Friday, December 30, 2011

Becton, Dickinson and Company (BDX) Dividend Stock Analysis 2011

Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. This dividend champion has paid uninterrupted dividends on its common stock since 1926 and increased payments to common shareholders every year for 39 consecutive years.

The most recent dividend increase was in November 2011, when the Board of Directors approved a 10 % increase in the quarterly dividend to 45 cents/share. Becton Dickinson’s largest competitors include Medtronic (MDT), Baxter International (BAX) and Boston Scientific (BSC).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.70% to its shareholders.

Despite soft economic outlook, the company should be able to generate higher sales in due to the sustainable demand for its diabetes products, disease testing products, and cell analysis products. The company generates over half of its sales from international operations, which is expected to increase as it grows its presence in emerging markets. The company is also active on the acquisition front as well as in investing heavily in research and development (R&D).

The company has managed to deliver a 13.50% annual increase in EPS since 2002. Analysts expect Becton Dickinson to earn $5.84 per share in 2011 and $6.45 per share in 2012. In comparison Becton Dickinson earned $5.59 /share in 2011. The company has been able to buyback 1.10% of its shares outstanding every year on average over the past decade.

The company’s Return on Equty has expanded over the past few years, from 20% in 2002 to 24% in 2011. 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 17.30% per year since 2001, which is much higher than the growth in EPS. Given the low dividend payout ratio however, Becton Dickinson can afford to raise distributions faster than earnings for at least one and a half to two decades.

A 17% growth in distributions translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1974 we see that Becton Dickinson has actually managed to double its dividend almost every six years on average.

The dividend payout ratio has increased from 21.80% in 2002 to 29.30% in 2011. Future increases in dividends above the rate of dividend increases could lead to further expansion in this indicator. 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 Becton Dickinson is attractively valued at 13.30 times earnings, has a sustainable dividend payout and yields 2.40%. I would consider initiating a position in the stock on dips below $72.

Full Disclosure: Long MDT

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Wednesday, December 28, 2011

Tech Dividends on the Rise

The technology sector has typically been characterized by rapid product obsolescence and the tremendous amounts of capital necessary to invest in Research and development, in order to maintain the competitive edge. The positive sides of technology include that a simple idea such as a piece of software can be widely distributed for a nominal cost, once the product is finished. The fact that companies have to come up with new innovative products all the time, since the status quo of the existing ones is challenged all the time, has historically lead to volatility in earnings. With such volatility, most companies have had to reinvest most of their earnings back into the business. This has not resulted in future growth however, as some firms ended up betting everything on themselves, while their industry niche was going into extinction.

In addition, the most successfully technology companies have been able to continuously predict and capitalize on future trends. Given the fact that the technologies ten years from now will be different that the technologies from today, a bet on tech stocks seems more like a speculation, rather than an investment. Because of the factors listed above, few tech companies have a wide moat. Most, such as Google, Microsoft, Intel or Apple have a moat, which could last for a few years. But that is until there is some ground breaking technology change or disruption, which provides consumers with a better, slicker and more advanced piece of technology. Companies such as International Business Machines (IBM), which has successfully been able to adapt for decades are the exception, rather than the norm.

Nevertheless, some companies such as International Business Machines (IBM), Intel (INTC) and Microsoft (MSFT) have been able to generate rising earnings per share over the past decade. This has enabled them to initiate a dividend, and also to increase it over time. The following companies have been able to achieve a higher annual dividend for at least five years:

Automatic Data Processing, Inc. (ADP) provides business outsourcing solutions. The company operates in three segments: Employer Services, Professional Employer Organization (PEO) Services, and Dealer Services. This dividend aristocrat has managed to boost distributions for 37 years in a row. Yield: 3.10% (analysis)

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. This dividend achiever has paid distributions for one century, and managed to boost distributions every year for 16 years in a row. Yield: 1.60% (analysis)

Microsoft Corporation (MSFT) develops, licenses, and supports a range of software products and services for various computing devices worldwide. This software giant has managed to raise distributions for seven consecutive year. Yield: 3.10% (analysis)

Intel Corporation (INTC) engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. The worlds largest chipmaker has managed to boost dividend payouts to shareholders for eight years in a row. Yield: 3.60% (analysis)

AT&T Inc. (T), together with its subsidiaries, provides telecommunication services to consumers, businesses, and other service providers worldwide. This dividend aristocrat has boosted distributions for 27 years in a row. Yield: 5.90% (analysis)

Verizon Communications Inc. (VZ) provides communication services. The company operates through two segments, Domestic Wireless and Wireline. The telecom carrier has managed to boost distributions for seven consecutive years. Yield: 5.20%

Vodafone Group Public Limited Company (VOD) provides mobile telecommunication services worldwide. It offers mobile voice services to approximately 370 million customers; messaging services; mobile data services; fixed broadband services to approximately 6 million customers; and whole sale carrier services to approximately 40 African countries. This international dividend achiever yields 7.70%.
I am not a big fan of technology in general for my dividend portfolio. As a result, I am mostly underweight the sector. While I might miss out on some spectacular stories such as Apple (AAPL), the lack of wide moats make it difficult to commit a large portion of my portfolio to the sector. In addition, the low number of dividend achievers and aristocrats in the technology sector epitomizes the fickle nature of technology as a business in general.


Full Disclosure: Long ADP

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Wednesday, December 21, 2011

Margin of Safety in Dividends

Benjamin Graham is the father of value investing. His strategy was focused on purchasing securities where the price was much lower than the total liquidation value of the corporation. This concept of purchasing stocks with a margin of safety has made him, his investors and the investors of his followers billions of dollars in profits. The real profits from this powerful concept were realized by Warren Buffett, who purchased stock in wide-moat companies at a fraction of what their future value was going to be.

Dividend investing is a form of value investing, where investors do not realize all of their return all at once, but rather on regular and consistent intervals. Dividends provide a direct link between the financial performance of a company, and the returns of its shareholders. Sometimes the market does not recognize that certain firms are more valuable for extended periods of time, even if their earnings are higher and valuations are cheap. With dividends, value investors realize a return that puts them closer to realizing the intrinsic value of the stock, no matter what the market or the stock price does.

Not all dividend stocks are attractive bargains however, which is evidenced when applying certain quantitative and qualitative criteria. In addition, investors should analyze whether the dividend payment is sustainable. There has to be an adequate margin of safety in dividend coverage from earnings or cashlows, which would ensure prompt payment of distributions even if there was a temporary fluctuation in operating performance.

