Wednesday, May 30, 2012

Why I am replacing ConEdison (ED) with ONEOK Partners (OKS)

I am a passive dividend investor. I purchase quality dividend stocks, with the expectations that I will hold on for decades. I do monitor my investments however, and typically sell when one of these three factors occurs. I am not a big fan of active dividend investing, since it leads to paying taxes on capital gains, transaction costs as well as opens me for the opportunity to make mistakes. Buying a stock that will perform much worse than the stock it just replaced in my portfolio, is one of the items in my decision process that might prevent me from active portfolio management. Dividend investing is not a black and white process however, which is why investors should sometimes act to break their rules, if the right opportunity arises.

Over the past month I sold almost my entire position in Con Edison (ED) realizing a substantial profit. I used the proceeds to purchase units of ONEOK Partners (OKS). This move resulted in an immediate increase of 10% to the dividend income of the 1.20% or so of my portfolio that was invested in Con Edison (ED).

I had not added any funds to Con Edison since 2010. The low interest rate environment has pushed many investors to chase high yielding utilities stocks to valuation levels that no longer make sense. Currently, this New York based utility yields 4.10%, and trades at a P/E ratio of 17 times earnings. My average cost on the stock was $44.61, bringing my effective yield on cost to be 5.40%. Unfortunately, Consolidated Edison has been unable to grow earnings much over the past decade, as EPS increased from $3.13 in 2002 to $3.57 in 2011. The annual dividend has been increased at an annual rate of 2 cents/share since 1996, and is projected to reach $2.44/share in 2013. As a regulated utility, Con Edison’s profits are limited by the amount it can charge its customers, which in turn is determined by regulators. Lately, regulators haven’t been particularly generous about utility price hikes, which does not bode well for revenue and profit growth in the long run. To summarize, I do not see much upside in ConEdison in the current environment, and I do not think that total returns over the next decade are going to be much larger than the amount of current dividend yield. That being said, I believe the company is a decent hold, particularly for investors who have purchased the stock below $50/share, as I believe that the dividend will be paid and increased at a super slow rate in the foreseeable future. In a dividend portfolio, having some exposure to the utilities sector could provide refuge to investors if the economy declines again.

The question on my mind was what I should invest the proceeds from Con Edison in. I decided to add to my position in ONEOK Partners (OKS), which has a slightly higher yield, but offers a much faster distribution growth. The partnership is undergoing rapid expansion in the Mid Continent and Gulf Coast, bringing income generating assets online, and generating strong organic growth by satisfying demand for Natural Gas Liquids. The partnership is eyeing a 15% - 20% growth in distributions in 2013 and 2014. The partnership paid $609.45 million in distributions in 2011, while its distributable cash flow amounted to $946 million, which was more than sufficient distribution coverage.

ONEOK Partners, L.P. (NYSE: OKS) is one of the largest publicly traded master limited partnerships, and is a leader in the gathering, processing, storage and transportation of natural gas in the U.S. and owns one of the nation's premier natural gas liquids (NGL) systems, connecting NGL supply in the Mid-Continent and Rocky Mountain regions with key market centers. Its general partner is a wholly owned subsidiary of ONEOK, Inc. (NYSE: OKE), a diversified energy company, which owns 43.4 percent of the overall partnership interest. The General Partner has an incentive to keep growing ONEOK Partners (OKS), in order to generate higher distributions themselves.

Investors in Oneok Partners are called limited partners, and shares are called units. Master Limited Partnerships are pass through entities, and as a result are not taxed by the IRS. Their income and gains/losses flow through on the individual partners tax returns proportionately. Partners receive a K-1 form each year, which is slightly more complicated than a 1099 –Div form. However, Oneok Partners did a very good job of sending me a detailed tax package support, which spelled out exactly what tax forms I needed, as well as exactly where I should input the various amounts included in my K-1 form. Best of all, I had to pay no tax on the amount of distributions I received in 2011. Most partnership distributions decrease one’s basis, and once this happens, partners would have to pay ordinary income taxes on most of the income that is distributed to them. However, certain types of income that the partnership distributes, such as capital gains on property sold, is taxable as capital gains. ONEOK also did a very good job in spelling out the amount of income/loss I had as a partner in each state it does business in.

