly dividend to 40.625 cents per share. This dividend marks Prospect Capital's 19th consecutive quarterly increase. The company’s investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. The stock currently yields 16.90%.
PetSmart, Inc. (PETM), which provides products, services, and solutions for pets in North America., increased its quarterly dividend by a staggering 233% to 10 cents per share. The company’s Board of Directors also authorized a $350 million stock purchase plan that expires in January 2012. PetSmart, Inc. initiated a dividend payment policy in 2003 at 2 cents/share. The company has increased its dividend only once , in 2004 to 3 cents/share and kept it unchanged since, until the most recent increase. The stock currently yields 1.90%.
Darden Restaurants Inc. (DRI), which engages in the ownership and operation of full-service restaurants in the United States and Canada, increased its quarterly dividend by 25% to 25 cents per share. Darden Restaurants Inc has consistently increased its quarterly since 2005. The stock currently yields 3.10%.
As usual there’s not free lunch on Wall Street. Thus, before getting too excited about the high yielding dividend raisers from last week, research them carefully and make sure you understand how their business model works. In a market where cash is king, relying on the capital markets to fund growth could turn very expensive if done at the wrong moment.
Full Disclosure: None
- High yield stocks for current income
- Dividend Cuts - the worst nightmare for dividend investors
- Don’t chase High Yielding Stocks Blindly
- General Motors (GM) bankruptcy trade
- ACAS Dividend News
Friday, June 26, 2009
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 2.10% to its shareholders. The stock has largely traded between $65 and $40 over the past decade.
The company has managed to deliver a 10.90% average annual increase in its EPS between 1999 and 2008. Analysts are expecting an increase in EPS to $3.05-$3.10 for 2009 and $3.25-$3.30 by 2010. This would be a nice increase from the 2008 earnings per share of $2.49. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time.
Some analysts believe that Coca Cola could follow arch rival Pepsi Co’s moves to acquire its own bottlers in an effort to gain more control over the production and distribution of its beverages in key markets. Coke holds a 35% interest in its largest manufacturer and distributor of Coca Cola products, Coca-Cola Enterprises In. (CCE). Coca-Cola Enterprises Inc. accounts for about 40% of Coke’s concentrate sales and 16% of the company’s worldwide volume, which makes it a likely target of acquisition, should Coca Cola decide to follow Pepsi Co’s strategy of buying back its bottling operations.
The Return on Equity has been in a decline after hitting a high in 2001. 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 10.10% annually since 1999, which is slightly lower than the growth in EPS. The company last raised its dividend by 8% in February 2009, for the 47th year in a row.
A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1969, The Coca Cola Company has indeed managed to double its dividend payment every seven years on average.
The dividend payout ratio remained above 50% for the majority of the past decade. 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 Coca Cola is trading at 20 times earnings and yields 3.30%. In comparison arch rival in the cola wars Pepsi Co (PEP) trades at a P/E multiple of 16.5 and yields 3.40%. Check my analysis of Pepsi Co (PEP)
I believe that The Coca Cola Company is not as attractively valued at the moment as Pepsi Co. I would consider adding to my position there if it can cover its dividends at least two times by its earnings by the end of the year, and if the P/E ratio doesn’t increase above 20.
Full Disclosure: Long KO and PEP
Wednesday, June 24, 2009
The 20 largest stock buybacks from the 1Q 2009 are listed below: (source S&P)
The decrease in buybacks was about 73% in comparison to the first quarter of 2008. S&P 500 companies spent $30.8 billion buying back their own stock in 1Q 2009 versus $113.9 billion in 1Q 2008.
It’s interesting to note that several prominent dividend stocks appear on the list.
Exxon Mobil (XOM) accounted for the majority of buybacks in the first quarter, after purchasing $7.85 billion worth of its own stock. This was slightly down from the $8.845 billion spent on buybacks in 4Q 2008. In comparison the largest oil and gas company in the US paid only $1.98 billion in dividend payments for the quarter. Exxon Mobil has been consistently increasing its dividends for 27 consecutive years, with its most recent dividend payment being 42 cents/share. Check my analysis of Exxon Mobil (XOM).
International Business Machines (IBM) was the third largest company repurchasing its shares, after spending $1.765 billion in the first quarter 2009 and $47.945 billion since 2004. This was higher from the $0.74 billion spent on buybacks in 4Q 2008.In comparison “Big Blue”, as traders on the NYSE call this global tech behemoth, spent only $675 million on dividends in the same quarter. IBM has been consistently increasing its dividends for 14 consecutive years, with its most recent dividend payment being $0.55/share . Check my analysis of IBM.
Procter & Gamble (PG) spent $1.122 billion on buybacks versus $1.215 billion on dividends. In comparison the company spent $1.332 billion on share buybacks and $1.239 billion on dividend payments. The money spent on buybacks translates into 38 to 44 cents/share for each of the past two quarters. This provider of branded consumer goods products worldwide has spent over $43 billion on share buybacks between 4Q 2004 and 1Q 2009, which was much larger than the amount of total dividends paid for the same period. Procter & Gamble is a dividend aristocrat, which has been increasing its dividends for the past 53 consecutive years, with its most recent dividend payment being 44 cents/share . Check my analysis of Procter & Gamble (PG).
