Friday, July 30, 2010
Over the past decade this dividend stock has delivered an average total return of 5.90% annually.
The company has managed to deliver a 13.30% average annual increase in its EPS between 2000 and 2009. Chubb is expected to earn $5.30 share in FY 2010, followed by $5.60/share in FY 2011.
The Return on Equity has remained around 15% for the latter part of the last decade, after falling to as low as 2% earlier. 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 8.70 % annually since 2000, which is slower than the growth in EPS. The disparity is mostly due to a gradual decrease in the dividend payout ratio and the billions of dollars the insurer has spent on stock buybacks.A 9 % growth in dividends translates into the dividend payment doubling almost every eight years. If we look at historical data, going as far back as 1984, Chubb has actually managed to double its dividend payment every nine years on average.
The dividend payout ratio has been on the decline, and is still much lower than my 50% threshold. 2001 and 2002 stick as outliers, since earnings per share were lower on high underwriting combined ratios. 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 Chubb is trading at 9.20 times earnings, yields 3.10% and has an adequately covered dividend payment. In comparison rival Travelers Cos (TRV) trades at a P/E multiple of 8 and yields 2.90% , while Cincinnati Financial (CINF) trades at a P/E multiple of 9 and yields 5.90%. Berkshire Hathaway (BRK.B) is also a competitor to Chubb(CB), although it trades at a P/E of 22, and does not pay a dividend. The company does spend a lot of its cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort. I like the company and its business model. Insurance companies like Chubb (CB) are a way for investors to fill in the need for exposure to the financial sector, after several high profile payers like Citigroup (C) and Bank of America (BAC) cut their distributions.I believe that the company is attractively valued at the moment; thus I would be looking forward to adding to my position in Chubb (CB).
Full Disclosure: Long CB
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Wednesday, July 28, 2010
My entry yield requirement has ranged from a low of 2% in 2008 to a high of 3% since 2009. After analyzing some of the most successful dividend stocks such as Wal-Mart (WMT), Johnson & Johnson (JNJ), McDonald’s (MCD) and Becton Dickinson (BDX) I have come to realize that a minimum yield requirement could have been a detriment to acquiring those stocks when they first became dividend achievers.
Stocks such as Johnson & Johnson (JNJ) never really yielded more than 3% until 2008 for example. As a result I would have missed on strong double digit dividend growth for several decades, which would have surely turned the yield on cost on original investments into the triple digits. A company that yields 2% currently but manages to raise distributions by 12% due to strong earnings growth would double the yield on cost in 6 years.
It seems that a more flexible approach would be to analyze the average yields investors could have received over the past decade and then decide whether it makes sense to purchase the stock based on valuation and earnings power. In this sense making sure not to pay over twenty times earnings or accepting an unreasonably high dividend payout is very important.
Another thing to do is to simply ignore current yield altogether and instead focus on the fundamentals, while evaluating whether the company could reasonably expect to boost distributions for the next decade. A company with a yield lower than 3% would definitely have to have an average dividend growth of at least ten percent.
While I would ignore current yield, I could still create a dividend portfolio where I try to obtain an average current dividend yield of 3% or 4%. This could be achieved by grouping high yielding stocks with low yielding dividend growth stocks. The high yielding stocks typically are slow growing and would provide current income. The low yielding stocks would have a growth component, which would ensure purchasing power protection from inflation. If an investor decides to create a diversified dividend portfolio with 40 individual stocks in it, they could purchase 20 dividend growth stocks yielding 2% or 3% on average and 20 stocks which yield 5% - 6% on average in order to obtain a portfolio yield of 4% for example. Examples of high yielding stocks that could used in this strategy include Realty Income (O), master limited partnerships such as Kinder Morgan Energy (KMP) ,utilities companies such as Con Edison (ED) or telecom firms such as AT&T (T).
To summarize, investors do not need to choose between yield and dividend growth. Instead, they could create portfolios where they take advantage of both.
Full Disclosure: Long JNJ, MCD, WMT, O, KMP, ED, T,
This article was included in the Carnival of Personal Finance #269: THE DIVA$ EDITION
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Monday, July 26, 2010
“We are able to restore the GE dividend at a historical payout level for 2010 earlier than previously anticipated and to extend our share buyback program because of continued strong cash generation, recovery at GE Capital, and solid underlying performance in our Industrial businesses through the first half of 2010,” GE CEO Jeff Immelt said. “In addition, the Company continues to plan on capitalizing on strategic and financially attractive inorganic growth opportunities. “
“We are executing well, progressing on our plans to make GE Capital a smaller, more competitive specialty-finance company, and continuing to generate strong cash flow,” Immelt said. “This gives us the flexibility to allocate capital for growth and shareholder value, while keeping GE safe and secure.”
