Monday, November 29, 2010

Seven Dividend Stocks Sharing Their Success with Shareholders

Dividend investors realize a return on their investment either when they sell shares at a higher price compared to what they paid for, or when they receive a dividend. Stock returns alone could be very volatile, as they are impacted by general market conditions, the economy as well as stock market sentiment to name a few. Dividends on the other hand are mostly affected by the underlying financial situation of the company. As a result dividends are the most direct way for companies to generate return to shareholders that is directly tied to the company’s financial performance.

Over the past week, the shareholders of the following companies received higher dividend payments, which were a direct result of the growth in profits and revenues:

Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. This dividend aristocrat raised quarterly distributions by 10.80% to 41 cents/share. This marked the 38th consecutive year in which Becton Dickinson has increased its dividend. Yield: 2.10% (analysis)

McCormick & Company (MKC), engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. It operates in two segments, Consumer and Industrial. This dividend champion boosted quarterly distributions by 8% to 28 cents/share. This was the twenty-fifth consecutive annual dividend increase for the company. Yield: 2.60% (analysis)

Hormel Foods Corporation (HRL), together with its subsidiaries, produces and markets various meat and food products in the United States and Internationally. This dividend champion announced its 45th consecutive annual dividend increase. The company raised distributions by 21.40% to 25.50 cents/share. Yield: 2.10%

The York Water Company (YORW) engages in impounding, purifying, and distributing drinking water in Pennsylvania. It owns and operates two reservoirs, Lake Williams and Lake Redman, which together holds approximately 2.2 billion gallons of water. This dividend achiever raised its quarterly distributions by 2.30% to 13.10 cents/share. This was the fourteenth consecutive annual dividend increase for the company. Yield: 3.30%

South Jersey Industries, Inc., (SJI) through its subsidiaries, engages in the purchase, transmission, and sale of natural gas for residential, commercial, and industrial customers. This dividend achiever raised its quarterly distributions by 10.60% to 36.50 cents/share. The company has raised dividends for 12 years in a row. Yield: 2.80%

Landauer, Inc. (LDR) and its subsidiaries provide technical and analytical services to determine occupational and environmental radiation exposure internationally. The company raised distributions for an eight consecutive year to 55 cents/share. Yield: 3.30%


RGC Resources, Inc. (RGCO), together with its subsidiaries, operates as an energy services company. It primarily engages in the regulated sale and distribution of natural gas in Virginia. The company raised its quarterly dividend by 3% to 34 cents/share. RGC Resources has raised dividends for eight years in a row. Yield: 4.40%

Investors should analyze the stocks above for dividend sustainability and dividend growth potential before initiating a position. Another part of the analysis should include evaluating each company’s ability to generate rising earnings over time.

Full Disclosure: Long MKC

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- Are Dividend Investors Stock Pickers?
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Monday, November 22, 2010

Eight Cash Machines Hiking Dividends

Many investors chose to focus on the General Motors (GM) IPO last week and on the moves of the Chinese Central Bank. Others kept speculating whether the strongest banks that have already repaid their TARP loans, such as Wells Fargo (WFC), JP Morgan (JPM) and US Bancorp (USB) would be allowed to raise dividends. As usual, I kept ignoring these sexy headlines and instead focused on the boring list of consistent dividend increasers, which kept announcing dividend hikes. Some of these companies are also dealing with the uncertainty behind the expiration of the advantageous tax treatment of qualified dividends by either paying distributions earlier or paying out a special dividend.

This week’s list of companies that have raised distributions for at least five years in a row and also announced dividend hikes last week include:

Brown-Forman Corporation (BF.B) engages in the manufacture, bottling, import, export, and marketing of alcoholic beverage brands. This dividend aristocrat raised its quarterly dividend by 6.70% to 32 cents/share. The company has consistently raised dividends for 27 years in a row. Historically the payment from the November declaration has been made in early January of the following calendar year. However, with the uncertainty surrounding the renewal of the current dividend tax rates which expire on December 31, 2010, the company chose to accelerate the cash payment, which will result in five cash payments for calendar 2010. Yield: 2% (analysis)

New Jersey Resources Corporation (NJR) provides retail and wholesale energy services. It operates in two segments, Natural Gas Distribution and Energy Services. This dividend achiever raised its quarterly dividends by 5.90% to 36 cents/share. This marked the sixteenth consecutive annual dividend increase for the company. Yield: 3.50%.