I typically look for a margin of safety in dividends in corporations to be 50%-60% or below. This means that the dividend payout ratio should not be over 60%, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. When a company pays out almost all of its earnings as dividends, that leaves little room for maneuvering if earnings decline. In addition, this leaves little for investing and growing the business. There are some exceptions, where investors need to look beyond dividend payout ratio in order to evaluate dividend sustainability for Real Estate Investment Trusts, Master Limited Partnerships or Business Development Corporations to name a few. For REITs, investors should look at Funds from Operations (FFO). FFO is defined as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items.

For example, in 2010 Realty Income (O) distributed $1.722/share in dividends, whereas earnings were $0.92/share. It’s FFO per share was $1.83/share however. Check my analysis of this REIT.

Some companies with safe dividends include:

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company earned $4.95/share in 2010, and its annual dividend is $1.32 /share. The dividend payout ratio is 26.70%. Yield: 3.10% (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company earned $2.86/share in 2011, and its annual dividend is $0.97/share. The dividend payout ratio is 33.90%. Yield: 2.70% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. The company earned $4.58/share in 2010, and its annual dividend is $2.80 /share. The dividend payout ratio is 61.10%. Yield: 2.90% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company earned $4.18/share in 2010, and its annual dividend is $1.46/share. The dividend payout ratio is 34.90%. Yield: 2.50% (analysis)

Margin of safety in dividends is just one of the characteristics I look in a stock before analyzing it and eventually initiating or adding to my position in it. Nevertheless it is important to purchase shares in companies that can grow dividends and produce sustainable distributions for decades, while minimizing the risk of a dividend cut.

Full Disclosure: Long all stocks mentioned above

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I've been included in the latest edition of the Carnival of Personal Finance hosted at Money Cactus.

Monday, December 19, 2011

McCormick & Company (MKC) Dividend Stock Analysis 2011

McCormick & Company, Incorporated (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 aristocrat has paid uninterrupted dividends on its common stock since 1925 and increased payments to common shareholders every year for 26 consecutive years.

The most recent dividend increase was in November 2011, when the Board of Directors approved a 10.70% increase in the quarterly dividend to 31 cents/share. McCormick’s largest competitors include J.M. Smucker (SJM), Ralcorp (RAH) and Tootsie Roll (TR).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.50% to its shareholders.

The company has managed to deliver a 11.30% annual increase in EPS since 2001. Analysts expect McCormick to earn $2.78 per share in 2011 and $3.10 per share in 2012. In comparison McCormick earned $2.75 /share in 2010.

The company will be able to generate sales growth through acquisitions and joint venture, price increases, introductions of new products and expansion in its distribution channels. Recent acquisitions include a leading brand of Polish spices and has also formed a Joint Venture with Kohinoor in India. Major risks include inability to pass on price inflation to consumers as well as consumer’s switching to generic labels. While the company has a 50% market share in generic labels domestically, these products carry lower margins. McCormick has been able to maintain its position in branded spice products through constant innovation.

The company’s Return on Equty has decreased substantially over the past decade. This indicator seems to have bottomed out and is on the rebound as of recently. 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 11.20% per year since 2001, which in line with the growth in EPS.



An 11% growth in distributions translates into the dividend payment doubling every six and a half years. If we look at historical data, going as far back as 1988 we see that McCormick has actually managed to double its dividend almost every six years on average.

The dividend payout ratio has remained consistently below 45% over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.



Currently McCormick is attractively valued at 17.40 times earnings, has a sustainable dividend payout and yields 2.50%. I would consider adding to my position in the stock on dips.

Full Disclosure: Long MKC

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Friday, December 16, 2011

Five Dividend Hikes In the News

In the world of dividend investing, there is always a trade-off between dividend yield and dividend growth. Companies that typically spot above average yields, tend to increase distributions very slowly. Corporations which manage to increase distributions very quickly, typically tend to pay a low current yield. I believe that there is a place for both strategies in a dividend growth investor's portfolio. The high yielders provide a steady stream of distribution income today, which will likely have a hard time keeping up with inflation. The high dividend growth stocks pay low yields today, but provide a great opportunity for high yields on cost in the future coupled with strong potential for capital gains.

The Boards of Directors of five consistent dividend paying companies approveded higher dividend payments to their loyal shareholders. The following consistent dividend payers exhibited the above mentioned characteristics very closely:

Nucor Corporation (NUE), together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. It operates through three segments: Steel Mills, Steel Products, and Raw Materials. The company raised its quarterly dividend by 0.70% to 36.50 cents/share. This marked the 39th consecutive annual dividend increase for this dividend champion. Yield: 3.80% (analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This real estate investment trust raised its monthly dividend to 14.55 cents/share. Realty Income is a dividend achiever, which has increased dividends for 17 years in a row. Yield: 5.20% (analysis)

Franklin Resources Inc. (BEN) is a publicly owned asset management holding company. It manages, through its subsidiary, separate client-focused equity, fixed income, and balanced portfolios. The company raised its quarterly dividend by 8% to 27 cents/share. This marked the 31st consecutive annual dividend increase for this dividend champion. Yield: 1.10%

ABM Industries Incorporated (ABM) , through its subsidiaries, provides facility services for commercial, industrial, institutional, and retail facilities primarily in the United States. It operates in four segments: Janitorial, Engineering, Parking, and Security. The company raised its quarterly dividend by 3.60% to 14.50 cents/share. This marked the 45th consecutive annual dividend increase for this dividend champion. Yield: 2.80%

Urstadt Biddle Properties, Inc. (UBP),is a real estate investment trust (REIT) which engages in the acquisition, ownership, and management of commercial real estate properties in the United States. The company raised its quarterly dividend by 1% to 24.75 cents/share. This marked the 18th consecutive annual dividend increase for this dividend achiever. Yield: 5.73%

Full Disclosure: Long NUE and O

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- Dividend Achievers Offer Income Growth and Capital Appreciation
- Dividend Champions - The Best List for Dividend Investors
- Dividend Growth Investing Gets No Respect
- How dividend stocks protect investors from inflation

Wednesday, December 14, 2011

Dividend Investors – Do not forget about capital gains

When investing for income, many retirees focus on the dividend stream. Living off dividends in retirement is helpful in creating a consistent stream of income, which does not fluctuate as wildly as stock prices do. Focusing only on the distributions however, without giving much thought to anything beyond the juicy current yield could be dangerous.