Other companies which are seldom mentioned, but should probably get much more credit include energy master limited partnerships, which boast strong cash flows and stable distributions. In addition to that, the toll-bridge business model for those energy transportation companies has enabled many of them to raised distributions more than once per year.
Enbridge Energy Partners, L.P. (EEP) owns and operates crude oil and liquid petroleum transportation and storage assets, as well as natural gas gathering, treating, processing, transmission, and marketing assets in the United States. The company announced a cash distribution of $1.0275 per unit, which was an increase of 2.5 percent over previous quarters distribution per unit. Yield: 7.10%
Navios Maritime Partners L.P. (NMM) operates as an international owner and operator of drybulk carriers in Greece. Navios Maritime Partners L.P. increased cash distributions by 1.20% to $0.42 per unit and has consistently raised distributions since going public in 2008. Yield: 9.20%
Western Gas Partners, LP (WES) owns, operates, acquires, and develops midstream energy assets in east and west Texas, the Rocky Mountains, and the Mid-Continent. This master limited partnership raised quarterly distributions by 3% to 35 cents/unit and has consistently raised distributions since going public in 2008. Yield: 5.70%
El Paso Pipeline Partners, L.P. (EPB) engages in the ownership and operation of natural gas transportation pipelines and storage assets in the United States. declared a $0.40 per unit quarterly cash distribution for the second quarter of 2010, or $1.60 per unit on an annualized basis. This distribution represents a 21% increase from the $0.33 per unit paid for the second quarter 2009 and a 5% increase from the $0.38 per unit paid for the first quarter 2010. El Paso Pipeline Partners, L.P. has raised distributions every quarter since going public in 2008. Yield: 5.10%
Vanguard Natural Resources, LLC, (VNR) through its subsidiaries, engages in the acquisition and development of natural gas and oil properties in the United States. The company raised quarterly distributions by 4.80% to 55 cents/unit. Vanguard Natural Resources, LLC has consistently raised distributions since going public in 2008. Yield: 8.90%
Spectra Energy Partners, LP, (SEP) through its subsidiaries, engages in the transportation of natural gas through interstate pipeline systems, and the storage of natural gas in underground facilities in the United States. This master limited partnership raised quarterly distributions by 2.40% to 43 cents/unit. Spectra Energy Partners, LP has raised distributions every quarter since going public in 2007. Yield: 4.90%
Other companies raising dividend include:
Starbucks Corporation (SBUX) engages in the purchase, roasting, and sale of whole bean coffees worldwide. The company increased quarterly dividend 30% to 13 cent/share. This was the first dividend increase since the company started paying dividends earlier this year. Yield: 2.10%
Westfield Financial, Inc. (WFD) operates as the bank holding company for Westfield Bank that provides various banking products and services to businesses and individuals in Massachusetts. The company raised dividends by 20% to $0.06 per share. This company has not only consistently raised distributions since 2003, but also frequently pays special dividends to shareholders. Yield: 2.80%
Eaton Corporation (ETN) operates as a power management company primarily in the United States, Canada, Latin America, Europe, and the Asia Pacific. The company also increased their quarterly dividend 16% to 58 cents/share. This was the first dividend increase since 2008. Yield: 3%
Solera Holdings, Inc. (SLH) provides software and services to the automobile insurance claims processing industry. The company’s board of directors approved a 20% increase in its quarterly dividend to 7.50 cents/share. This was the first dividend increase since the company started paying dividends in 2009. Yield: 0.80%
Digital Realty Trust, Inc. (DLR), a real estate investment trust (REIT), through its controlling interest in Digital Realty Trust, L.P., engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate. The company increased quarterly dividends by 10.30% to 53 cents/share. The company has consistently raised distributions since 2004. Yield: 3.50%
Lindsay Corporation (LNN) designs, manufactures, and sells automated agricultural irrigation systems that are primarily used in the agricultural industry to increase or stabilize crop production while conserving water, energy, and labor in the United States and internationally. The board of directors declared a six percent increase in its regular quarterly cash dividend to $0.085/share. The company has consistently raised distributions since 2003. Yield: 1%
Altera Corporation (ALTR) designs, manufactures, and markets programmable logic devices (PLD), HardCopy application-specific integrated circuit (ASIC) devices, pre-defined design building blocks, and associated development tools. The company raised quarterly dividends by 20% to 6 cents/share. The company doesn’t have a long history of dividend increases. Yield: 0.80%
Airgas, Inc., (ARG) through its subsidiaries, distributes industrial, medical, and specialty gases, as well as hardgoods in the United States. The company raised quarterly dividends from 22 to 25 cents/share. The company has consistently raised distributions since 2003. Yield: 1.50%
A. O. Smith Corporation (AOS) engages in the manufacture and sale of water heating equipment and electric motors for the residential, commercial, and industrial end markets in the United States and internationally. The Board of Directors approved an 8% increase in the company's quarterly cash dividend to a rate of $0.21/share. This dividend achiever has raised distributions for 17 consecutive years.Yield: 1.50%
On a side note, investors who find Enbridge Energy Partners, L.P. (EEP) to be attractively valued at the moment, but are not willing to deal with further complications in their tax returns, could consider purchasing Enbridge Energy Management, L.L.C. (EEQ) shares instead. Enbridge Energy Management, L.L.C. does not pay distributions in cash, but automatically distributes fractional shares to shareholders on record. They pay their distributions directly as additional shares, which is similar to automatic dividend reinvestment. If you choose to invest in Kinder Morgan Energy (KMP) or Enbridge Energy Partners (EEP) in an IRA, consider investing in Kinder Morgan Management (KMR) and Enbridge Energy Management, L.L.C. (EEQ). KMR and EEQ are great vehicles for taxable accounts as well since their distributions are not taxable when received, and thus shareholders are not issued an annual 1099 tax form. You would pay taxes only when you sell your units.The taxation characteristics of your investments are just one part of the investment puzzle. Always make sure to investigate the company’s fundamentals and do your homework before investing in stocks.