Campbell Soup Company (CPB), together with its subsidiaries, engages in the manufacture and marketing of branded convenience food products worldwide. The company raised its quarterly dividend by 5% to 29 cents/share. This was the seventh consecutive year of dividend increases for Campbell Soup. Yield: 3.40%

NSTAR (NST), through its subsidiaries, engages in the distribution, transmission, and sale of energy in Massachusetts. This dividend achiever announced a 6.3% increase in its quarterly dividend to 42.50 cents/share. The company has raised dividends for 13 years in a row. Yield: 4.10%

NIKE, Inc. (NKE) designs, develops, and markets footwear, apparel, equipment, and accessory products for men, women, and children worldwide. The company raised its quarterly dividend by 15% from 27 cents/share to 31 cents/share. This was the ninth consecutive annual dividend increase for Nike. Yield: 1.40%

The Laclede Group, Inc. (LG) operates as a public utility holding company. The company raised its quarterly dividend by 2.50% to 40.50 cents/share. This was the seventh consecutive annual dividend increase for Laclede. Yield: 4.60%

Donaldson Company, Inc. (DCI) engages in the manufacture and sale of filtration systems and replacement parts worldwide. The company operates in two segments, Engine Products and Industrial Products. This dividend champion raised its quarterly distribution by 4% to 13 cents/ share. This was the second dividend increase this year, and marked the 25th consecutive annual dividend increase for the company. Yield: 1%

Royal Gold, Inc. (RGLD), together with its subsidiaries, acquires and operates precious metals royalties. The company raised its quarterly dividend by 22% to 11 cents/share. This was the sixth consecutive annual dividend increase for this gold stock. Yield: 0.90%

A consistent history of dividend growth is just one of the prerequisites behind identifying the best dividend stocks. Other factors include competitive advantages and valuation to name a few.

Full Disclosure: Long BF.B

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- TARP is bad for dividend investors
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Friday, November 19, 2010

V.F. Corporation (VFC) Dividend Stock Analysis

V.F. Corporation, together with its subsidiaries, engages in the design, manufacture, and sourcing of branded apparel and related products for men, women, and children in the United States. This dividend aristocrat has increased distributions for the past 38 consecutive years. The latest dividend increase was in October 2010, when the company raised distributions by 5% to 63 cents/share.

Over the past decade this dividend stock has delivered annualized total returns of 15.80 % to its shareholders.

The company has managed to deliver a 6.90% average annual increase in its EPS between 2000 and 2009. Analysts expect V.F. Corp to earn $6.19 per share in 2010 and $6.67/share in 2011. In comparison, the company earned $4.13/share in 2009.

The company’s return on equity has deteriorated steadily since hitting a hit in 2003. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by an average of 11.50% annually since 2000, which is much higher than the growth in EPS. The main reason is the increase in the dividend payout ratio over the past decade, triggered by a steep one time dividend increase of almost 90% in 2006.
A 12 % growth in dividends translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1986, V.F. Corp has actually managed to double its dividend payment every seven and a half years on average.

The dividend payout ratio has increased over the past decade, breaking out above 50% in 2009. Given the expected earnings of $6.19 in 2010 and the new annual dividend rate of $2.52/share, I would expect the payout to drop to 50% and to decrease further by 2011. 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, VF. Corp is attractively valued at 13.50 times earnings, has an adequately covered distribution and yields 3%. I would consider initiating a position in the company on dips.

Full Disclosure: None

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- Eleven Dividend Machines Beating Inflation
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Wednesday, November 17, 2010

How much money do you really need to retire with dividend stocks?

Many investors are being told that in order to retire, one needs to accumulate a minimum nest egg of $1,000,000. Some advisers do recommend that even one million dollars might not be enough to ensure comfortable retirement to individuals, given higher life expectancies or variability of investment returns. This is discouraging many investors, who are starting to believe that they would be working forever. Instead of focusing on the amount of money one needs to accumulate however, I think that a much better way should be to focus on the income from your investments.

After all, a million dollar investment in your home would most likely lead to thousands of dollars in annual property taxes, but no income. Thus, having even a million dollars invested in the wrong asset might not be enough to ensure a comfortable retirement. If that same investor purchased dividend stocks, which increase distributions regularly, they would be able to generate and inflation adjusted stream of income, which would be sustainable for extended periods of time.

If our dividend investor built a portfolio consisting of stocks which yield 10% on average, they should be able to generate $100,000 in annual pre-tax income on that $1,000,000 nest egg. Companies which yield more than 10% include American Capital Agency Corp. (AGNC), Hatteras Financial Corp. (HTS) or Annaly Capital Management, Inc. (NLY).