Another notable company on the share repurchasing front is Johnson & Johnson (JNJ). The company repurchased $834 million worth of stock in 1Q 2009 versus $878 million bought in 4Q 2008. The money spent on buybacks translates into 30 cents/share for each of the past two quarters. In comparison this healthcare company spent $1.273 billion on dividends for each of the last two quarters. JNJ has been consistently increasing its dividends for 47 consecutive years, with its most recent dividend payment being 49 cents/share. Check my analysis of Johnson and Johnson (JNJ).
McDonald’s (MCD) returned $813 million and $553.4 million respectively on stock buybacks and dividend distributions in the latest quarter. The stock buyback translates into $0.70/share for the quarter, which could have been paid as a cash dividend. McDonald’s has been consistently increasing its dividends for 32 consecutive years, with its most recent dividend payment being 50 cents/share. Check my analysis of McDonald’s (MCD).
Wal-Mart Stores (WMT) returned $886 million and $1.067 billion on share repurchases and dividends for the latest quarter. The money spent on buybacks translates into 22.50 cents/share for the latest quarter. In comparison, the world’s largest retailer returned $932 million in the form of dividends and zero in the form of stock buybacks in the previous quarter. Most recently it announced a new share repurchase program that gives the company authorization to repurchase $15 billion of its shares. Wal-Mart (WMT) has increased its quarterly dividend in each of the past thirty-five years, with its most recent dividend payment being 27.3 cents/share. Check my analysis of WMT.
Overall, the money spent on stock buybacks, does increase earnings per share in the long run, which also leaves room for faster dividend growth. This could also lower total dividend costs paid by corporations down the road.
In the end I enjoy a balanced approach, where companies do both dividends and share buybacks. My preference is on dividends, as I view share buybacks as a way to share the wealth with shareholders only during good times. The recent Standard and Poors report shows the steep declines in share repurchases in the first quarter of 2009. This confirms my theory that stock buybacks are similar to special dividends, and should not be taken into consideration when evaluating the income attractiveness of dividend stocks. However while both methods have their pros and cons, when used carefully, they could strongly add to the total returns of long-term shareholders.
This post was included in Carnival of Personal Finance #212: Independence Day Around the World Edition
Tuesday, June 23, 2009
Share Repurchases have gained popularity among companies because there's a total flexibility with them, whereas dividend payments require a commitment. With repurchases a company could spend billions buying back its stock in one year, and then spend nothing for the next few years. With dividends however a company that cuts, eliminates or suspends its payment would likely enrage shareholders.
Some investors believe that stock buybacks are the most tax efficient way for companies to return cash to shareholders. Currently, the highest tax on qualified dividend income is 15% for the top income tax bracket. When companies earn money, they pay taxes on it. When companies pay dividends, dividends are taxed again at the individual level.
When companies repurchase their own shares, they decrease the number of outstanding stock available, which theoretically increases the stock value. Some investors consider this to be the most tax efficient method of returning cash to shareholders, since there is no tax on repurchasing shares. These investors seem to forget however that the holders of stock who sold to the company end up paying a capital gains tax on their profit. While not all shareholders sell stocks to companies, which are repurchasing their own stock, the ones that do could end up with a higher tax bill at the end of the day, especially if they were long-term buy and hold investors.
One reason for the increased popularity of buybacks is that companies do not wish to commit to a certain dividend level, since their earnings are volatile. Stocks like Exxon Mobil (XOM) didn’t pay a large dividend during the huge run up in oil prices over the past decade, partly because their executives might have believed that once oil prices stabilized, dividends would have had to been cut in order to account for the new reality. It looks like Exxon Mobil (XOM) managers were correct about using caution in expecting the good times to continue indefinitely. Projections for near term earnings per share are to contract by 50% in 2009 before recovering to only two-thirds of the record earnings numbers from 2008. Check my analysis of Exxon Mobil (XOM)
Some analysts believe that companies use share buybacks as a clever way to offset shareholder dilution from exercised stock options from management. With stock repurchases companies fail to reduce share count due to new issuance of stock to redeem employee stock options. Stock buybacks are typically initiated in good times, when stock prices are high and discontinued in bad times, when stock prices are low, Thus, corporations end up purchasing their own stock at inflated prices, which greatly limits the supposed benefits of increasing the ownership percentage of each share owned by stockholders.
General Electric (GE) is a prime example for this. In 2007 the company spend $12.319 billion buying back stock, which reduced the share count from 10394 million to 10218 million, or a decrease of 176 million shares. This comes out to $70/share, whereas the high and low prices of GE stock in 2007 were $42.15 and $34.50 respectively. This sure tells us that the company gave out at least one hundred million shares through option exercises. Facing a liquidity crunch in 2008 the company was forced to sell $12 billion worth of stock at $22.25/share, much lower than the price is had paid for buybacks over the past 4 years. Back in February 2009, the company cut its dividend as well in order to conserve cash.
IBM is another interesting buyback stock to research further. Over the past decade, the worldwide supplier of advanced information processing technology and communication systems and services and program products has managed to decrease the number of shares outstanding from 1.852 billion at the end of 1998 to 1.339 billion by 2008. At the same time revenues have increased by 18.4% from $87.548 billion to $103.63 billion over the past decade. Earnings per share increased by 116.75% from $4.12 to $8.93, mainly due to share buybacks, since net income only rose by 60.4% from $7.692 billion to $12.334 billion in the process. $100 invested in IBM stock at the end of 1998 would now be worth $130.30 with dividends reinvested, and only $117.4 without reinvestment. Dividend payments increased from 0.11/share in 1998, when the yield was a little less than 0.5% to $0.55/share, for a yield of less than 2.1%.