Dividend investing is a process with several stages, in order to minimize risk of income reduction in retirement. The first stage should be selecting quality income candidates from a pool of securities which have certain characteristics that the dividend investor is looking for. For example, I tend to purchase companies which have consistently raised dividends for at least ten years in a row. As a result, I start my screen with the list of Dividend Achievers.

The second stage should be applying a set of entry criteria to the list of qualified candidates, in order to narrow it down to a more manageable list for further research. This set of criteria should reflect important points of the investor’s strategy, determined based off their experience in the markets and risk tolerance.

The next stage should be analyzing each security in detail. Given the wealth of data on the internet these days, many investors tend to focus on the quantitative side of analysis. While it is helpful to see the trends behind the data and it is fun to project past results, investors should not stop there. Evaluating qualitative characteristics such as branding, product mix, competitive advantages, strengths, weaknesses, opportunities, trends and industry factors should be an important part of the analysis toolset. Obtaining an understanding of the business by reading annual reports or research reports and news stories as well as observing the business operations in person would also add to the investment evaluation of the business.

While creating a diversified income stream is important, investors should also not forget about capital gains either. It is important to understand where the distributions are being derived from. There have been certain investments where investors have receiving a large portion of the distribution as a return of capital, rather than income. While the cashflow was high enogh to lure investors into the high yielding investment, the security was paying these distributions on a borrowed time. Once the capital base is depleted, investors would end up with no income and their security might be worthless.

One such security are US oil and gas royalty trusts. Most of these pass-through entities tend to pay high current distributions every month out of their royalty interests in Oil and Gas fields. As these fields get depleted however, there comes a time when there would be no longer any revenues and thus no profits to distribute to shareholders. A larger portion of the current distributions of these businesses represents a return of capital, which is logical given the fact that for every barrel of oil equivalents pumped out of the ground, there is one less barrel to be pumped in the future. Once all the barrels in the reserve have been depleted, there will be no more oil to be produced and sold.

Examples include BP Prudhoe Bay Royalty Trust (BPT), Hugoton Royalty Trust (HGT)and San Juan Basin Royalty Trust (SJT).

Dividends typically account for 40% of annual total stock market returns. The remaining 60% come from capital gains. It is also important to not forget about capital gains because they ensure that over time your principal investment maintains and even grows its purchasing power over time. That is why selecting companies which have future prospects for growth is so important.

Companies, whose future growth is virtually unlimited include:

McDonald’s Corporation, together with its subsidiaries, operates as a foodservice retailer worldwide. (MCD). This dividend aristocrat has raised distributions for 35 years in a row. Over the past decade, the company has managed to boost dividends by 26.50% per year. Yield: 2.80% (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has raised distributions for 49 years in a row. Over the past decade, the company has managed to boost dividends by 13% per year. Yield: 3.50% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. This dividend aristocrat has raised distributions for 55 years in a row. Over the past decade, the company has managed to boost dividends by 10.90% per year. Yield: 3.40% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. This dividend aristocrat has raised distributions for 49 years in a row. Over the past decade, the company has managed to boost dividends by 10% per year. Yield: 2.70% (analysis)

Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and the Americas. This international dividend aristocrat has raised distributions for 11 years in a row. Over the past decade, the company has managed to boost dividends by 9.20% per year. Yield: 3.70% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrat has raised distributions for 37 years in a row. Over the past decade, the company has managed to boost dividends by 17.80% per year. Yield: 2.80% (analysis)

Full disclosure: Long MCD, JNJ, PG, KO, UL, WMT

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Monday, December 12, 2011

How to invest like a Dividend Billionaire

Some of America’s richest families, own stakes in one of the oldest enterprises. The Rockefellers, Waltons, DuPonts, Johnson’s, Mellon’s control fortunes in the billions of dollars, which are spread amongst descendents of the people that accumulated the fortunes. These families have had generations of trust fund babies, which are essentially people who are expected to be retired for the rest of their lives. One common characteristic between all of these families, is that their wealth is stores in companies, which tend to pay consistently increasing dividends. The Waltons have Wal-Mart Stores (WMT), the Rockefeller's have Exxon-Mobil (XOM), the Johnsons have Johnson & Johnson (JNJ) while the Stryker Family has Stryker (SYK). The rising dividend payments generated by the companies these families own, generate the sufficient stream of income, to pay for the monthly expenses of generations of descendants. These families have essentially managed to live off dividends for decades.

Investors, who are interested in generating an income stream off their capital, that would last for several generations, should look no further than dividend growth stocks. As far as the Stryker Family is concerned, their core holding announced an 18% increase in dividend income over the past week.

Stryker Corporation (SYK), together with its subsidiaries, operates as a medical technology company worldwide. The company operates in three segments: Reconstructive, MedSurg, and Neurotechnology and Spine. The company raised its quarterly dividend by 18% to 21.25 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Yield: 1.80%

Other companies, which rewarded their shareholders with dividend hikes include:

Universal Health Realty Income Trust (UHT) operates as a real estate investment trust (REIT) in the United States. The company invests in health care and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings. The company raised its quarterly dividend by 0.80% to 61 cents/share. This marked the 23th consecutive annual dividend increase for this dividend achiever. Yield: 6.50% (analysis)

The Valspar Corporation (VAL) manufactures and distributes coatings, paints, and related products worldwide. The company raised its quarterly dividend by 11.10% to 20 cents/share. This marked the 34th consecutive annual dividend increase for this dividend champion. Yield: 2.20%

Ameriprise Financial, Inc. (AMP), through its subsidiaries, provides financial planning, products, and services primarily in the United States. The company raised its quarterly dividend by 21.70% to 28 cents/share. This marked the 8th consecutive annual dividend increase for this dividend stock. Yield: 2.30%

Enbridge Inc. (ENB) engages in the transportation and distribution of crude oil and natural gas primarily in Canada and the United States. The company raised its quarterly dividend by 15% to 28.25 CAD cents/share. Enbridge is an international dividend achiever, which has raised dividends for 17 years in a row. Yield: 3.10%

Edison International (EIX), through its subsidiaries, engages in the supply of electric energy. Its distribution system consists of approximately 60,000 circuit miles of overhead lines, 43,500 circuit miles of underground lines, and 700 distribution substations located in California. The company raised its quarterly dividend by 1.60% to 32.50 cents/share. This marked the ninth consecutive annual dividend increase for Edison International. Edison International has paid dividends for over 100 years. Yield: 3.30%

National Health Investors, Inc. (NHI), a real estate investment trust (REIT), invests in health care properties, primarily in the long-term care industry in the United States. . The company raised its quarterly dividend by 5.70% to 65 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Yield: 6.10%