If our dividend investor build a portfolio consisting of dividend stocks yielding 6% on average, they should be able to generate a $60,000 annual pre-tax dividend income on the $1,000,000 nest egg. Companies yielding more than 6% include Universal Health Realty Income Trust(UHT) and Kinder Morgan Energy Partners, L.P. (KMP).

While it is possible to find companies yielding much more than 6% in today’s market, investors have to look at those investments with a questioning mind. It is highly unlikely that a company which pays a 10% dividend is able to reinvest anything back into growing the business. In addition to that, chances are that such a company is also using a special corporate tax form, which might add in further to the risk of income depletion provided that this income tax form is disallowed. Many investors in the Canadian income trusts have suffered huge losses in income and principal since 2006, when Canadian government announced that it would be phasing out the tax advantaged income trust structure in 2011. Many US investors have allocated excess amounts into Master Limited Partnerships, Business Development Companies or Real Estate Investment trusts, all of which pass through all of their income to the individual holders. A change in the tax code could certainly jeopardize these investors. In addition to that, most of those corporate structures have not been around for as long as common stocks, which makes it difficult to backtest their performance during various market conditions.

Common stocks on the other hand, have been around for several hundred years. Some studies suggest that spending 4% from your portfolio annually should ensure maximum longevity for you. Given the fact that dividend yields were typically around 4% during the time of the studies, I have concluded that a starting 4% average portfolio yield should be sustainable for at least four decades. A portfolio yielding 4% could include high yielding stocks with low or average dividend growth such as Kinder Morgan (KMP), Realty Income (O) or Royad Dutch (RDS.B). It could also include low yielding stocks with high dividend growth such as Archer Daniels Midland (ADM) or Family Dollar (FDO). The portfolio could also include stocks in the sweet spot such as Coca Cola (KO),McDonald's (MCD) or Johnson & Johnson (JNJ). As a result, a $1,000,000 investment could result in $40,000 in annual dividend income.

Truth however is that investors do not truly need $1,000,000 in order to retire. If you focus on companies which regularly raise distributions, it is possible to construct a portfolio with much less than $1 million dollars. For example, let assume that one wants to retire in 24 years and assumes a 3% inflation rate. Let’s also assume that this individual also requires $40,000 in dividend income in 2010. Using the rule of 72, a 3% inflation rate would erode the purchasing power of $40,000 in 2010 dollars by half by the year 2034. As a result the investor would need to generate $80,000 in 2034. Let’s assume that this investor is able to purchase a well rounded portfolio of dividend growth stocks, which currently yield 4%, but which will increase distributions by 6% for the next 24 years. This is not an unreasonable dividend growth rate, since it slightly exceeds the 5.4% average dividend growth rates achieved by Dow Jones Industrials average for the 85 year period ending in 2005. This means that our investor needs only $500,000 to invest at 4%, which would generate income of $20,000 in year one, $40,000 in year 12 and $80,000 in year 24.

Of course if our investor decides to reinvest dividends for 24 years they would need much less in start up costs in order to generate sufficient dividend income. Most strong brand names which sell consumer products have been able to generate such returns over time.

The type of stocks that enterprising dividend growth investors should be focusing on include:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company yields 3.40%, but has managed to grow dividends at 13.50% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 29.10%. (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. The company yields 3.00%, but has managed to grow dividends at 10.70% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 22%. (analysis)

Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company yields 3.30%, but has managed to grow dividends at 7.90% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 17%. (analysis)

McDonald’s (MCD) franchises and operates McDonald's restaurants that offer various food items, soft drinks, coffee, and other beverages. The company yields 3.10%, but has managed to grow dividends at 26.50% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 28.30%. (analysis)

Abbott Labs (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. The company yields 3.50%, but has managed to grow dividends at 9% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 20.70%. (analysis)

Coca Cola (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company yields 2.80%, but has managed to grow dividends at 9.90% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 18.20%. (analysis)

Pepsi Co (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company yields 3.00%, but has managed to grow dividends at 12.70% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 18%. (analysis)

Clorox (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 yields 3.50%, but has managed to grow dividends at 9.70% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 21%. (analysis)

Colgate Palmolive (CL) manufactures and markets consumer products worldwide. The company yields 2.80% t has managed to grow dividends at 11.30% annually over the past decade. The yield on cost ofa 1989 investment in the company would be a staggering 34.40%. (analysis)

At the end of the day those dividend machines would not only generate substantial yields on cost but they would most likely generate substantial capital gains as well. Dividends are typically taxable in the year they have been received, whereas capital gains are only taxable when you sell your stocks. If someone inherits company stock, their basis is increases to the fair value at the time of the transfer. As a result investing in these dividend growth stocks is similar to planting a tree, and then harvesting its fruit for decades, without having the necessity to cut the branches you are sitting on.