The company has spent $73 billion on share buybacks, which should have been paid out as special dividends instead. This would have increased the total returns for shareholders by rewarding them with a higher dividend payment, the compounding effects of which could have greatly magnified long-term stockholder returns. I am a supporter of the extra cash being paid out as a dividend, since its contribution to the total returns would have been more visible than share buybacks. Check my analysis of International Business Machines (IBM).
Dividends on the other hand are mostly cash in hand that gives the investors options about their further allocation. They could be spent, re-invested in the same or other stocks or could be placed in a savings account. Dividends are somewhat more predictable and reliable sources of income, especially if you are looking for an alternative income stream in retirement.
Dividends have contributed a large portion of total returns to shareholders. They typically account for 40% of average annual total returns each year and are the only form of returns on investment that shareholders achieve during bear markets. The reinvestment of dividends has accounted for majority of S&P 500 total returns as well over the past century.
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.
It would be much easier for an individual who plans on living off their investments to rely solely on dividends that on hoping that share buybacks would lift the value of his or her stocks. Selling your stocks at the midst of a bear market in order to sustain your lifestyle doesn’t make much sense, yet investors keep cheering the supposed “tax efficiency” of stock buybacks.
I typically treat share repurchases the same way as special dividends. Share buybacks are inferior to dividend payments, as they could be canceled or temporary suspended at any moment, without many investors noticing this. Dividend payments on the other hand are visible to shareholders and cutting or eliminating a payment would certainly create negative publicity for the company. I would much rather see special dividends, rather than stock buybacks, which are a clever way to mask the diluting effect of employee option being exercised.
Full Disclosure: None
- Special Dividends Unlock Hidden Value in Stocks
- Dividends and Stock Buybacks in the news
- Dividend Investing vs Trading
- IBM Dividend Stock Analysis
- Exxon Mobil (XOM) Dividend Stock Analysis
Monday, June 22, 2009
Several companies expressed their confidence in their future business prospects, by raising their dividends. One of them was Realty Income (O), which engages in the acquisition and ownership of commercial retail real estate properties in the United States. The monthly cash dividend was increased to $0.142375 per share from $0.1420625 per share. This represents the 6th increase for the past year. Tom A. Lewis, Chief Executive Officer of Realty Income, commented, "We are pleased that, despite challenging economic conditions, our operations allow us to once again increase the amount of the dividend we pay to our shareholders. With the payment of the July dividend we will have made 468 consecutive monthly dividend payments."
Realty Income calls itself The Monthly Dividend Company(R), since it has declared 468 consecutive common stock monthly dividends throughout its 40-year operating history and increased the dividend 54 times since Realty Income's listing on the New York Stock Exchange in 1994. The monthly dividend is supported by the cash flow from over 2,300 retail properties owned under long-term lease agreements with leading regional and national retail chains. Check my analysis of Realty Income (O). This dividend achiever currently yields 7.70%.
Medtronic, Inc. (MDT), which develops, manufactures, and markets medical devices worldwide, approved a 9% increase in its quarterly dividend to 20.50 cents per share. In addition to that the company also approved an increase in its Share Repurchase Plan, authorizing Medtronic to purchase an additional 60 million shares of its common stock, which represents 5.4% of the company’s outstanding stock issued. Medtronic, Inc. is a dividend champion, which has increased its quarterly dividend for thirty one consecutive years. The stock currently yields 2.20%.
John Wiley & Sons, Inc. (JW.A) and (JW.B), which publishes print and electronic products that provide content and solutions, raised its quarterly dividend for A and B shares to 14 cents per share. This action represented an almost 8% increase in comparison to the previous dividend payment. This was the 16th annual dividend increase for this dividend achiever. The stock currently yields 1.50%.
Del Monte Foods Company (DLM), which engages in the production, distribution, and marketing of branded food and pet products for the retail market in the United States, announced that its board of directors has approved a 25% increase in its quarterly dividend to 5 cents per share. This is the first dividend increase for Del Monte Foods Company since it initiated its dividend policy in 2006. The stock currently yields 1.80%.
Annaly Capital Management, Inc. (NLY), which engages in the ownership, management, and financing of a portfolio of investment securities, increased its quarterly dividend by 20% to 60 cents a share. The dividends that Annaly Capital Management, Inc. pays are volatile and have ranged between 10 cents/share in 2005 to 68 cents/share in 2002. The stock currently yields 13.80% based off the past three payments and the new quarterly distribution.
Screening the news for potential additions to my dividend growth portfolio didn’t unveil any new hidden gems except for Realty Income (O), which was on my Best High Yield Dividend Stocks for 2009 list.
Full Disclosure: Long ORelevant Articles:
- Realty Income (O) Dividend Analisys
- Dividend Conspiracies
- Why do I like Dividend Achievers
- Best High Yield Dividend Stocks for 2009
Friday, June 19, 2009
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 5.40% to its shareholders. The stock has lost over two thirds of its value from its peak in 2000. The stock performance resembles the continued slide in Pfizer (PFE) stock right before the dividend cut in January 2009.
The company has managed to deliver an unimpressive 2.10% average annual increase in its EPS between 1999 and 2007. Earnings per share were a negative $1.89 due to several factors. One of the factors was a $4.46/share net impact associated with the acquisition of Imclone in 2008 for acquired IPR&D related to this acquisition. Another major item that affected earnings per share was a $1.20/share charge related to federal and state investigations regarding the drug Zyprexa. If it weren’t for these adjustments in earnings, adjusted EPS would have been $4.02, versus $3.54 in 2007. Analysts are expecting an increase in 2009 earnings per share to $4.20 and $4.50 by 2010. This is a rather steep increase from the range in which the stock’s earnings remained between 1999 and 2007. The most important factor for Elli Lilly and Co is their pipeline. The company’s future success depends upon its ability to discover and develop innovative new medicines that help people live longer, healthier, and more active lives.