C.H. Robinson Worldwide, Inc. (CHRW), a third-party logistics company, provides multimodal freight transportation services and logistics solutions to companies in various industries worldwide. The company raised its quarterly dividend by 13.80% to 33 cents/share. This marked the 14th consecutive annual dividend increase for this dividend achiever. Yield: 2%

Erie Indemnity Company (ERIE) provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States. The company raised its quarterly dividend by 7.30% to 55.25 cents/share. This marked the 22nd consecutive annual dividend increase for this dividend achiever. Yield: 2.90%

AXIS Capital Holdings Limited (AXS), through its subsidiaries, provides various insurance and reinsurance products to insurers and reinsurers worldwide. The company raised its quarterly dividend by 4.30% to 24 cents/share. This marked the tenth consecutive annual dividend increase for AXIS. Yield: 3.10%

Roper Industries, Inc. (ROP) designs, manufactures, and distributes medical and scientific imaging products and software, energy systems and controls, and industrial technology products and radio frequency (RF) products and services. The company raised its quarterly dividend by 25% to 13.75 cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Yield: 0.70%

J&J Snack Foods Corp. (JJSF) manufactures nutritional snack foods; and distributes frozen beverages to the food service and retail supermarket industries in the United States, Mexico, and Canada. The company raised its quarterly dividend by 10.60% to 13 cents/share. This marked the 8th consecutive annual dividend increase for this dividend stock. Yield: 1%

Full Disclosure: Long UHT

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Friday, December 9, 2011

International Business Machines (IBM) Dividend Stock Analysis

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. This dividend achiever has paid uninterrupted dividends on its common stock since 1913 and increased payments to common shareholders every year for 16 consecutive years. Most recently, billionaire investor Warren Buffett made public his 5% stake in IBM, along with his stakes in several new companies.

The most recent dividend increase was in May 2011, when the Board of Directors approved a 15.40% increase in the quarterly dividend to 75 cents/share. IBM’s largest competitors include Infosys (INFY), Wipro (WIT) and Accenture (ACN).

Over the past decade this dividend growth stock has delivered an annualized total return of 8% to its shareholders.

The company has managed to deliver a 11.60% annual increase in EPS since 2001. Analysts expect IBM to earn $13.36 per share in 2011 and $14.79 per share in 2012. In comparison IBM earned $11.52 /share in 2010. IBM has publicly announced its goal to hit $20 in earnings per share by 2015. The company is one of the most consistent repurchasers of stock, having reduced the total shares outstanding by 50% since 1995.

IBM has transformed itself from a hardware company to services, solutions and software conglomerate. The company’ expansion overseas, focus on high margin software and providing solutions to customers, investing in innovation should help it in achieving its goals. The company faces some pricing pressure from competitors, and risks related to failure to transition new products successfully. However, given the company’s economies of scale, contiguous focus on building and maintaining strong client relations and drive to innovate, it should weather any near term weaknesses successfully.

The company’s Return on Equty has doubled 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 annual dividend payment has increased by 18.30% per year since 2001, which is higher than the growth in EPS. I would expect IBM to keep increasing in dividends at 10% per year at least for the foreseeable future.

An 18% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1993 we see that IBM has actually managed to double its dividend every four and a half years on average. The company did cut distributions by 80% in 1993. If the company diverts the money it uses for share buybacks, its dividend payment could have easily topped $14/share in 2010.

The dividend payout ratio has remained low below 25% for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently IBM is cheap at 15.30 times earnings, has a sustainable dividend payout but yields a paltry 1.60%. I would keep IBM on my radar, and would consider it for inclusion in my dividend growth portfolio on dips below $120/share, which is the equivalent of a 2.50% yield at current dividend rates.

Full Disclosure: None

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Wednesday, December 7, 2011

Dividend Aristocrats List

The Dividend Aristocrats index was created by Standard and Poor’s, to include companies in the S&P 500 which have increased dividends for at least 25 consecutive years. The types of companies included in the index are representative of several sectors, and thus the list is relatively well diversified. The stocks offer both capital appreciation potential as well as a growing dividend payment. Besides being a member of S&P 500 index, companies need to have a float of at least $3 billion, an average daily trading volume of $5 million and have increased distributions for at least 25 years in a row. Companies are deleted from the list, if they fail to increase or cut dividends in a given year.

The index is typically rebalanced once per year in December. The number of constituents bottomed at 42 in 2010, and will increase to 50 in 2012. Recently, Standard and Poor’s announced that it would not take into account special dividends in its determination of a streak of 25 years of dividend increases in a row. As a result, several new companies were added to the index:

AT&T Inc. (T), together with its subsidiaries, provides telecommunication services to consumers, businesses, and other service providers worldwide. The company has raised dividends for 27 consecutive years. Yield: 5.90% (analysis)

HCP, Inc. (HCP) is an independent hybrid real estate investment trust. It primarily invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing. The company has raised dividends for 26 consecutive years. Yield: 5.50% (analysis)

Sysco Corporation (SYY), through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily to the foodservice or food-away-from-home industry. The company has raised dividends for 42 consecutive years. Yield: 3.70% (analysis)

Illinois Tool Works Inc. (ITW) manufactures a range of industrial products and equipment worldwide. The company has raised dividends for 48 consecutive years. Yield: 3.30%

Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. The company has raised dividends for 55 consecutive years. Yield: 3.50% (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company has raised dividends for 34 consecutive years. Yield: 3% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has raised dividends for 48 consecutive years. Yield: 2.70% (analysis)

T. Rowe Price Group, Inc. (TROW) is a publicly owned asset management holding company. The company has raised dividends for 24 consecutive years. Yield: 2.40% (analysis)

Franklin Resources Inc. (BEN) is a publicly owned asset management holding company. The company has raised dividends for 30 consecutive years. Yield: 0.90%

The only company, removed from the index includes CenturyLink (CTL).

CenturyLink, Inc. (CTL), together with its subsidiaries, operates as an integrated communications company. The company has maintained its quarterly dividend at 72.50 cents/share for two years, which is why it is being kicked out of the index after raising distributions for 37 years in a row.

The complete listing is included below:



While I initially considered the Dividend Aristocrat’s index the cream of the crop and the first stop in my dividend research, the volume and capitalization requirements have somewhat turned me off of the index. For example, companies which have managed to raise dividends for over a quarter of a century with a market capitalization of less than $3 billion and average daily volume of less than $5 million dollars would not be included. This is the reason why I prefer to use the Dividend Champions index instead. The only drawback of the Champions index is that the total returns are not calculated, whereas the total returns on the S&P Dividend Aristocrat’s index are.