Full Disclosure: Long EEQ and KMR
- MLPs for tax-deferred accounts
- General Electric (GE) Cuts the Dividend
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Friday, July 23, 2010
With growth slowing down, the price/earnings multiple could contract even lower. This being said I believe Wal-Mart is an excellent business, as it always investing in innovation that helps control inventory and focus on certain types of merchandise that offsets weaker demand in recessions. Despite the expected slow down in consumer spending, Wal Mart is well positioned with its diverse product mix of consumer staples and foods that it is offering on its shelves. It has lower prices in comparison to its competitors, which could drive more traffic for the retailer. Just like Walgreen (WAG), Wal-Mart Stores expects to slow down on the rate of opening new stores and instead would try to focus on developing the profitability of existing locations, without cannibalizing sales in its existing outlets. The lower capital spending has freed up enough cash flow to fund the company's agressive share buyback program.
Wednesday, July 21, 2010
The similarities between Brown-Forman (BF-B) and other prominent dividend aristocrats do not end here. Most elite dividend stocks are household names, whose products and services are available to consumers and businesses worldwide. They are easily recognizable names for which consumers are willing to pay a premium in order to enjoy them.
The strong brand name provides a good differentiation strategy versus competitors, which ensures that the company is able to charge a premium for its products and have an enduring wide-moat business.
Other companies with strong brands which have been able to provide a growing stream of dividends include Procter & Gamble (PG), McDonald’s (MCD), Altria Group (MO), Coca Cola (KO) and Abbott Laboratories (ABT).
The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has rewarded stockholders with dividend increases for 54 consecutive years. Annual dividends have increased by an average of 10.70% annually over the past decade. The stock currently yields 3.10%. Check my analysis of the stock.
Altria Group, Inc., (MO) through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in the United States. Philip Morris International Inc (PM) on the other hand manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. Before spinning off Kraft (KFT) and Philip Morris International (PM), Altria had an uninterrupted streak of 41 consecutive annual dividend increases. The spun out companies are also likely to return increasing amounts of profits back to shareholders in the form of share buybacks and dividend increases. I like both MO and PM for global exposure to tobacco. The stock currently yields 6.60%. Check my analysis of both stocks.
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. Its restaurants offer various food items, soft drinks, and coffee and other beverages. The golden arches has raised dividends for 33 years. Annual dividends have increased by an average of 26.20% annually over the past decade. The stock currently yields 3.10%. Check my analysis of the stock.
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. The company has increased distributions for 48 consecutive years. Annual dividends have increased by an average of 10% annually over the past decade. The stock currently yields 3.40%. Check my analysis of the stock.
Abbott Laboratories (ABT), which manufactures and sells health care products worldwide, has raised dividends for 38 consecutive years. Annual dividends have increased by an average of 8.80% annually over the past decade. The stock currently yields 3.70%. Check my analysis of Abbott Laboratories (ABT).
Just because a company owns a strong brand, investors shouldn’t simply rush in to purchase the stock. Overpaying for future earnings is likely to cause diminished returns over time. That’s why having a strict entry criteria and requiring at least a decade of consistent earnings and dividend growth should weed out the fads from the trends.
Full Disclosure: Long ABT, KO, MCD, MO, PG
This article was included in the Carnival of Personal Finance # 268.