Back in 2011, I sold my position in ONEOK Inc (OKE) at $72.35/share, and used it to acquire units in ONEOK Partners (OKS) at an average price of $41.71/unit. My average cost on ONEOK Inc (OKE) was $54.15/share. With this move, I was able to double the amount of distributions, attributable to this portion of my portfolio. One year later, I am more than satisfied with the total returns and distribution growth of ONEOK Partners (OKS). By replacing ConEdison with ONEOK Partners, I will further manage to increase amount of distributions, while further consolidating my position in the partnership.

Full Disclosure: Long ED and OKS

Relevant Articles:

- Replacing appreciated investments with higher yielding stocks
- Active Dividend Growth Investing
- Dividend Investing is not a black or white process
- Master Limited Partnerships: An Island of Opportunity for Dividend Investors

Friday, May 25, 2012

Emerson Electric (EMR) Dividend Stock Analysis

Emerson Electric Co. (EMR) operates as a diversified technology company worldwide. It engages in designing and supplying products and technology, and delivering engineering services and solutions to industrial, commercial, and consumer markets. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1947 and increased payments to common shareholders every for 55 consecutive years. There are only twelve companies which have managed to raise distributions for over 50 years in a row.

The company’s last dividend increase was in November 2011 when the Board of Directors approved a 15.90% increase to 40 cents/share. Emerson Electric ‘s largest competitors include Roper Industries (ROP), Cooper Industries (CBE) and Ametek (AME).

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 11.10% in annual EPS growth since 2002. Analysts expect Emerson Electric to earn $3.49 per share in 2012 and $3.98 per share in 2013. In comparison Emerson Electric earned $3.24/share in 2011.

The company’s strategy for long-term growth is focused on product innovations, strategic acquisitions and growing its presence in emerging markets. The company is focusing on emerging markets growth, and expects to increase the portion of emerging market sales to 45% of overall revenues in five years. The company’s fortunes are dependent on the economic cycle. However, as the global economy expands, its sales should increase over the next few years

The company has managed to maintain a consistently high return on equity 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 6.60% per year over the past decade, which is lower than to the growth in EPS.

A 7% growth in distributions translates into the dividend payment doubling almost every six ten years. If we look at historical data, going as far back as 1983 we see that Emerson Electric has managed to double its dividend every nine years on average.

Over the past decade, the dividend payout ratio has been on the decline, falling from a high of 65% in 2003 to 42.60% in 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 Emerson Electric is attractively valued at 15.10 times earnings, has a sustainable dividend payout and yields 3.40%. I would consider adding to my position subject to availability of funds.

Full Disclosure: Long EMR

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Wednesday, May 23, 2012

How to generate $1000/month in dividends

The goal of every dividend growth investor is to create a portfolio which throws off a sufficient stream of income that pays their expenses. As soon as the amount of dividends exceeds the monthly expenses, the investor has reached financial independence. Let’s assume that an investor needs approximately $3000/quarter for their expenses. This translates to $1000/month.

Now that we have the end goal in mind, we have to determine when exactly we need to be able to achieve the target monthly dividend income. The next step would be the actual creation of the dividend portfolio.

Time is an important ally for the dividend investor. After all, by allowing their dividends to reinvest for many years, investors will be able to compound their income to reach their goals. The dividend growth factor further increases the speed of compounding, and allows for reaching the target income figures much faster. Assuming that a portfolio constructed today yields 4% and has a future annual dividend growth rate of 6%, investors need a $300,000 lump sum investment in order to generate $1000 in monthly dividend income. Few investors have such massive amounts of cash ready to be invested however. In reality, investors make small purchases every month.


If however investors expect that they will need the $1000/month in a decade, there is a much smaller lump sum that will be needed. In fact, an $114,000 investment today in a dividend growth portfolio with a yield 4% and dividend growth of 6% will generate the target monthly income in 10 years, assuming dividend reinvestment.
(annual portfolio)

If the portfolio construction is broken down to a more realistic monthly investment program however, one would notice that only small amounts of regular investments in quality companies prevent them from achieving financial freedom. For this exercise I assumed that the income portfolio throws off 1% once per quarter, which is reinvested in a batch of dividend stocks which exhibit 4% yields and 6% dividend growth. I also assumed that the investor methodically adds $1,200/month to their dividend portfolio.