Full Disclosure: Long MMM, AFL, ABT, APD, ADM, ADP, BF/B, CB, CINF, CL, CLX, KO, ED, EMR, XOM, FDO, GWW, ITW, JNJ, KMB, LOW, MKC, MCD, MHP, MDT, PEP, PG, SYY, WMT, WAG

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Monday, December 5, 2011

Four Income Stocks Raising Distributions

Every week, I review the list of dividend stocks, which announce dividend hikes. I tend to focus on the ones which have at least a five year record of consecutive dividend increases for future research. While I typically require at least ten years of consecutive dividend increases before I initiate a position in a given stock, familiarizing myself with potential additions several years before I pull the trigger could be a real time saver. In other words, if I like the economics of a company such as Intel (INTC) today, and the only red flag is that it hasn’t raised dividends for 10 years in a row, I would be mentally prepared to act if it is still attractively priced in a few years.

The four consistent dividend stocks, whose boards approved dividend hikes over the past week included:

Ecolab Inc. (ECL) develops and markets products and services for the hospitality, foodservice, healthcare, and industrial markets primarily in the United States. The company increased its quarterly dividend by 14.30% to 20 cents/share. This marked the 20th consecutive dividend increase for this dividend achiever. Yield: 1.40%

Graco Inc. (GGG) designs, manufactures, and markets systems and equipment to move, measure, control, dispense, and spray fluid materials. It operates in three segments: Industrial, Contractor, and Lubrication. The company increased its quarterly dividend by 7.10% to 22.50 cents/share. This marked the 15th consecutive dividend increase for this dividend achiever. Yield: 2.10%

OGE Energy Corp. (OGE), together with its subsidiaries, operates as an energy and energy services provider that offers physical delivery and related services for electricity and natural gas primarily in the south central United States. The company increased its quarterly dividend by 4.70% to 39.25 cents/share. This marked the 6th consecutive dividend increase for OGE Energy Corporation. Yield: 3.00%

Wisconsin Energy Corporation (WEC) engages in the generation, distribution, and sale of electric energy and steam. The company increased its quarterly dividend by 15.40% to 30 cents/share. This marked the 9th consecutive dividend increase for Wisconsin Energy Corporation. Yield: 3.60%

Full Disclosure: None

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Friday, December 2, 2011

V.F. Corporation (VFC) Dividend Stock Analysis 2011

V.F. Corporation (VFC) designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. This dividend champion has paid uninterrupted dividends on its common stock since 1941 and increased payments to common shareholders every year for 39 consecutive years.

The most recent dividend increase was in October 2011, when the Board of Directors approved a 14.30% increase in the quarterly dividend to 72 cents/share. V.F. Corporation’s largest competitors include Coach (COH), Ralpha Lauren (RL) and PVH Corp (PVH).

Over the past decade this dividend growth stock has delivered an annualized total return of 18.50% to its shareholders.

The company has managed to deliver a 17.70% annual increase in EPS since 2001. Analysts expect V.F. Corporation to earn $8.04 per share in 2011 and $9.31 per share in 2012. In comparison V.F. Corporation earned $5.18 /share in 2010.

I last analyzed the stock in 2010, but never managed to pull the trigger, given the fact that I know little about apparel. I have been skeptical of most apparel and footwear industries, but V.F. Corp has managed to defy my skepticism. The company seems to have strong brands and pricing power, which could explain the reason why it has been able to earn sufficient amounts of excess cash to pay higher distributions for almost 4 decades.

In early 2011 the company updated its long-term targets to reflect confidence in its future. In short V.F. Corporation aims to add $5 billion in organic revenue growth and $5 in earnings per share over the next five years from 2010 levels. Strong growth in its highly profitable international and direct-to-consumer businesses is expected to fuel an expansion in operating margins to 15%. Over the next five years, the company’s goal is to grow international revenues by 15% annually to comprise 40% of total revenues. V.F. Corporation’s management team also expects 15% growth in its direct-to-consumer businesses, which should account for about 22% of revenues by 2015.

The company’s acquisition of Timberland Brand, will help it acquire a strong lifestyle brand, and would result in higher sales as well as $35 million in annual synergies. This acquisition is expected to add at least 50 cents/share in 2011, at least $1/share by 2012 and $2/share by 2015.

The company’s Return on Equty has been on a slow decline since hitting a high at 23% in 2003. This indicator seems to have hit a bottom in 2009, and is currently on the rebound. 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 11.20% per year since 2001, which is lower than the growth in EPS. I would expect V.F. Corporation to keep increasing in dividends at 10% per year at least for the foreseeable future.

An 11% growth in distributions translates into the dividend payment doubling every six and a half years. If we look at historical data, going as far back as 1986 we see that V.F. Corporation has actually managed to double its dividend every 8 years on average.

The dividend payout ratio has remained sustainable for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently V.F. Corporation overvalued and is trading at 22 times earnings, yields 2.10% but has a sustainable dividend payout. I am excited about the growth opportunities behind this stock, and the potential for dividend growth and capital gains. I would keep V.F. Corporation on my radar, and would consider it for inclusion in my dividend growth portfolio on dips below $115/share.

Full Disclosure: None

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Wednesday, November 30, 2011

How to Build a Retirement Dividend Portfolio with only $1000/month

Most articles on retirement investing assume that a lump sum of approximately $1 million is invested in order to provide income in retirement. In reality however, few individuals receive a lump-sum of such proportions all at once. Instead, many individual investors end up with a substantial nest-egg through long-term saving and investing. This long-term investing utilizes the power of compounding during the time it took to accumulate the nest egg. With dividend investing, instead of focusing on an asset number, investors typically focus on generating a specific amount of income. In a previous article I discussed the ways to increase your dividend income.

The way that younger dividend investors should approach retirement is no different. They should save a set amount of funds each month and purchase quality dividend stocks that are attractively priced at the time. After that, they should strive to reinvest dividends selectively or using drips. As they build their portfolios over time, investors in the accumulation stage should also avoid concentrating their efforts on just a handful of stocks. In order to have a properly diversified portfolio, which will withstand dividend cuts during financial crises, investors in the accumulation stage should hold at least 30 individual domestic and international securities representative of the ten market sectors in the S&P 500.

Diversification is not a silver bullet however, as certain risks, such as market risk cannot be diversified away, unless of course a non-correlated asset such as Real Estate or Fixed Income is added to the portfolio mix. In addition, investors should not diversify for the sake of diversification, and should stick to purchasing quality dividend stocks and attractive valuations.