Full Disclosure: Long ABT, CL, CLX, CVX, FDO, JNJ, KMP, KO, MCD, O, PEP ,PG, RDS.B, UHT,

This article was included in the Carnival of Personal Finance #284: Thanksgiving Preparation Edition

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Monday, November 15, 2010

Six Reliable Dividend Growth Stocks Raising Distributions

Investors who plan to life off their investments in retirement need reliability and consistency of investment returns. Investors which subscribed to the traditional expectations of ten percent annual total returns learned the hard way that volatility in investment results is something that they have to accept. Total return is comprised of price gains and dividend income. What few advisers tell their clients these days is that there is one component of investment returns which is stable, reliable and consistent. This dividend portion of total returns is typically is not as volatile as equity prices, which makes it an ideal fit for a successful retirement strategy.

Just because a company pays dividends however, that doesn’t automatically make it a good investment. A company has to have some competitive advantages, which allow it to grow earnings, which translates into higher dividends down the road. Few companies can afford to grow dividends for more than several consecutive years. Companies that can do this should be regularly monitored and screened against an objective set of criteria in order to weed out the weakest links. As a result I regularly highlight stocks which have announced dividend increases over the preceding week. The companies which approved dividend hikes include:

Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. The company raised its quarterly dividend by 4% to 26 cents/share. This was the forty-first consecutive annual dividend increase for this dividend champion. Yield: 3.60% (analysis)

Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. The company raised its quarterly dividend by 6% to 36 cents/share. This was the 36th consecutive annual dividend increase for this dividend aristocrat. Yield: 3.20% (analysis)

MDU Resources Group Inc. (MDU) operates as a natural resource company in the United States. The company provides electric retail, natural gas distribution, and natural gas transportation services. The company raised dividends by 3.20% to 16.25 cents/share. This dividend achiever has consistently raised distributions for 20 years in a row. Yield: 3.20%

Tennant Company (TNC) engages in the design, manufacture, and marketing cleaning solutions worldwide. The company boosted its quarterly dividend by 21% from 14 cents to 17 cents/share. This marks the thirty-ninth consecutive annual dividend increase for this dividend champion. Yield: 2%

Intel Corporation (INTC) designs, manufactures, and sells integrated circuits for computing and communications industries worldwide. The company raised its dividends by 15% to 18 cents/share. The world’s largest chip manufacturer has raised distributions for 8 years in a row. The stock yields 3.30%

AmerisourceBergen Corporation (ABC), a pharmaceutical services company, provides drug distribution and related services to healthcare providers and pharmaceutical manufacturers in the United States, the United Kingdom, and Canada. The company raised its quarterly distribution by 25% to 10 cents/share. Amerisource Bergen has raised distributions for six years in a row and currently yields 1.30%

Of the six dividend raisers listed above, Automatic Data Processing (ADP), MDU Resources (MDU) and Sysco (SYY) seem attractively priced at the moment. I would also start researching Intel (INTC) in order to evaluate whether it would be a good fit for my dividend portfolio.

Full Disclosure: Long ADP and SYY

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- Automatic Data Processing (ADP) Dividend Stock Analysis
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Friday, November 12, 2010

Eaton Vance (EV) Dividend Stock Analysis

Eaton Vance Corp. (EV) , through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. This dividend champion has increased distributions for the past 30 consecutive years. The latest dividend increase was in October 2010, when the company raised distributions by 12.50% to 18 cents/share.

Over the past decade this dividend growth stock has delivered annualized total returns of 10.80 % to its shareholders.

The company has managed to deliver a 3.50% average annual increase in its EPS between 2000 and 2009. Analysts expect Eaton Vance to earn $1.39 per share in 2010 and $1.76/share in 2011.

Overall I am bullish on asset managers in the long run, and Eaton Vance fits by default. As we have millions of baby boomers retiring and needing financial advice, I expect them to use financial advice from certified planners, which would pre-sell open and closed-end funds and other financial products. Once a product has been sold to investors, it creates a recurring income stream to the provider of funds. The revenues that investment managers generate are realizable in cash almost instantaneously, which is a big plus. New product offerings could also contribute to growth, although at $173 billion in asset under management, it won’t be the main source of revenues for Eaton Vance. Acquisitions to obtain companies that target high-net worth individuals could be a big driver for future growth, as would be expansion internationally. Another positive is that as US stock prices keep increasing, this would eventually attract more investors to add in more money, which would create even higher profits for companies like Eaton Vance. Overtime I expect Eaton Vance to get an even larger pile of assets under management due to all of the above mentioned reasons, which would lead to earnings and dividend growth.