The Return on Equity has been in a steep decline, falling from 54% in 1999 to 24% in 2007. 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 8.20% annually since 1999, which is much higher than the growth in EPS.
An 8 % growth in dividends translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1974, Eli Lilly Company has actually managed to double its dividend payment every seven years on average.
The dividend payout ratio remained above 50% since 2002. 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 Eli Lilly and Co is trading at 8.20 times 2009 earnings and yields 5.70%. In comparison Pfizer (PFE) trades at a P/E multiple of 12.5 and yields 4.30%, Merck (MRK) trades at a P/E multiple of 10 and yields 5.50%, while Novartis (NVS) trades at a P/E multiple 11.60 while yielding 4.30%.
Full Disclosure: None
Wednesday, June 17, 2009
My post on replacing dividend stocks sold triggered some heated debates by some readers. Some investors believe that by concentrating on their best ideas they could generate the best returns. After all, it is much easier to be up to date on any developments on ten to fifteen companies, rather than focusing on at least 30 individual stocks.
In retrospect, it is easy to identify the best performing stocks over the past two or three decades and develop screening criteria that would have triggered a buy signal. The question is whether this success could be replicated over the next two to three decades. I am highly skeptical of methods that show great promise on paper, because the market is an ever-evolving creature, which tends to fool even the best investors. Even the almighty Warren Buffett has evolved his strategies over the years, from a pure Graham follower, to an avid business owner and stakeholder in some of America’s most successful corporations such as Johnson & Johnson (JNJ), Coca Cola (KO) and Procter and Gamble (PG). Without adapting his methodology to the external environment and his portfolio size, Berkshire Hathaway (BRK.A) would have never made it to what it is today.
Back to sticking to the best investments, I disagree that ten to fifteen companies would provide an adequate diversification for ones portfolio. There are about ten sectors that comprise the S&P 500 alone, which sure leaves you holding just a single stock from each sector if you wanted to concentrate only on your best ideas. Chances are that a concentrated portfolio would not be diversified internationally or diversified into small and mid cap dividend stocks. Over time even the best ideas could take a longer time to live up to their full potential especially if the market ignores a group of stocks such as large caps, while favoring international and mid cap domestic stocks. It is difficult to forecast which would be the best performing sectors or stocks over the next few years
A portfolio consisting of 10 to 15 shares would likely experience a higher volatility and thus a higher amount of risk in comparison to a portfolio consisting of at least 30 dividend stocks from a diversified list of sectors. Thus, on a risk adjusted basis the more concentrated portfolio would likely underperform a more diversified portfolio consisting of more than 30 individual stocks.
Even if you owned a quality dividend stock from each sector in the S&P 500, your dividend income could suffer greatly if your stock cuts or eliminates its dividends. If you owned Bank of America (BAC) stock and had a 10% allocation to this once high yielding and high dividend growth stock, chances are that your dividend income would have dropped off much faster in comparison to having a 3% allocation to the stock. You also might have not properly diversified your sector risk as well, as you might have picked the worst performer in the sector, even though the other leaders do better.
For example, Coca Cola (KO) has had a horrible ten-year total return in comparison to Pepsi Co (PEP). While the so-called cola wars have swept the globe over the past several decades, predicting which company would be the winner in each decade would have been highly unlikely. Thus, sticking with both competitors in the cola wars could be the best idea for investors.
Now there is another side to this equation and it is that identifying more than 40 quality dividend stocks could be a rather difficult task to handle. My goal has been to diversify as much as possible by holding up to 100 individual securities. This would make my dividend income stream properly diversified and not dependent on a dividend cut by any individual stock. In reality however, requiring a minimum number of companies to own could lead to lowering your entry criteria, which could prove as disastrous for long term performance as concentrating in the best ten stock ideas that you might have.
One thing to add here is that per the paretto principle, I would expect about 80% of my long-term performance to come from 20% of the issues I select. In a 40 stock portfolio that means that about 8-10 companies that I own today would be responsible for most of my gains over time. Since I own mostly dividend growth stocks such as the dividend aristocrats and the dividend achievers I think that this is a fairly accurate statement. In a previous study I found that the percentage of companies that remain in the S&P Dividend Aristocrats index after 10 years is about 30%. In addition to that the average company stayed 6.5 years in the S&P Dividend Aristocrats index from the time of its addition. In addition to that out of 26 initial components of the elite dividend index in 1989, only 7 are still parts of it 20 years later. The companies are: Dover Corp (DOV), Emerson Electric (EMR), Johnson & Johnson (JNJ), Coca Cola (KO), Lowe’s (LOW), 3M (MMM) and Procter & Gamble (PG).
Of course 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, due to the limitations of using only past data to reach a conclusion. Thus, 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.
The article was included in the Carnival of Personal Finance #210 – Punch Out Edition
Full Disclosure: Long EMR, KO, PEP, JNJ, PG and MMMRelevant Articles:
- Replacing dividend stocks sold
- Warren Buffett – The Ultimate Dividend Investor
- Diversifying into small and mid cap dividend stocks
- International Dividend Achievers for diversification
Monday, June 15, 2009
The Clorox Company (CLX), which manufacture and markets a range of consumer products, announced an 8.70% increase to its quarterly dividend from 46 to 50 cents per share. The Clorox Company is a member of the dividend aristocrats index, and has regularly increased its quarterly dividend for the past thirty-two years. The stock currently yields 3.40%. Check my analysis of Clorox (CLX).