So how can one accumulate a dividend portfolio that would generate sufficient dividend income in retirement?

I ran the numbers using the following assumptions:

An investor saves $1000/month and is able to allocate them to dividend growth stocks which yield 3% at the time and grow distributions at 7% per year. At that rate the distributions will double every ten years. This investor will also re-invest the accumulated dividends into more shares of dividend growth stocks yielding 3% which grow distributions at 7% per year.
This means that in year 21, this investor will be able to generate over $20,000 in annual dividend income based off the $240,000 investment. The purchasing power of this investment will be cut in half assuming a 3% annual rate of inflation.

In order to increase their dividend income, the investor should either save a higher amount of money every month or they should let their investment compound for a longer period of time. Saving $2000/month will generate over $41,000 in dividend income in year 21. If one saves $2000/month for 30 years however, this would lead to an annual dividend income of $118,000 by year 31.

The types of dividend growth stocks that investors could purchase include:

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has managed to boost dividends for 39 consecutive years, and has also managed to increase them by 13% per year over the past decade. Yield: 3.20% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has managed to boost dividends for 37 consecutive years, and has also managed to increase them by 17.80% per year over the past decade. Yield: 2.80% (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The company has managed to boost dividends for 39 consecutive years, and has also managed to increase them by 8.80% per year over the past decade. Yield: 3.80% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has managed to boost dividends for 48 consecutive years, and has also managed to increase them by 12.40% per year over the past decade. Yield: 2.70% (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of health care products worldwide. The company has managed to boost dividends for 39 consecutive years, and has also managed to increase them by 9.20% per year over the past decade. Yield: 4.20% (analysis)

In addition, this example did not account for taxes. If investors could afford to stash away as much as possible in tax deferred accounts which let them compound their investments tax free for decades, they will avoid paying the tax man every year out of their investment returns. The drawback is that withdrawals from such accounts are difficult and costly to make if one wants to retire before the age of 59.

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This post was featured in the Carnival of Persona Finance

Monday, November 28, 2011

Five Show me the money dividend stocks

Investors can realize a return on investment either in the form of capital gains or whenever they receive a dividend. Capital gains are tricky, since if they are not realized they could disappear and quickly turn into unrealized losses. The volatile market environment over the past several months has lead to trillions of dollars in stock market losses worldwide. As a result, more investors are seeking to invest in stable corporations, which provide positive feedback every quarter in the form of cash dividends. Particularly of interest are the stocks of these companies which not only pay a stable dividend, but can also afford to grow that dividend. As a result, investors of such dividend paying stocks are not at the mercy of the market in order to generate returns from their investments. They could afford to patiently wait on the sidelines, and get paid for doing so, while the irrational Mr. Market zig-zags.

The following dividend growth stocks raised distributions to shareholders over the past week:

McCormick & Company, Incorporated (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. The company raised its quarterly distributions by 10.70% to 31 cents/share. This marked the 26th consecutive annual dividend increase for this dividend champion. Yield: 2.70% (analysis)

Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company raised its quarterly distributions by 9.80% to 45 cents/share. This marked the 99th consecutive annual dividend increase for this dividend champion. Yield: 2.50% (analysis)

Hormel Foods Corporation (HRL), together with its subsidiaries, produces and markets various meat and food products in the United States and Internationally. The company raised its quarterly distributions by 17.60% to 15 cents/share. This marked the 46th consecutive annual dividend increase for this dividend champion. Yield: 2.10%

Lancaster Colony Corporation (LANC) engages in the manufacture and marketing of consumer products focusing primarily on specialty foods for the retail and foodservice markets in the United States. The company operates in two segments, Specialty Foods, and Glassware and Candles. The company raised its quarterly distributions by 9.10% to 36 cents/share. This marked the 49th consecutive annual dividend increase for this dividend champion. Yield: 2.20%

United Bankshares, Inc. (UBSI), through its subsidiaries, provides commercial and retail banking services and products in the United States. The company raised its quarterly distributions by 3.30% to 31 cents/share. This marked the 38th consecutive annual dividend increase for this dividend champion. Yield: 5%

Full Disclosure: Long MKC

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Wednesday, November 23, 2011

Should you follow Buffett’s latest investments?

Warren Buffett is one of the most successful investors of all time. He has been able to transform a small textile company into a $200 billion conglomerate, with interests in insurance, manufacturing, utilities and railroads. One of the most followed segment of the business however is the investment portfolio. In a previous article, I discussed how investors who closely followed Buffett’s moves in the Berkshire Hathaway (BRK.B) stock portfolio between 1976 and 2006 would have significantly outperformed the market.

The company is required by the SEC to publicly disclose its stock holdings each quarter. Sometimes, Buffett is able to request an exception for holdings he is in the process of accumulating. This is to ensure that investors who closely follow his trades do not bid up the prices of stocks he is purchasing, while he is building up his positions.

Over the past week, Berkshire Hathaway disclosed new holdings in International Business Machines (IBM), Visa (V) and Direct TV (DTV), Intel (INTC), CVS Caremark (CVS) and General Dynamics (GD). I have long speculated that Buffett is a closet dividend investor. Indeed, Berkshire’s portfolio generates over $1.40 billion in annual dividend income. Most of the new additions represent stocks which could easily be characterized as dividend growth companies. I have analyzed each one below, in order to determine if they are decent buys at the moment.

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. Big Blue has paid dividends for 100 years, and raised them for each of the past 16 years. The company has been able to transform itself from a hardware company to service and consulting juggernaut. I would consider initiating a position in IBM on dips below $150. The major issue with IBM is the low yield of 1.70%. (analysis)

Intel Corporation (INTC) engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. The leader in microprocessors has been able to raise distributions for 8 years in a row. I would consider adding the stock to my portfolio in a few years. Yield: 4.10% (analysis)

Visa Inc. (V) operates retail electronic payments network worldwide. It facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. Since initiating a dividend in 2008, the company has raised it three times. Given its low payout ratio, and expected growth in EPS, Visa has the potential to become the next big dividend growth stock. Yield: 0.70%

General Dynamics Corporation (GD) provides business aviation, combat vehicles, weapons systems and munitions, military and commercial shipbuilding, and communications and information technology products and services worldwide. This dividend achiever has managed to boost distributions for 20 years in a row. Betting on this firm means betting that US will continue engaging in war activity in the future, and that the budget deficits would not decrease the appetite for military equipment. Yield: 3%

CVS Caremark Corporation (CVS) operates as a pharmacy services company in the United States. The company has managed to boost distributions for 8 years in a row. Yield: 1.50%

Overall, I find all of these as great businesses, which fit the Buffett model of having durable competitive advantages, pricing power and strong cash flow generation. Of all, I find Visa has the potential to be a great dividend growth story for the next few decades. Visa and MasterCard (MA) are basically a duopoly, which will certainly benefit from an increasing number of cashless transactions globally. Despite the low current yield, and the fact that the shares are close to being overvalued currently, I found the megatrends powerful enough to initiate a position in the stock. The long term dividend growth and total return potential of a company like Visa is hard to ignore. Thus being said, from a risk management perspective, I will only keep a smaller position in the company.