- 14 Dividend Stocks with Dividend Growth Potential
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Monday, July 19, 2010
Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. The company increased the quarterly dividend 27.3% to $0.175 per share, for the 35th consecutive year. Walgreen is a dividend aristocrat and yields 2.40%. (analysis)
PPG Industries, Inc. (PPG) manufactures and supplies protective and decorative coatings. The company’s board of directors approved an increase in the company’s dividend, declaring a regular quarterly dividend of $0.55 per share. This dividend aristocrat has raised distributions for 39 consecutive years. The stock yields 3.30%.
Stanley Black & Decker, Inc. (SWK) manufactures tools and engineered security solutions worldwide. Stanley Black & Decker raised its quarterly dividend by 3% from $0.33 to $0.34 per common share, This dividend aristocrat has consistently increased distributions for 43 consecutive years. The stock yields 2.50%.
National Retail Properties, Inc. (NNN) is a publicly owned equity real estate investment trust. The firm acquires, owns, manages, and develops retail properties in the United States. The company increased quarterly distributions 1.30% to 38 cents/share. This was the 21st consecutive annual dividend increase for this dividend achiever. Without this increase the company would have lost its status of a dividend growth stock. National Retail Properties yields 6.60%. (analysis)
Enterprise Products Partners L.P. (EPD) provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the continental United States, Canada, and Gulf of Mexico. The board of directors of the company’s general partner declared an increase in the quarterly cash distribution rate paid to partners to $0.575 per common unit. This master limited partnership has raised distributions for over a decade, and is a member of the dividend achievers index. The units yield 6.20%.
ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. The partnership's quarterly cash distribution increased to $1.12 per unit from $1.11 per unit, or $4.48 annualized. The partnership has consistently raised distributions since 2006. The units yield 6.50%.
ONEOK, Inc. (OKE), a diversified energy company, operates as a natural gas distributor primarily in the United States. The company is the general partner of ONEOK Partners, L.P. (OKS). The company increased the quarterly dividend to $0.46 per share of common stock from $0.44 per share. The company has raised distributions for eight consecutive years. The stock yields 3.80%.
Omega Healthcare Investors, Inc. (OHI) operates as a real estate investment trust (REIT) in the United States. The Company’s Board of Directors declared a common stock dividend of $0.36 per share, increasing the quarterly common dividend by $0.04, or 12.5%, per share over the prior quarter. The company has raised distributions since 2003. This REIT yields 6.10%.
Duncan Energy Partners L.P. (DEP) engages in gathering, transporting, marketing, and storing natural gas, as well as in transporting and storing natural gas liquids (NGLs) and petrochemicals in the United States. The board of directors of its general partner declared an increase in the quarterly cash distribution rate paid to partners by 3.40% to $0.45 per common unit. This master limited partnership has raised distributions for three consecutive years. The units yield 6.20%.
Genesis Energy, L.P. (GEL), together with its subsidiaries, operates in the midstream segment of the oil and gas industry in the Gulf Coast area of the United States. This master limited partnership increased distributions by approximately 8.7% over the second quarter 2009 quarterly distribution of 34.50 cents/unit to 37.5 cents/unit. While distributions have been increased each year since 2003, the current distribution is still below the highest distribution paid in 2000. The company’s units yield 7.30%.
National Semiconductor Corporation (NSM) designs, develops, manufactures, and markets analog and mixed-signal integrated circuits and sub-systems. The company increased its quarterly dividend by 25% to 10 cents/share. This was the first dividend increase since 2008. The stock yields 2.80%.
Healthcare Services Group, Inc. (HCSG), through its subsidiaries, provides housekeeping, laundry, linen, facility maintenance, and food services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States. The company raised its regular quarterly cash dividend by 4.50% to $0.23 per share. The company has raised distributions every quarter since initiating a dividend policy in 2003. The stock yields 4.20%
Cummins Inc. (CMI) designs, manufactures, distributes, and services diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide. raises its quarterly dividend by 50% from $0.175 to $0.2625 per share. This was the first distribution increase since 2008. The stock yields 1.40%.
Not every stock on this list is attractively valued to be purchased at current prices. Investors should focus on fundamentals first, which the key to finding a company with a sustainable distribution which has a low risk of being cut or eliminated. Investors should also try and understand the difference between corporations such as Walgreens (WAG) and pass-through entities such as Master Limited Partnerships like Enterprise Products Partners L.P. (EPD) or Real Estate Investment Trusts such as National Retail Properties, Inc. (NNN), in order to make the best investment decision. Just because Enterprise Products Partners L.P. (EPD) yields more than Walgreen Co. (WAG), that doesn’t mean anything without a thorough fundamental analysis of both companies.