One of the largest risks for Eaton Vance includes competition, which could result in net outflows for assets under management as well as decrease in fees charged to clients. Another risk includes prolonged declines in equity markets, which could turn investors off stock market investing. Most notably that hasn’t been the case for Eaton Vance during the “lost decade”, as assets under management grew from $49.20 billion at the end of 2000 to $173.30 billion as of July 31, 2010.

The company generates very high return on equity, whose trend has closely followed the rise and fall in equity markets over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The company has managed to raise its annual dividend at a rate of of 22.50% annually since 2000, which is much higher than the growth in EPS. The main reason is the increase in the dividend payout ratio over the past decade. I would reasonably expect Eaton Vance to manage to raise distributions by at least 10% per year for the next few years. The latest dividend increase was in October 2010, when the company raised distributions by 12.50% to 18 cents/share.

A 22 % growth in dividends translates into the dividend payment doubling every three years. If we look at historical data, going as far back as 1990, Eaton Vance has actually managed to double its dividend payment every four years on average. The company last raised its dividends in 2010 by 12.50%.

The dividend payout ratio has increased over the past decade, breaking out above 50% in 2009. Given the expected earnings of $1.40 in 2010 and the new annual dividend rate of $0.72/share, I would expect the payout to drop to 50% and to decrease further by 2011. 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 Eaton Vance is overvalued at 21.20 times earnings, has an adequately covered distribution and yields only 2.40%. Competitor State Street (STT) trades at a P/E of 11.50 and yields 0.10%, while Blackrock (BLK) trades at a P/E of 8.30 and yields 2.40%. Ben Franklin Resources (BEN), which like Eaton Vance (EV) has a long history of uninterrupted dividend increases trades at a P/E of 18.40 and yields a paltry 0.80%.
Eaton Vance would be more attractively priced below $28. I would continue to monitor this company for dips below $28.

Full Disclosure: None

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Wednesday, November 10, 2010

Dividend Growth Stocks – The best kept secret on Wall Street

When considering dividend stocks, many investors consider the companies with the highest yields to be the best picks. In a zero interest rate environment however no one can blame investors who want to maximize their yield in order to generate enough income.
One thing that yield hungry investors tend to forget is total returns. Another thing that yield hungry investors forget is inflation. Talk to them about companies raising dividend payments for 50 years in row and you get blank stares. Many investors ask how a company could raise dividends each year for many decades, yet the yield is 3%. In order to understand the dividend growth strategy however, investors have to get back to basics.

Dividend yield is calculated by annualizing the latest dividend payment and dividing it by the stock price. If we look at Johnson & Johnson (JNJ) whose latest quarterly dividend payment is 54 cents/share and which trades at $64, its current annual dividend is $2.16/share. Its current yield is thus 3.30%.

The yield on cost is calculated by dividing the most recent annual dividend payment to the price that you paid for the shares that you own. If you purchased Johnson & Johnson (JNJ) at the very end of 1990, when the stock was trading at $8.97/share, and the annual dividend was 17 cents/share, your current yield would have been 1.90%. Your yield on the $8.97 cost would have also been 1.90%. This was a particularly low yield, given the fact that 30 year treasuries delivered 8.25% and the yield on the S&P 500 was 3.74%.

The company was able to grow earnings over the next 20 years, and as a result was able to increase dividends every year since the hypothetical purchase. While the company didn’t have any control over its stock price, which was one of the determinants of its dividend yield, it had control over the actual amount of the quarterly dividend payment. The dividend yield fluctuated wildly over the past 20 years, while the dividend payment increased steadily for 20 years. Actually the dividend payment had increased steadily for 28 years before that!



The yield on cost on an investment in Johnson & Johnson (JNJ) steadily increased with the increase in dividends each year and reached 23.50% in 2010. This income stream was three times higher than what investors who purchased treasuries in 1990 generated. The growth in this income stream has also exceeded inflation for the period studied.

Last but not least a $100 investment in Johnson & Johnson (JNJ) at the end of 1990, with dividends reinvested would be worth $9646 by August 2010. Investors who spent all the dividend income would only have accumulated $6592 by August 2010.