Full disclosure: Long V

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This article was featured in Carnival of Personal Finance #337

Monday, November 21, 2011

Twelve income stocks boosting distributions

As I mentioned in a previous article, the most satisfying press release coming from a dividend paying corporation, is the one announcing a dividend increase. For dividend growth investors, who have analyzed the company and purchased its stock based on the dividend growth capabilities of that business, this provides a strong almost instantaneous feedback in the form of a higher reward. After all, a company which can afford to continuously to raise distributions year after year, will generate rising returns on investment for investors who were shrewd enough to select it at the right time. The consistency of dividend increases, ensures that investors can live off that income stream and attain financial independence.

Below, I have highlighted twelve cash machines, which announced dividend increases over the past week. All of the companies listed below have raised distributions for at least five consecutive years:

Brown-Forman Corporation (BF-B) engages in manufacturing, bottling, importing, exporting, and marketing alcoholic beverages. The company raised its quarterly dividend by 9.40% to 35 cents/share. This marked the 28th consecutive annual dividend increase for this dividend champion. Yield: 1.90% (analysis)

Sysco Corporation (SYY), through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily to the foodservice or food-away-from-home industry. The company raised its quarterly dividend by 3.80% to 36 cents/share. This marked the 10th consecutive annual dividend increase for this dividend champion. Yield: 4% (analysis)

National Bankshares, Inc. (NKSH) operates as the holding company for the National Bank of Blacksburg, a chartered national bank that provides a range of retail and commercial banking services to individuals, businesses, non-profits, and local governments in Virginia. The company raised its semi-annual dividend by 8.30% to 52 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. The company has raised dividends two times in the past year. Yield: 4%

The Laclede Group, Inc. (LG), through its subsidiaries, engages in the retail distribution, sale, and marketing of natural gas. The company raised its quarterly dividend by 2.50% to 41.50 cents/share. This marked the ninth consecutive annual dividend increase for the stock. Yield: 4%

The Williams Companies, Inc. (WMB), through its subsidiaries, engages in finding, producing, gathering, processing, and transporting natural gas primarily in the United States. The company raised its quarterly dividend by 25% to 25 cents/share. This marked the second dividend increase this year for Williams Companies, which has raised distributions for 8 years in a row. Yield: 3.30%

MDU Resources Group, Inc. (MDU) operates as a diversified natural resource company in the United States. The company generates, transmits, and distributes electricity, as well as distributes natural gas. The company raised its quarterly dividend by 3.10% to 16.75 cents/share. This marked the 21st consecutive annual dividend increase for this dividend achiever. Yield: 3.30%

NIKE, Inc. (NKE), together with its subsidiaries, engages in the design, development, marketing, and sale of footwear, apparel, equipment, and accessory products for men, women, and children worldwide. The company raised its quarterly dividend by 16.10% to 36 cents/share. This marked the 10th consecutive annual dividend increase for this dividend achiever. Yield: 1.60%

Union Pacific Corporation (UNP), through its subsidiary, Union Pacific Railroad Company, provides rail transportation services in North America. The company raised its quarterly dividend by 26.30% to 60 cents/share. This marked the 6th consecutive annual dividend increase for this dividend stock. Yield: 2.40%

New Jersey Resources Corporation (NJR) provides retail and wholesale energy services. It operates in two segments, Natural Gas Distribution and Energy Services. The company raised its quarterly dividend by 5.60% to 38 cents/share. This marked the 17th consecutive annual dividend increase for this dividend achiever. Yield: 3.20%

Royal Gold, Inc. (RGLD), together with its subsidiaries, engages in the acquisition and management of precious metal royalties. The company raised its quarterly dividend by 36.40% to 15 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Yield: 0.80%

The Hanover Insurance Group, Inc. (THG), through its subsidiaries, underwrites commercial and personal property, and casualty insurance coverage in the United States. The company raised its quarterly dividend by 9.10% to 30 cents/share. This marked the 8th consecutive annual dividend increase for this dividend stock. Yield: 3.20%

StanCorp Financial Group, Inc. (SFG), through its subsidiaries, provides group insurance products and services in the United States. The company raised its annual dividend by 3.50% to 89 cents/share. This marked the 14th consecutive annual dividend increase for this dividend stock. Yield: 2.70%

Full disclosure: Long BF-B and SYY

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Friday, November 18, 2011

Microsoft (MSFT) Dividend Stock Analysis

Microsoft Corporation (MSFT) develops, licenses, and supports a range of software products and services for various computing devices worldwide. Microsoft has paid uninterrupted dividends on its common stock since 2003 and increased payments to common shareholders every year for 7 years. The company is one of four AAA rated companies in the US.

The most recent dividend increase was in September 2011, when the Board of Directors approved a 25% increase in the quarterly dividend to 20 cents/share. Microsoft ’s largest competitors include Apple (AAPL), Google (GOOG) and Oracle (ORCL).

Over the past decade this dividend growth stock has delivered an annualized total return of 2.10% to its shareholders.

The company has managed to deliver a 16 % annual increase in EPS since 2001. Analysts expect Microsoft to earn $2.79 per share in 2012 and $3.08 per share in 2013. In comparison Microsoft earned $2.69 /share in 2011. The company has consistently managed to repurchase 3% of its outstanding stock since 2002.

Microsoft is an example of a pure growth company, which has matured and become an income stock. The beauty of the company is that it still generates solid earnings growth and its Windows operating system is the backbone of businesses and consumers software needs worldwide. Most businesses worldwide are used to Word, Excel, Access and Powerpoint. As a result, it would be virtually impossible for a competitor to make these users switch to a different product. With corporations upgrading existing systems every 4 -5 years, Microsoft will be able to keep its toll-like business model on the PC market for years.