Full Disclosure: Long NNN and WAG
- Four High Yield REITs for current income
- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
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Friday, July 16, 2010
Walgreen Co is the nation's largest drugstore chain with fiscal 2008 sales of $59 billion. The company operates 6,902 drugstores in all 50 states, the District of Columbia and Puerto Rico. The company is member of the S&P 500 and was a recent addition to the S&P Dividend Aristocrats index.Walgreen Co has paid dividends for more than 76 years and consistently increased payments to common shareholders every year for 35 years. On July 14, the company raised distributions by 27.30% to 17.50 cents/share.
Over the past decade this dividend stock has delivered a negative annual average total return of 1.10% to its shareholders. The stock is trading at the same levels it was changing hands a decade ago.
The company has managed to deliver an 11.50% average annual increase in its EPS between 2000 and 2009. Earnings per share are expected to increase to $2.14 in FY 2010, and $2.49 by FY 2011. Walgreens focuses on internal growth either through opening new stores or focusing on proper location of in store merchandise, growth of products offered and making its operations more efficient. Front-end growth could benefit from the rollout of store remodelings across a majority of stores, including new merchandising initiatives that could boost non-pharmacy sales. The company expects to slow down on the store openings from 4 to 4.50% to 2.50 to 3% of total number of stores. The company is experiencing strong growth in prescription sales, and its overall same store pharmacy sales are increasing. The reason for this is focus on internal processes and customer service. Technology investments have focused on boosting pharmacist efficiency and reducing distribution system costs, which could further facilitate growth. The acquisition of Duane Reade, which gave it access to New York city market added 257 stores to Walgreens. In addition to that, the acquisition is expected to save over one hundred million dollars over the next two to three years.
The Return on Equity has decreased over the past decade from 20.10% in 2000 to 14.70% in 2009. 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 14.70 % annually since 2000, which is higher than the growth in EPS. The reason for this is that earnings per share hit a temporary setback in 2009. Once EPS resumes its upward trend, dividend growth should almost equal it over time.
A 15 % growth in dividends translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1972, Walgreen Co has actually managed to double its dividend payment every six years on average.
The dividend payout ratio has increased from a low of 13.60% in 2004 to 23.80% in 2009. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The low payout has enabled Walgreen to spend more on growing its business. As its markets become saturated I expect the company to increase its payout over time.
Currently Walgreen Co is trading at 14.10 times earnings and yields 2.40%. While the price earnings multiple and the dividend payout are attractive, the dividend yield is below my 2.50% entry criteria. By utilizing my dividend grouping strategy however I plan on initiating a partial position in this retailer as long as it yields 2%.
Full Disclosure: None
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Wednesday, July 14, 2010
The relative stability of dividend payments makes them an ideal source of retirement income for individuals looking to live off their investments. Not only are dividend payment stable however, but they also tend to rise faster than the rate of inflation over time. Over the past 80 years, dividends have increased by 5.4% on average, which was almost 2.4% higher than the rate of inflation. Earnings per share, which is the ultimate driver behind dividend growth, increased by 5.50% over the same time period. Without earnings growth, companies could not afford to raise distributions consistently.
Investors should realize of course that these numbers fluctuate from year to year. As a result it is important not to get too optimistic in estimating future dividend growth prospects. For example, most of the times I have added any stocks to my dividend portfolio, they had all shown a strong dividend growth pattern over the preceding decade. Things do happen however, and dividends do get frozen, cut or eliminated. Since I own a diversified portfolio of dividend stocks I am not exposed too much on these risks from a single individual company. As a result, my overall portfolio projections for dividend growth are typically equal to 5% or 6% on average.
While I also require at least a 2.50% initial yield before purchasing a stock, my target portfolio yield is closer to 4%. This could be achieved by purchasing a small position in a higher yielding stock such as Royal Dutch Shell (RDS.B) or Kinder Morgan (KMP), which increases my current yield. In a portfolio of 40 stocks one could have 25 stocks yielding three percent, seven stocks yielding four percent, five stocks yielding six percent and four stocks yielding eight percent in order to achieve a portfolio yield of 4%. The negative side of this exercise of course that it reduces my portfolio dividend growth. As Dave Van Knapp’s article 10 by 10: A New Way to Look at Yield and Dividend Growth illustrates, the balancing act of current income versus future growth is important in dividend investing.