Target Corporation (TGT), which operates general merchandise and food discount stores in the United States, increased its quarterly dividend by 6% to 17 cents per share. This marked the 42nd consecutive annual dividend increase for Target Corporation, which is also a dividend aristocrat. The stock currently yields only 1.70%. Check my analysis of Target (TGT).
C. R. Bard, Inc. (BCR), which engages in the design, manufacture, packaging, distribution, and sale of medical, surgical, diagnostic, and patient care devices worldwide, increased its quarterly dividend by 6% to 17 cents per share. C. R. Bard, Inc. is a dividend aristocrat which has regularly increased its quarterly dividend in each of the past thirty eight years. The stock currently yields 0.90%. The slow dividend growth and the low current yield are one of the reasons why I have never analyzed this stock.
W. P. Carey & Co. LLC (WPC), which is an investment management company, increased its quarterly dividend to 49.8 cents per share, up from 49.6 cents. W. P. Carey & Co. LLC is a dividend achiever, which has increased its quarterly dividend in each of the past eleven years. The stock currently yields 7.70%.
National Fuel Gas Company (NFG), which invests in health care and human service related facilities,, increased its quarterly dividend by 3.10% to 33.50 cents per share. National Fuel Gas Company is a dividend champion, which has increased its quarterly dividend in each of the past thirty-nine years. The stock currently yields 3.70%.
Oil-Dri Corporation of America (ODC), which engages in the development, manufacture, and marketing of sorbent products, increased its quarterly dividend by 7% to 15 cents per share. Oil-Dri Corporation of America has only increased its quarterly dividend in each of the past six years. The stock currently yields 3.00%.
VSE Corporation (VSEC), which provides program management, logistics, engineering, information technology (IT), construction program, and consulting services, boosted its quarterly dividend by 11% to 5 cents per share. VSE Corporation has increased its quarterly dividend in each of the past five years. The stock currently yields only 0.70%.
Florida Public Utilities Company (FPU), which engages in the purchase, transmission, distribution, and sale of electricity and natural gas to residential, commercial, and industrial customers in Florida, announced a 2.1% boost to its quarterly dividend to 12 cents per share. Florida Public Utilities Company has increased its quarterly dividend for over ten years. The stock currently yields 3.60%.
Full Disclosure: Long Clorox
- Clorox (CLX) Dividend Stock Analysis
- Dividend Aristocrats keep raising their dividends
- Dividend Aristocrats Strike Back
- Target Corporation (TGT) Dividend analysis
Friday, June 12, 2009
Clorox has paid uninterrupted dividends on its common stock since it was spun out of Procter and Gamble (PG) in 1968 and increased payments to common shareholders every year for 31 years.
From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 1.70% to its shareholders. While the stock has largely remained flat for the majority of the past most of the returns came from reinvested dividends.
At the same time company has managed to deliver an impressive 13.60% average annual increase in its EPS since 1999. Analysts are expecting an increase in 2009 earnings per share to $3.80 and $4.15 by 2010.
The Return on Assets increased to 11% in 2008 from 6% in 1999. I used return on assets, since the stockholders equity portion of the balance sheet was negative after in 2004 Clorox exchanged its ownership in a subsidiary for approximately 29% of the company’s outstanding shares at the time of this transaction. In addition to that the company spent over 1.65 billion in share buybacks in 2007 and 2008.
Annual dividends have increased by an average of 8.60% annually since 1999, which is lower than the growth in EPS. Clorox has an ever-evolving dividend payment policy, which doesn’t stop the company from raising the annual distributions for 31 years in a row. There have been times such as in 2007 when dividend were raised twice while there are times such as 2003-2004 and 2000-2002 when dividends are not being raised for 6 to 9 quarters.
A 9 % growth in dividends translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1983, The Clorox Company has actually managed to double its dividend payment every six years on average. The dividend is very well covered at the moment and is safe.
The dividend payout ratio remained above 50% until 2002. Since then the dividend payout ratio has consistently 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.
Currently Clorox is trading at a P/E of 14 and yields 3.50%. I believe that the company is attractively valued at current levels and would consider adding to my position in the stock.
In comparison Procter & Gamble (PG) trades at a P/E multiple of 12 and yields 3.40%, Kimberly-Clark (KMB) trades at a P/E multiple of 13 and yields 4.70%, while Colgate Palmolive (CL) trades at a P/E multiple 18 while yielding 2.70%.
Full Disclosure: Long CLX, PG, and KMB
- Procter & Gamble (PG) Dividend Stock Analysis
- Why do I like Dividend Aristocrats?
- The Rule of 72
- Johnson & Johnson (JNJ) Dividend Stock Analysis
Wednesday, June 10, 2009
I do agree that in the globalized society of the 21st century it is important do be able to diversify your stock investments away from the US. By purchasing international stocks one essentially receives income in a different currency, which is a decent hedge against a possible devaluation of the US dollar. Another benefit of shopping for quality dividend stocks abroad is the huge potential for economic growth and development that both established and emerging economies posses.