Microsoft has been relatively successful in its investments in other technology companies such as Apple (AAPL) and Facebook. Microsoft purchased shares of Apple back in 1997, but sold them in the early 2000’s. The investment in Facebook at a $15 billion valuation looked silly at the time, although now Facebook’s valuation is several times that.

The big challenge for Microsoft includes the market for handheld tablet devices. As consumers increasingly switch to these products, failure to capitalize on that trend could jeopardize the company’s future profitability. The major software system for mobile phones is Google’s Android, which has been widely popular with consumers. On the negative side, Microsoft has tried breaking into markets such as search advertising, mobile phones and video games, but has been unable to create the type of blockbuster business franchise, that the Windows operation has been for the past two decades.

The problem with tech stocks in general is that creating a long-standing moat is difficult, as technologies change all the time. As a result, companies need to keep reinvesting profits in research and development just so that they stay current on new technologies. For example, Microsoft has had a virtual monopoly on software for PC’s with its Windows system. However, if more consumers choose to replace PCs with tablets, Microsoft will be unable to generate high profits. As a result, it is difficult to predict what the future for Windows will be over the next two decades.

The company’s Returns on Equty has tripled over the past decade, to a mind boggling 45% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Microsoft started paying dividends in 2003, and paid a onetime special dividend of $3/share in 2004. The annual dividend payment has increased by 11.50% per year since 2005, which is lower than the growth in EPS. I would expect Microsoft to keep increasing in dividends at 10% per year at least until it reaches dividend achiever status.

A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 2005 we see that Microsoft has managed to double its dividend almost every 6 years on average.

The dividend payout ratio has been stable between 20% and 30% since 2004. 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 Microsoft is attractively valued and is trading at 9.30 times earnings, yields 3.00% and has a sustainable forward dividend payout. I would keep Microsoft on my radar, as it would be eligible for inclusion in my dividend growth portfolio when it becomes a dividend achiever.

Full Disclosure: None

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Wednesday, November 16, 2011

How to create a bulletproof dividend portfolio

Investors who plan on living off their assets in retirement face several risks. The risks include inflation, longevity risks, extreme market conditions and liquidity. By creating a diversified dividend portfolio however, investors could not only address these risks, but have a very good odds of achieving a rising stream of dividend income, which means that they would never have to dip into principal to finance their retirement.

The first risk includes inflation. Over the past century, inflation has averaged 3% per year. While the effects of inflation are not visible over a period of five years or less, over the long run its eroding effect is significant. Even at 3%, the purchasing power of the dollar decreases by 50% in 24 years. That means that a bottle of Coca-Cola which costs $1.25 would likely cost $2.50 in 2034. Investors should realize that this is just an average however. Some costs would increase much faster than the average, while others would likely decrease over time. As a result, investors should be able to invest in assets which not only generate an inflation adjusted stream of income but also protect the purchasing power of their principal. I have discussed such investments in this article.

Companies such as Procter& Gamble (PG) and Coca Cola (KO) have the pricing power to pass cost increases over to their consumers. As a result, their earnings should be able to increase if there is any inflationary pressure.

The second risk is longevity risk. Investors typically depend on the four percent rule, which requires that a set percentage of one’s portfolio is sold each year, no matter what. In an event of an extended flat market, or if the retiree happens to have started retirement during a significant stock market top like the one in 1929 or 2000, then they would likely deplete their assets in less than 2 decades. A male that was born in 1946, is expected to live 19 more years according to this SSI Life Expectancy Calculator. The problem is that this is just an estimate – a major portion of those which have chosen to retire at 65 would likely live longer than average. Running out of money in retirement should never be an option, since it is impossible to predict the life expectancy of an individual with any precision.

Dividend Growth Investors do not have to worry about longevity risks, as long as they hold a properly diversified dividend portfolio. This portfolio should include at least 30 individual securities representative of as many sectors in the economy as well as a variety of geographic areas. This portfolio should also include certain noncorrelated assets such as fixed income as well. For an example dividend growth portfolio for the long term, check this portfolio. The process of building a bullet proof portfolio should take some time, as not all great dividend stocks are attractively valued at all times.

The third risk includes extreme market conditions. This could include bear markets, recessions and depressions. The beauty of most quality dividend stocks is that while their prices fluctuate with the market, their dividend payments are stable and even rising. As a result, investors are essentially paid for holding on to their investments. As long as the carefully selected dividend stocks maintain their profitability and can afford to pay the distributions, investors should do exactly that – hold on to their positions. Selling your stocks just because the market is down 20%- 30% and all the doom and gloomers are predicting the end of the world is not a good idea if the dividend is maintained or increased, unless of course the dividend is cut or eliminated. In order to withstand market corrections caused by recessions, investors should have a properly diversified dividend portfolio which has proper representation from the ten sectors in the S&P 500. Adding some international stocks could also reduce volatility in dividend and stock price returns as well. During the financial crisis of 2007 -2009 most of the dividend cuts were concentrated in the financial sector as some dividend aristocrats like Bank of America (BAC) and US Bancorp (USB) cut distributions. At the same time however, companies like PepsiCo (PEP) and McDonald’s (MCD) kept raising dividend stocks. This means that if dividend investors were properly diversified using the above mentioned principles, the effect on the financial crisis on their dividend income would have been insignificant at worst.

The fourth risk is liquidity. Investors who purchase annuities typically are able to generate a stable stream of income in exchange for handing over their nest egg to an insurance company. They pay a fee for this service, and have their money locked up. The annuity payment typically does not grow over time, which decreases the purchasing power of the income stream. If the retiree tries to sell the annuity, they would be hit with a large number of steep fees. In addition, most annuities stop paying income once the original participant is deceased. They could be extended to provide a payment to the participant’s spouse, but this would result in a lower current payment. This means that the next generation would not be able to benefit from the wealth accumulated by the retiree.

Investors who depend on dividend stocks for income in retirements, do not face any liquidity risks. Most of the best dividend stocks are actively traded blue chips, which could be sold every day that the market is open. Investors living off dividends should not dip into principal unless there are extreme circumstances, which absolutely requires this to happen. For example, Johnson & Johnson (JNJ) trades an average of 12 million shares per day. This means that unless the size for your trade is in the tens of thousands of shares, liquidity should not be an issue. That being said, most dividend investors focus on the long term dividend potential of their income stocks. However, knowing that your portfolio is quietly appreciating as well because of the higher earnings generation capacity of the business, is always appreciated as well.

Full disclosure: Long JNJ,PG, MCD, PEP, KO

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