This was not really an isolated incident. Many of the original dividend aristocrats of 1989 managed to deliver very good total returns over the next twenty years, coupled with solid yields on cost. Investors who were able to understand the power of dividend growth stocks were able to generate a dividend income stream that exceeded inflation as well as total returns, which at least matched market returns in aggregate.

Other quality stocks which could result in double digit future yields on cost include:

Medtronic, Inc. (MDT) develops, manufactures, and sells device-based medical therapies worldwide. This dividend champion has increased distributions for 33 years in a row. Over the past decade, the company has managed to increase dividends by 18.40% annually. Yield: 2.50% (analysis)

Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. This dividend aristocrat has increased distributions for 37 years in a row. Over the past decade, the company has managed to increase dividends by 14.50% annually. Yield: 1.90% (analysis)

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. This dividend aristocrat has increased distributions for 28 years in a row. Over the past decade, the company has managed to increase dividends by 22.70% annually. Yield: 2.10% (analysis)

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores for low to lower-middle income consumers in the United States. This dividend aristocrat has increased distributions for 34 years in a row. Over the past decade, the company has managed to increase dividends by 10.50% annually. Yield: 1.30% (analysis)

In conclusion, a company yielding 2-3% today that has raised dividends for many years has rewarded early shareholders with yields on cost, which are higher than what most high yield stocks could have generated at the time of purchase. Investors who buy stock in companies which regularly raise dividends would enjoy higher dividend income over time and solid capital gains as well.

Full Disclosure: Long all stocks listed

This article was included in the Carnival of Personal Finance #283

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Monday, November 8, 2010

Three Dividend Growth Stocks raising the bar

Investors, who want to be treated as owners of a business, should focus on buying and holding onto solid businesses that throw excess cash every year, while still growing at a decent pace. Investing in stocks should not be any different than investing in a business. Purchasing quality stocks with stability in earnings that can pay rising distributions, while also growing the business, will result in a positive return on investment during any market condition or economic cycle. Companies which consistently are able to generate rising incomes in order to support a consistent dividend growth are rare gems, yet they sell products or services that most consumers and businesses use fairly often.

Three companies which have raised distributions for over five years in a row and which raised distributions last week include:

Universal Corporation (UVV), together with its subsidiaries, operates as the leaf tobacco merchants and processors worldwide. The company raised its quarterly dividend by 2.10% to 48 cents/share. This dividend champion has consistently raised dividends for 40 years in a row. Yield: 4.40% (analysis)

Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology, as well as delivering engineering services and solutions to various industrial, commercial, and consumer markets worldwide. The company raised its dividends by 3% to 34.50 cents/share. Emerson is a member of the dividend aristocrats index, and has consistently raised dividends for 54 years in a row. Yield: 2.40% (analysis)

Aaron’s, Inc. (AAN) operates as a specialty retailer of consumer electronics, computers, residential and office furniture, household appliances, and accessories in the United States and Canada. The company raised its quarterly dividend by 8.30% to 1.30 cents/share. Aaron’s has regularly raised dividends since 2003. Yield: 0.30%

Of the three companies listed above, I view only Universal (UVV) as a buy candidate at current prices. The company not only has an above average dividend yield, but also has a sustainable dividend payout ratio. Emerson Electric (EMR) on the other hand has slowed down on distributions increases in the past few years, as it was hit by the recession. In addition to that it is yielding less than my minimum yield requirement of 2.50%. The problem with Aaron’s (AAN) is also its very low yield, caused by its low payout ratio.

Full Disclosure: Long UVV and EMR

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Friday, November 5, 2010

Enterprise Products Partners L.P. (EPD) Dividend Stock Analysis

Enterprise Products Partners L.P. 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. This dividend achiever has raised distributions for thirteen consecutive years. As a master limited partnership, the company doesn’t pay taxes at the corporate level. The tax bill is paid by the unitholders, which receive K-1 forms that give detailed explanations on how to report each significant item of income that Enterprise Product Partners has generated.

Over the past decade, this dividend stock has delivered a total return of 18.30% annually.
Over the past decade, Enterprise Products Partners L.P. has managed to increase cash flow per share by 10.20% annually. The beauty of pipeline MLPs is that they generate stable revenues, as they have virtual monopoly on oil and gas transportation for a particular pipeline in a particular region. In addition to that, volumes transported of natural gas or oil are much less volatile than the price of the underlying commodity.


The company has managed to raise annual distributions at a rate of 8.60% annually over the past decade. At 9%, dividends double every eight years. The current rate of distribution is double the amount paid every quarter nine years ago.