There are some differences between US and international based dividend stocks. The first is that the dividend payments of foreign dividend stocks closely follow the earnings trend for the corporation. This is a problem for international dividend growth investors as it does not lead to a consistently increasing dividend income stream, which they are used to by investing in US companies. In the US companies are reluctant to cut dividends if the company had a bad year, while in Europe the dividends are more likely to be cut in response to short term fluctuations in earnings.
Another difference with global dividend stocks is that most pay dividends on an annual or semi-annual basis, which decreases the compounding effect of your payments. In addition to that, a certain percentage of your foreign dividends could be withheld directly from your payment, which decreases your income and makes individual dividend investing in a tax-deferred account inefficient. For example dividends paid from Canadian Companies to US investors are subject to a 15% withholding tax. The IRS however does give a tax credit for the current 15% Canadian withholding tax for foreign investors.
Different countries might have different taxation treaties for taxing dividends, thus you might consider hiring a good tax advisor.
Speaking of accounting matters, most foreign companies do not report results using the US GAAP but using IFRS. This could create material differences when analyzing foreign stocks, as there could be distortions in the amounts of net income, balance sheet values and cash flows.
In addition to that, most US based corporations have operations on a global scale, which derive a large portion of their revenues from abroad. I found that the ten stocks with the highest weights in the S&P 500 index derive about 44% of their aggregate financial contributions from foreign operations then the overall contribution to financial performance would be similar for the index as a whole. Thus an investor, who is simply invested in an S&P 500 index fund, is also properly diversified internationally. Adding any further international stocks could increase my international exposure, without adding any further incremental benefits.
I focused my study only on international stocks trading on the US exchanges. This does provide some limitations to the pool of available investments, but the risks to opening a non-US brokerage account in a foreign currency, paying taxes to foreign governments and paying higher brokerage fees for trades are not worth the incremental rewards for individual investors.
The companies I selected were foreign-based corporations, which have increased their dividends for at least five consecutive years. I tried creating a diversified list of foreign stocks, in order to avoid putting all my eggs in one basket.
SJR Shaw Communications Inc. (Cl B)
TRI Thomson Reuters Corporation
BTI British American Tobacco PLC (ADS)
CBY Cadbury PLC ADR
DEO Diageo (analysis)
UN/UL Unilever PLC/Unilever N.V.
BP BP PLC (ADS) (analysis)
ENB Enbridge Inc.
TK Teekay Corp.
TNP Tsakos Energy Navigation Ltd.
TRP TransCanada Corp.
BMO Bank of Montreal
BNS Bank of Nova Scotia
CM Canadian Imperial Bank of Commerce
MFC Manulife Financial Corp.
PRE PartnerRe Ltd.
TD Toronto-Dominion Bank (analysis)
ACL Alcon Inc.
AZN AstraZeneca PLC (ADS)
FMS Fresenius Medical Care AG & Co. KGaA (ADS)
NVO Novo Nordisk A/S (ADS)
MITSY Mitsui & Co. Ltd. (ADS)
BHP BHP Billiton Ltd. (ADS)
SQM Sociedad Quimica y Minera de Chile S.A. (ADS)
NTT Nippon Telegraph & Telephone Corp. (ADS)
TEF Telefonica S.A. (ADS)
TU TELUS Corp.
VOD Vodafone Group PLC (ADS)
NGG National Grid PLC (ADS)
VE Veolia Environnement (ADS)
The portfolio is not a recommendation to buy or sell any stocks, as it reflects my specific financial risk tolerance. Always do your own research before initiating a position in any financial instrument.
Full Disclosure: Long BP, TD and looking to enter other stocks mentioned here on dips
This post was featured on 209th Carnival of Personal Finance
- Best Dividends Stocks for the Long Run
- International Over Diversification
- International Dividend Achievers for diversification
- My Dividend Growth Plan - Diversification
Monday, June 8, 2009
Several companies announced plans to return billions of dollars to shareholders either through stock buybacks or dividend increases;
Wal-Mart Stores, Inc. (WMT), which operates retails store in various formats worldwide, approved a new share repurchase program that gives the company authorization to repurchase $15 billion of its shares. That’s after having repurchased $11.5 billion in stock over the past two years. If all the stock were bought at the current prices, the company would be able to retire about 7.5% of its outstanding common stock.
Wal-Mart Stores, Inc. is a dividend aristocrat, which has increased its quarterly dividend in each of the past thirty-five years. The company raised its quarterly dividend by 15% in early march to 0.273/share. The stock currently yields 2.10%.
Despite the fact that I am bullish on the stock, I would still need an initial yield of 3% before I could add to my position there. Wal-Mart has been flat for over a decade now, where any returns were achieved exclusively through dividend reinvestment. If the stock price remained where it’s at for another decade, I would like to at least get some decent return in the form of at least a somewhat decent dividend yield. Currently there are many other dividend growth stocks that yield more than 3%, which still have the same growth characteristics as the Bentonville, AR based retailer.
Cardinal Health (CAH), which provides products and services to the healthcare sector in the United States, announced a 25% increase in its quarterly dividend to $0.175/share. Cardinal Health is a dividend achiever, which has increased its quarterly dividend for twenty consecutive years. The dividend has increased over 11 times over the past decade. The company's focus on dividend expansion creates a predictable and disciplined use of cash to drive shareholder returns and signals confidence and strength in the cash generated by its businesses. The stock currently yields 2.30%. I would be interested in acquiring shares in this global healthcare provider on dips below $24.