The stocks with strong dividend growth which are attractive buys at the moment include:
For a brief description of each company, check the overview below:
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. Abbott Laboratories has increased dividends for 38 years in a row. (analysis)
Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. This dividend aristocrat has raised dividends for 35 consecutive years and yields 3.30%. (analysis)
Air Products and Chemicals, Inc. (APD) offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. The company has increased payments to common shareholders every year for 28 years. (analysis)
The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. This dividend aristocrat has raised dividends for 45 consecutive years and yields 2.90%. (analysis)
The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. The company has increased payments to common shareholders every year for 32 years. (analysis)
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. JNJ has been consistently increasing its dividend for 48 consecutive years. (analysis)
Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of health and hygiene products worldwide. The company has boosted distributions for 38 years in a row. (analysis)
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for 48 years. (analysis)
The McGraw-Hill Companies, Inc. (MHP) provides information services and products to the financial services, education, and business information markets worldwide. The company operates in three segments: McGraw-Hill Education, Financial Services, and Information & Media. The company has raised distributions for 37 consecutive years. (analysis)
PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has raised distributions for 38 years in a row. (analysis)
The Procter & Gamble Company engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. This dividend aristocrat has raised distributions for 54 consecutive years. (analysis)
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has been consistently increasing its dividends for 33 consecutive years. (analysis)
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. Wal-Mart Stores has consistently increased dividends every year for 35 years. (analysis)
Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas. Exxon Mobil has been consistently increasing its dividends for 28 years in a row. (analysis)
Full Disclosure: Long all stocks listed above
This article was featured on Carnival of Personal Finance #267 at Beating Broke
- The case for dividend investing in retirement
- 10 by 10: A New Way to Look at Yield and Dividend Growth
- Should you sell after a dividend cut?
- A dividend portfolio for the long-term
Monday, July 12, 2010
Since 2003 there has been great interest in dividend paying stocks. Many companies such as Yum Brands (YUM) initiated dividends for the first time ever, while companies like Microsoft (MSFT) paid onetime special dividend payments to shareholders. In addition to that several dividend focused exchange traded funds such as iShares Dow Jones Select Dividend index (DVY) and SPDR S&P Dividend (SDY) were formed, attracting millions in assets under management. In addition to that many long time dividend payers such as PepsiCo (PEP) started increasing distributions at a higher pace than before, which further benefited their shareholders.
As a result, some dividend investors are concerned that the increase of tax rates on dividends will negatively affect payouts, which would negatively affect dividend stock prices for the next few years. In general the future tax rates on investment income for 2011 and beyond are still not set in stone by Congress, which makes most assumptions on taxation of dividends or capital gains pure speculation. It is possible that the top rate on dividend income could only increase to 23.60%, as 20% was the highest tax on dividend income for which Obama campaigned in 2008, while the 3.60% comes as the extra tax for high income earners which generate investment income.
So should dividend investors worry about the potential increase in taxes on dividend income? The answer is that it depends. While some companies might cut dividends as a result of the tax hike, many dividend payers would keep following a strategy of regularly raising distributions, provided that these companies can generate enough in free cash flow. Most dividend growth investors would not be affected by much, particularly since most dividend achievers and dividend aristocrats have increased distributions for over 10 and 25 years, which was before the Bush tax cuts were initiated. The companies that are less likely to cut distributions than grow them include:
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide.Johnson & Johnson is a major component of the S&P 500, Dow Industrials and the Dividend Aristocrats Indexes. One of the company’s largest shareholders includes Warren Buffett. JNJ has been consistently increasing its dividends for 48 consecutive years.(analysis)
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. (analysis)
The Procter & Gamble Company (P&G), together with its subsidiaries, provides branded consumer goods products worldwide. The company operates in three global business units (GBU): Beauty, Health and Well-Being, and Household Care. Procter & Gamble is a dividend aristocrat as well as a component of the S&P 500 index. One of its most prominent investors includes the legendary Warren Buffett. Procter & Gamble has been increasing its dividends for the past 54 consecutive years. (analysis)
Wal-Mart Stores, Inc. (WMT)operates retail stores in various formats worldwide. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. Wal-Mart Stores has consistently increased dividends every year for 36 years. (analysis)
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company is member of the S&P 500, Dow Jones Industrials and the S&P Dividend Aristocrats indexes. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for 48 years. (analysis)
Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company is a component of the S&P 500, Dow Jones Industrials and the Dividend Aristocrats indexes. Exxon Mobil has been consistently increasing its dividends for 28 years in a row, and has paid dividends for over one hundred years. (analysis)
In addition to that, investors could avoid paying taxes on dividend income by investing through tax-deferred accounts such as the ROTH IRA. There is a contribution limit of $5000 for taxpayers, and there is also an additional catch up contribution for taxpayers over the age of 50. Those contributions should come from earned income (such as employee income) and are phased out for high income individuals. While a ROTH IRA would not generate any tax savings today, any money put in it compound tax free forever, there are no required minimum distributions and any distributions from it are tax free.