The company’s cashflow payout ratio has steadily decreased over the past decade from its highs reached in the early 2000s. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
As a master limited partnership, Enterprise Product Partners tends to distribute more than what it earns in a given year. Because it distributes almost all of its cashflow to unitholders, the company grows by issuing additional units or taking on debt.
There are several risks to EPD in particular. The first risk is that interest rates could increase, which will make master limited partnerships unattractive relative to risk-free fixed income instruments. This could also increase the cost of capital for the company and hinder future growth. Another risk with master limited partnerships is that the government could decide to abolish the MLP structure, in order to generate more revenues to fill in the huge deficits that the US is running. A similar move by the Canadian government in 2006 to phase-out the Canadian royalty trust structure led to losses in principal and income for investors who were relying exclusively on Canroys. The most important thing is to be diversified and not have over 10-15% of one’s portfolio in master limited partnerships such as Enterprise Product Partners (EPD) or Kinder Morgan Partners (KMP).

Another risk that will be mitigated for this MLP is incentive distribution rights, which allow the general partner a cut of distributions above certain thresholds. This would not be an issue for EPD, since on September 7 it announced plans to purchase the general partner that held those rights, and merge it with one of its wholly-owned subsidiaries. This move would lower the cost of capital for EPD.

The return on assets dropped off sharply between 2000 and 2003, before starting to recover since 2003. Master limited partnerships typically grow by purchasing new assets, which is one reason that this indicator would fluctuate over time. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Overall I find Enterprise Product Partners (EPD) to be an attractive dividend stock for current income and distribution growth. It yields 5.50% and trades at a P/E of 21.40. I would consider initiating a position in the stock on dips below $39.

Full Disclosure: None


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- Kinder Morgan Energy Partners (KMP) Dividend Stock Analysis
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- General vs Limited Partners in MLP's
- MLPs for tax-deferred accounts

Wednesday, November 3, 2010

Is Buy and Hold Dividend Investing dead?

Back in late 2008 and 2009 many investors were asking themselves whether it was worth it to be invested in the market. Business journalists and hedge fund managers were using this to question whether buy and hold was still relevant today. Now that the market has increased significantly since hitting its March 2009 lows, many investors are realizing that buy and hold still works. The difficult part of buy and hold investing is sitting through declines in the stock market, while being fully invested. Another problem with buy hold is that investors could start believing the hype that it would have been possible to “time the market" and exit at the right time, right after the market hit its highs, and thus become market timers. Many such investors are still in cash, thus missing most of the recovery in stock prices. It is very difficult not to succumb to the temptation of actively managing your portfolio, especially given the ease of access to markets over the internet.

The main problem with trading however is that if you trade you incur significant transaction fees and trigger tax liabilities that you otherwise would not have incurred with a buy and hold strategy. In addition to that, once you sell you can miss any big moves in the market. Another risk is that the company you purchase with the proceeds from the first investment could turn out to be a poor performer. Most investors will never be successful in timing the market, especially since they get scared at the bottom and greedy near market tops. As a result academic studies have found that most “active” individual investors tend to underperform the market averages particularly due to overtrading.

One positive thing behind buy and hold is when you purchase a stock and then give some time to your position to work in your favor. If you had done your research and purchased a strong brand with solid competitive advantages, such as Johnson & Johnson (JNJ) or McDonald’s (MCD) where the fundamentals are expected to improve over the long term, the exact entry price should not matter too much. As long as you do not overpay dearly for a stock by paying more than 20 times earnings, it shouldn’t matter whether you paid $55/share or $70/share. The most important thing is to be able to identify the solid company in the first place and then simply reinvest dividends, which would further compound your gains and magnify total returns.

In order to be able to sleep well at night however, the portfolio has to be properly diversified. In addition to that your stocks have to have strong competitive advantages, which would translate into higher earnings, dividends and stock prices over time. It is also important not to overpay for stocks. One of the primary reasons why the stock market has been flat over the past decade, despite solid earnings growth, is simply because it was much overvalued in the late 1990s and early 2000s. Many analysts are again trying to time what will happen in the next few months in the stocks market. Chances are they have no idea what they are talking about. The best solution is to pick at least 30 solid companies and hold on to them for the next few decades.