Universal Health Realty Income Trust (UHT), which invests in health care and human service related facilities,, increased its quarterly dividend to 59.50 cents per share. Universal Health Realty Income Trust is a dividend achiever, which has increased its quarterly dividend in each of the past twenty-one years. The stock currently yields 7.00%.
As usual, scanning the wires for dividend increases or any dividend news whatsoever is only the beginning in the process of sifting through many stocks, before identifying the best dividend stocks to own for the long run.
Full Disclosure: Long WMT
- Why do I like Dividend Aristocrats?
- Wal-Mart Dividend Analysis
- Replacing dividend stocks sold
- Dividend Investors Running With the bulls
Saturday, June 6, 2009
New Jersey's Cooperative Extension Services (operated out of Rutgers University) offer a great online quiz that will calculate your level of investment risk tolerance. If you don't like that one, you can take a look at Yahoo's free calculator. Still not happy? Merrill Lynch has their own. And there are others. Many others.
And all of the calculators attempt to do the same thing--they want to tell you how much risk you're comfortable taking in your financial planning. Obviously, that's a tough nut to crack. We don't really have a standard unit of measurement for risk, after all. So, what you end up with is a numerical score that corresponds with a few sentences describing the way the calculator believes you feel about risk and money.
Is that valuable information? For some people, it might be. There are undoubtedly a few folks out there who aren't big fans of introspection who've never considered whether they're devil-may-care or risk aversive. Those horoscope-like explanations of what the results mean might give people a slightly better sense of what their feeling really mean in some senses.
In those ways, you could consider the risk assessment tools valuable. They also have some potential value if you find that your attitudes about risk are in direct conflict with your optimal personal finance objectives (more on that later).
Even though there is some value in calculating your risk tolerance, you shouldn't fool yourself into believing this information is truly mighty. Don't make the common mistake of assuming that your comfort level should dictate your resource management.
That's right, the argument that you should only invest at a risk level compatible with your own comfort level is wrong, wrong, wrong. If you're tolerance for risk is out of whack (in either direction), you don't necessarily need to change your investment pattern. You need to adjust your attitude instead.
That argument assumes an optimized investment plan, of course. The argument is quite simple. You should be following the best possible system to reach your financial objectives. If you are using that system and your personal sense of risk tolerance runs contrary to it, you need to change your attitude, not your plan.
Not everyone agrees with that. Statements like, "Your risk tolerance should determine a suitable asset allocation that is right for you" are common. There's a belief out there that you shouldn't invest if the move makes you uncomfortable.
That's a backwards perspective, though. You should be focused on developing a plan of action that will meet your needs and objectives. If you can do that while staying in your psychological "comfort zone", that's great. If, however, it moves you into uncomfortable territory, you need to change the dimensions of that "comfort zone".
Otherwise, you're setting yourself up for a long-term failure. If you need to undertake a certain level of risk to reach your goals, anything short of that is going result in you falling short of those goals. If the plan is sound and the strategy is workable, you should be at least somewhat comfortable in knowing you're doing the right thing. If you don't feel that way, it's time to either (a) persuade yourself to start or (b) prepare to be nervous for a while.
InvestorGuide.com lays out the argument:
We need to remember that it is not only our personal risk tolerance that we want to consider, but we also want to ask ourselves, "What is the appropriate risk to take?"
Asking how you feel about something is wonderful. Letting the answer dictate your personal finance strategy, however, isn't. Instead, you should be making decisions based on your own financial interests.
If you don't have a good plan and you're living on a personal finance roller coaster, it's fine to take stock of your comfort level and to act accordingly. If you're following the kind of smart plan you need to get ahead, however, your comfort level needs to take a backseat.
- Diversifying into small and mid cap dividend stocks
- Dividend Investing vs Trading
- My Dividend Growth Plan - Diversification
- Don’t chase High Yielding Stocks Blindly
Friday, June 5, 2009
From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 5.90% to its shareholders. While the stock has largely remained flat for the majority of the past decade (except for the breakout in the stock price in 2007) most of the returns came from reinvested dividends.
At the same time company has managed to deliver an impressive 10.70% average annual increase in its EPS since 1999.
The ROE has consistently remained high, ranging between 57% and 475% over the past decade.
Annual dividends have increased by an average of 11.40% annually since 1999, which is slightly higher than the growth in EPS.
An 11 % growth in dividends translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1977, Colgate Palmolive has actually managed to double its dividend payment every eight years on average. Just a few weeks ago Colgate Palmolive boosted its dividend by 10% for the 46th year in a row. The dividend is very well covered at the moment.
The dividend payout has ranged between a high of 51% in 2006 and a low of 33% in 2002. One positive fact is that the payout ratio has consistently 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.
Despite the low dividend payout ratio and low P/E ratio, I require a dividend yield of at least 3% in order to initiate a position in Colgate Palmolive. Currently the yield is at 2.80%, and price earnings ratio is 17.
In comparison Procter & Gamble (PG) trades at a P/E multiple of 12 and yields 3.40%, Kimberly-Clark (KMB) trades at a P/E multiple of 13 and yields 4.70%, while Clorox (CLX) trades at a P/E multiple 14 while yielding 3.60%.
I would consider initiating a position in Colgate Palmolive on dips below $58.66.
Full Disclosure: Long PG, KMB and CLX
Wednesday, June 3, 2009
In real life however things are usually far from ideal. What could happen is that some dividend stocks would outperform the others and thus their weightings could be disproportionately large. In order to maintain the equal weights, investors have several choices besides selling the best performers and placing the proceeds in the underdogs.