Furthermore I doubt that quality dividend stocks such as the dividend achievers or dividend aristocrats would be affected much even if tax rates increase, because not every individual would pay top rates on dividend income. In addition to that dividend returns are much less volatile than stock price returns, which is the reason why retirees prefer dividend stocks in retirement. Focusing too much on just one aspect of the investment process could lead to subpar returns over time. Many investors who wait for a few months longer before they sold their stock in order to qualify for long-term capital gains treatment could see their paper gains evaporate and turn into massive losses. This is just one reason why focusing just on tax rates while ignoring business or market fundamentals of the companies one is invested in is a dangerous exercise.
Full Disclosure: Long all stocks mentioned except MSFT
This article was featured on the Carnival of Money Stories – Starting A Sideline Edition
- The case for dividend investing in retirement
- Capital gains for dividend investors
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- Why Dividend Growth Stocks Rock?
Friday, July 9, 2010
Over the past 10 years this dividend stock has delivered an annual average total return of 9 % to its shareholders. After peaking at 44 in late 2003, the stock fell all the way down to 15 in 2007, before recovering all the way to 40.
At the same time company has managed to deliver an impressive 8.40% average annual increase in its EPS over the past nine years. Analysts expect EPS to increase to $2.60 in FY 2010, followed by an increase to $2.95 in FY 2011. Increases in sales will be driven by expanding the current store count by 2%, as well as increasing same store sales as price conscious consumers purchase the company's value-priced assortment of everyday necessities.
The once cash-only stores now accept PIN-based debit card payments in most locations. Food stamp and credit card acceptance is also being rolled out.
The company has benefited from the recent financial crisis, as some middle-class consumers have traded down to its store locations for everyday items. Family Dollar also drives traffic through limited time offerings as well as stocking up on treasure hunt items which creates customer excitement.
The ROE has been hovering in the 18% - 21 % range over the past 10 years, with the exception of a brief dip in 2005 and 2006.
Annual dividend payments have increased over the past 10 years by an average of 10.10% annually, which is higher than the growth in EPS. A 10% growth in dividends translates into the dividend payment doubling almost every seven years. If we look at historical data, going as far back as 1976, FDO has actually managed to double its dividend payments every five years.
The dividend payout ratio expanded slightly over the past decade but remained under 30% throughout the 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.
FDO is attractively valued with its low price/earnings multiple of 16.30. The current dividend yield of 1.60% however is low for my taste. I would consider adding a partial position on dips below $31.
Disclosure: Long FDO
- Wal-Mart (WMT) Dividend Stock Analysis
- A dividend portfolio for the long-term
- Three Dividend Strategies to pick from
- Busy week for dividend increases
Wednesday, July 7, 2010
Two differing paths are presented to aspiring dividend investors. One path is to do it on your own. Another path is to trust the experience of an investment professional and invest in dividend funds or dividend etfs. In this article I would compare and contrast the two methods and also outline some of the most widely held alternatives for both scenarios.
The main advantages of dividend funds are the instant diversification that investors achieve, since many of them hold a large basket of securities. It might also be cheaper to purchase one ETF than purchasing 30 or 40 individual securities.
Another advantage of holding dividend etf’s is the time saved in research or portfolio rebalancing. This benefit of dividend ETF’s is especially important for busy investors.
One disadvantage of dividend etfs is that they might follow an index or a strategy which is too slow to react to changes in the companies owned. For example, the companies which are members of the S&P High Yield Dividend Aristocrats index (SDY) are added or removed once an year. This means that a company like General Electric (GE), which cut dividends in February 2009 stayed in the index until December 2009. Most income investors would have disposed of the stock immediately after the dividend announcement.
Another disadvantage might be that these dividend indexes could be constructed and ran on autopilot. One recent example is dividend indexes which overweigh companies with a higher yield, without taking into consideration the sustainability of the dividend payment. Because of this many dividend etf’s were overweight financial stocks such as Bank of America (BAC) or Fifth-Third Bank (FITB) before they had cut dividends substantially. This added further pain to the ETF’s already depressed share prices.
A third disadvantage of dividend funds is annual management fees. Because they typically have smaller asset bases, and because they are more actively managed than regular index funds, investors pay between 0.40% for iShares Dow Jones Select Dividend Index ETF (DVY) and 0.60 % for the The PowerShares Dividend Achievers ETF (PFM). This could detract from long-term performance and could prove costly in the long run. Another disadvantage is the fact that investors would be subject to excessive turnover within their etf portfolios. Many indexes such as the dividend achievers for example have a small but consistent turnover which might detract from long term performance.
Another issue with ETF’s is that most of their holdings are concentrated in large cap dividend stocks, which account for a large portion of the movement in the underlying indexes. For example, the ten largest holdings of the Powershares Dividend Achievers ETF (PFM) include:
The ETF currently has 212 holdings. The top 10 holdings account for almost 46% of the total portfolio.