Some of the best companies which have solid business models that throw off enough cash to reinvest and grow the business as well as grow distributions include:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 48 consecutive years. Over the past decade, the company has managed to increase dividends by 13.50% annually. Yield: 3.40% (analysis)

McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 34 consecutive years. Over the past decade, the company has managed to increase dividends by 26.50% annually. Yield: 3.10% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 48 consecutive years. Over the past decade, the company has managed to increase dividends by 9.90% annually. Yield: 2.90% (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 28 consecutive years. Over the past decade, the company has managed to increase dividends by 7.10% annually. Yield: 2.60% (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 38 consecutive years. Over the past decade, the company has managed to increase dividends by 8.70% annually. Yield: 4.20% (analysis)

Full Disclosure: Long JNJ, MCD, KO, XOM, KMB

Relevant Articles:

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Monday, November 1, 2010

Nine Consistent Dividend Raisers in the News

It doesn’t take much for a company to raise distributions once in a while. In fact, even companies without a shareholder friendly dividend policy could occasionally afford to raise dividends. It is only companies with strong balance sheets and ability to generate excess scash flows that could not only maintain a solid dividend payment, but also afford to increase it consistently every year. As a result enterprising dividend investors should avoid companies that only sporadically raise distributions, and instead follow companies that consistently raise them. I define a company as a consistent dividend payer, if it has raised distributions for over five years in a row. I typically however require a history of at least ten years in a row of annual dividend increases, before initiating a position in a stock. I do this in order to avoid companies which have been able to raise distributions simply because they were in the right place at the right time, and not because they had any solid competitive advantages.

Over the past week, the following consistent dividend payers raised distributions:

Boardwalk Pipeline Partners, LP(BWP), through its subsidiaries, engages in the interstate transportation and storage of natural gas in the United States. This master limited partnership raised its quarterly distribution from 51 to 51.5 cents/unit. The company has raised distributions since going public in 2006. Yield: 6.10%

Ecology and Environment, Inc. (EEI), an environmental consulting firm, provides professional services to the government and private sectors worldwide. The company raised its smi-annual dividend by 4.80% to 22 cents/share. The company has consistently raised dividends since 2006. Yield: 3.30%

NuStar Energy L.P. (NS) engages in the terminalling, storage, and transportation of petroleum products in the United States, the Netherland Antilles, Canada, Mexico, the Netherlands, and the United Kingdom. The company raised its quarterly distributions by 1% to $1.075/share. This master limited partnership has consistently raised distributions since 2001. Yield: 6.80%

Holly Energy Partners, L.P. (HEP) operates a system of petroleum product and crude oil pipelines, storage tanks, distribution terminals, and loading rack facilities. The company raised its quarterly distribution by 1.20% over the previous quarters distribution, to 83.50 cents/unit. This master limited partnership has consistently raised distributions since 2005. Yield: 6.60%

Cintas Corporation (CTAS) provides corporate identity uniforms and related business services in the United States and Canada. This dividend aristocrat raised its annual dividend by 2% to 49 cents/share. The company has raised distributions for 28 years in a row. Yield: 1.80%

Molex Incorporated (MOLX) manufactures and sells electronic components worldwide. The company raised its quarterly dividend by 14.8% to 17.50 cents/share. Despite the fact that this was the first dividend increase since 2008, the company has actually managed to raise annual dividends since 2003.

UMB Financial Corporation (UMBF), a multi-bank holding company, provides banking and other financial services in the United States. The company raised its quarterly dividends by 5.40% to 19.50 cents/share. This dividend achiever has raised distributions for 20 years in a row. Yield: 2.10%

Perrigo Company (PRGO), through its subsidiaries, develops, manufactures, and distributes over-the-counter (OTC) and prescription (Rx) pharmaceuticals, nutritional products, active pharmaceutical ingredients (API), and medical diagnostic products worldwide. The company raised its quarterly dividend by 12% to 7 cents/share. Perrigo has consistently raised distributions since 2003, but only yields 0.40%.

Arrow Financial Corporation (AROW) operates as the holding company for Glens Falls National Bank and Trust Company, and Saratoga National Bank and Trust Company that offer various commercial and consumer banking, and financial products in the United States. The company raised dividends by 3.10% to 25 cents/share. This was the 18th consecutive annual dividend increase for this dividend achiever. Yield: 3.90%

Identifying companies which consistently raise dividends is just the beginning of the screening process. Next steps include analysis of competitive advantages and business models in order to avoid chasing companies which are not likely to keep raising distributions. Even after the right great company has been identified, one shouldn’t overpay for it, nor should they put all their money on that stock.

Full Disclosure: None

Relevant Articles:

- The ten year dividend growth requirement
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- Strong Brands Grow Dividends
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