One of them includes reinvesting the dividends from the stocks with the highest weights into the stocks with the lowest weights.
Another option includes adding extra funds to the stocks which have a below average weighting in your portfolio, as part of your process of regular contributions toward your portfolio.
An important thing to add is that one should not consider adding to a position, which no longer fits two or more points from your entry criteria. My entry criteria consists of several bullet points including:
1) A stock which has increased annual dividends for at least the past ten consecutive years (preferably for at least 25 years)
2) A price/earnings ratio of under 20
3) A dividend payout ratio of less than 50%. In certain cases such as Master Limited Partnerships, Utilities or Real Estate Investment Trusts, which distribute the majority of their earnings to stockholders, compare the current payout ratio to the historical one.
4) A dividend yield, which at least matches the dividend yield on the S&P 500. This criterion used to be a 2% initial yield for the majority of 2008, until yields on the S&P 500 rose to the highest levels since the early 1990’s. Currently I prefer to invest in stocks with a current dividend yield of at least 3%.
For example, if you have a position in M&T Bank (MTB), you would be receiving a quarterly dividend of $0.70/share. M&T Bank last raised its dividends in July 2007. Unless the bank raises its dividends by the end of 2009, it would lose its dividend aristocrat status.
Because of the unchanged dividend, I stopped re-investing dividends in the stock by the end of 2008. I also stopped adding to this position as well. The dividend payout is slightly above 50%, while the P/E and the yield are pretty attractive at 12.7 times earnings and 6%. Another thing that concerns me about M&T Bank is that it took $600 million in TARP money back in December 2008. My experience with other banks, which received TARP money, such as Bank of America (BAC), US Bancorp (USB), Wells Fargo (WFC) and BB&T (BBT), is that TARP receivers are very likely to cut their dividends.
Since I have started reinvesting my MTB dividends into other companies I own, my allocation in the stock has dropped to about 1.7% of my total portfolio value. This position contributes about 2.20% of my total annual dividend income. My yield on cost is 4%. If the dividend were cut while the stock was trading at $46 however, I would sell the stock.
The question now is what should I do with the money I received from the sale. My dividend income would be lowered, and I would now have $46 to invest, which is lower than my average cost of $69/share. In order to maintain my dividend income of $2.80/share, I would have to purchase $46 worth of shares in a dividend stock, which currently yields at least 6%. In the current market it is possible to find a solid dividend stock, which yields at least 6%. One example that comes to mind is Consolidated Edison (ED). Another is Kinder Morgan Partners (KMP). It is important to try and keep sector weights as well however.
On the other hand I could simply accept that my dividend income for this portion of my portfolio would be lower and simply invest in a promising candidate such as Johnson & Johnson (JNJ) or Abbott (ABT). It is more important to have a diversified stream of dividend income, rather than chase the highest yielding stocks when replacing dividend stocks sold in an effort to maintain your previous levels of dividend income. Check my example with General Electric (GE) for more clarification.
Back in February 2009, General Electric (GE), which was one of my favorites until the end of 2008 announced its intention to cut its quarterly dividends to the lowest levels since 1997. I immediately sold my position at a loss for $8.63/share. My cost basis was $28.97/share. My dividend income was $1.24/share, while my yield on cost was 4.30 %. The new dividend would have been $0.40/share, which makes up for a yield on cost of only 1.40%, much worse than rates on Certificates of Deposit. Even though I had stopped contributing to my GE position by the beginning of the fourth quarter 2008,GE made up about 1.00% of my portfolio value. This position also contributed about 3% of my total annual dividend income. Thus, in order for me to generate $1.24 in dividend income for every GE share that I sold, I would need to purchase a stock yielding 14.40%. In the current market, most stocks that pay such a high current dividend are very likely to cut their distributions. Thus, maintaining the dividend income just for this portion of my dividend portfolio was not worth the risk of chasing the highest yielding stocks. Instead I purchased shares in Abbott Labs (ABT), which generate almost the same income that I would have received had I not sold my GE shares. While in retrospect my sale of GE stock seems foolish as the shares have risen almost 50% since then, I do not see the same potential for dividend growth that I see for Abbott (ABT). With Abbott (ABT) I see the potential for stable dividend growth, fueled by its strong new product pipeline and the potential for initiatives in the medical device and pharmaceuticals fields. In retrospect I could have added to my position in Kinder Morgan instead, but this could have lead to me being overweight the largest master limited partnership in the US, which is something I try to avoid.
My overall dividend income is up almost 3% year to date, after several reliable companies such as Johnson & Johnson (JNJ), Procter and Gamble (PG) and Coca Cola (KO) continued their long history of sharing prosperity with shareholders through regular annual dividend increases.
Dividend investors who are trying to replace the lost dividend income from stocks, which cut or eliminated their dividends, should realize that it is important to diversify the number of holdings that generate income for them. While a dividend cut or elimination from a stock that generated 3% of your portfolio income hurts, one should keep an eye on the big picture and not repeat their mistakes. It is the diversified income stream that counts and not replacing dividend stocks sold with the highest yielding stocks matter, which would certainly increase risk. At the end of the day, the dividend cutter has already compromised your dividend income. Taking on a higher risk only leads to a vicious circle of not focusing on dividend growth potential, but on chasing the highest yielders, which is a game of wealth destruction.
- Abbott Labs (ABT) Dividend Stock Analysis
- Dividend Cuts - the worst nightmare for dividend investors
- When to sell my dividend stocks?
- More Dividend Stocks to Avoid
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