Thus, by purchasing the ETF, dividend investors are being charged an annual management fee, are subject to large annual holdings turnover and essentially hold a portfolio which is not as diversified as it looks initially. If you simply purchased stock in large cap companies such as Wal-Mart (WMT), Procter & Gamble (PG), Johnson & Johnson (JNJ), Chevron-Texaco (CVX), PepsiCo (PEP) and others, investors could benefit from dividend investing, without having to pay fees each year for the privilege of being an income investor.
If instead investors focus on building their portfolios, they could pay little or no commissions, they could adjust portfolio weights any way they want and could invest not only in the large cap stocks but also in small but promising dividend growth stocks.
Full Disclosure: Long PG, T, XOM, CVX, WMT, JNJ,KO,PEP ABT
Friday, July 2, 2010
Over the past decade this dividend stock has delivered an annual average total return of 8.70% to its shareholders.
At the same time company has managed to deliver an impressive 12.20% average annual increase in its EPS since 2000. Analysts are expecting MCD to grow EPS to $4.49 by 2010 and $4.87 in 2011.. The economic slowdown is making consumers to trade down and dine out at fast food places like the ones owned by the Golden Arches. Mcdonald’s has been focusing more on expanding the sales of existing restaurants since 2003 versus relying on new stores to be the driver for growth. Same store sales and profits have been driven by product innovation, and comparable-store sales growth, and are part of the company’s recent success. The constant innovations in the menu are indeed fueling strong same store sales volumes. The McCafe Offerings, in addition to the Dollar Breakfast Menu and Restaurant remodeling are further fuelling the growth in sales.
International operations, which accounted for almost half of operating profits in 2008, have been a major growth factor over the past two decades. This however exposes the company to fluctuations in exchange rates, which could add or detract from EPS performance. MCD's stated operating priorities include fixing operating inadequacies in existing restaurants; taking a more integrated and focused approach to growth, with an emphasis on increasing sales, margins and returns in existing restaurants; and ensuring the correct operating structure and resources, aligned behind focusing priorities that create benefits for its customers and restaurants.
The ROE has been increasing since it hit a low of 14 in 2002. Recently it hit 30%, and has stayed above that level for two consecutive years.
Full Disclosure: Long MCD
Thursday, July 1, 2010
Back in 2009 several stock bloggers and I chose four stock picks each in a friendly stock contest. The companies I selected have low earnings volatility and as a result have stable dividend payments. In addition to that, the four companies were representative of four sectors of the economy – real estate, tobacco, utilities and energy. The companies include Realty Income (O), Con Edison (ED), Philip Morris International (PM) and Kinder Morgan Energy Partners (KMP).
Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. This dividend achiever has raised distributions to unit holders for fourteen consecutive years. The last distribution increase occurred in 2010, when this master limited partnership increased quarterly distributions from $1.05 to $1.07/unit. Yield 6.50%. (analysis)
Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This dividend achiever has raised distributions for sixteen consecutive years. Since the end of 2009, Realty Income has raised distributions from 0.1426875/share to 0.1433125/share. Yield 5.50%. (analysis)
Consolidated Edison, Inc., (ED) through its subsidiaries, provides electric, gas, and steam utility services in the United States. This dividend aristocrat has raised distributions for 36 consecutive years. Earlier this year the company raised distributions from 59 cents/share to 59.5 cents/share. Yield 5.40%. (analysis)
Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company has increased dividends twice since the spin-off from Altria (MO) in 2008. The last dividend increase was announced in September 2009. Yield 5.00%. (analysis)
The above mentioned stocks are good additions for current income. They should only be a part however of a diversified income portfolio, whose goal would be to produce income until the dividend growth component of the portfolio kicks in and starts generating enough cash flow. I would expect slow distribution growth from these stocks over the next few years.
Overall, this portfolio has achieved a 6.39% total return so far in 2010. I outperforming the stock selections of the other market newsletters for a second quarter in a row. (see results below)
Dividend Growth Investor: 6.39%
My Traders Journal: -11.90%
Where does all my money go: -14.16%
Zach Stocks: -17.24%
Intelligent Speculator: -19.06%
Four Pillars: -20.11%
The Financial blogger: -22.65%
Million Dollar Journey: -23.65%
The lesson to learn is that "boring" dividend stocks are less volatile in comparison to the overall market. The regular dividends paid also make shareholders hold on to their shares through thick and thin, without panicking. As long as dividends are being paid, income investors realize a positive return even in a flat or down market.
Full Disclosure: Long all stocks mentioned above
- Top Dividend Stocks for 2010, 1Q update
- 2010’s Top Dividend Plays
- Best High Yield Dividend Stocks for 2009
- Five Consumer Stocks for 2010
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