The spreadsheet can be opened from this link.

Rather than looking at individual stocks for the yield and growth characteristics, I chose to look at the dividend portfolio as a whole. There are companies which will exhibit these yield/growth characteristics today, but might not in five or ten years. As a result, the enterprising dividend investor would have to keep scanning the market for adequate opportunities for the purposes of reinvesting their dividend income during the accumulation phase. Just because a portfolio yields 4% today however, does not mean that all components are high yielders. It is possible to include stocks with low current yields, and still achieve an overall target portfolio yield. In my portfolio, I have a few positions where yields are less than 2%, which is heavily compensated by the high expected growth in distributions.

In order to make the calculation easier, I assumed that every dollar is invested in a dividend stock trading at $1. This is what the dividend unit means.

The second step involves the actual composition of the portfolio. I have previously discussed my screening selections as well as the quality criteria I use for further analysis of potential investments. I basically look for dividend growth stocks with attractive fundamentals which have wide moats, or strong competitive advantages. Three such stocks include:

Johnson & Johnson (JNJ) engages in the research, development, manufacture, and sale of various products in the health care field worldwide. The company has raised dividends for 50 years in a row, and has a ten year average dividend growth rate of 12.40% per year. Yield: 3.80% (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has managed to boost dividends at a double-digit pace since being spun off from Altria Group (MO) in 2008. Yield: 3.60% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised dividends for 38 years in a row, and has a ten year average dividend growth rate of 17.90% per year. Yield:  2.70% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. The company has raised dividends for 35 years in a row, and has a ten year average dividend growth rate of 27.40% per year. Yield: 3.10% (analysis)

Full Disclosure: Long JNJ, PM, WMT, MCD

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Does entry price matter to dividend investors?

Monday, May 21, 2012

Eight Companies Paying Investors to Hold onto their Stock

The past month has been difficult for stock market investors. Stock markets around the world have been in free fall, as short-term worries are pushing stocks lower. The declines in prices are testing the beliefs of many long term investors. For dividend investors however, stock market declines are seen just as noise or as an opportunity to purchase more shares at attractive valuations. In fact, the regular dividend payments provide shareholders with positive reinforcement about the underlying business strength behind their stocks. The regular dividend payments soften the blow of short term price fluctuations, and help investors focus on the big picture. Long term investors are much more likely to hold on a stock which delivers higher earnings and distributions over time. What could be more bullish than companies that not only pay investors to hold their shares, but also increase the amount of cash dividend every year?

Several consistent dividend payers announced plans to increase dividends over the past week. The companies include:

The Clorox Company (CLX) manufactures and markets consumer and institutional products worldwide. The company operates in four segments: Cleaning, Lifestyle, Household, and International. The company increased its quarterly distributions by 6.70% to 64 cents/share. This dividend aristocrat has raised distributions for 35 years in a row. Yield: 3.70% (analysis)

Republic Bancorp, Inc. (RBCAA) operates as the holding company for Republic Bank & Trust Company and Republic Bank, which provides banking, tax refund solutions, and mortgage banking 7.10% to 16.50 cents/share. This dividend achiever has raised distributions for 14 years in a row. Yield: 3.10%

Xcel Energy Inc. (XEL), through its subsidiaries, engages in the generation, purchase, transmission, distribution, and sale of electricity in the United States. The company increased its quarterly distributions by 3.80% to 27 cents/share. Xcel Energy has raised distributions for 9 years in a row. Yield: 4%

Tiffany & Co. (TIF), through its subsidiaries, engages in the design, manufacture, and retail of fine jewelry worldwide. The company increased its quarterly distributions by 10.30% to 32 cents/share. Tiffany & Co has raised distributions for 10 years in a row. Yield: 2.10%

The Williams Companies, Inc. (WMB) operates as an energy infrastructure company in the United States. The company increased its quarterly distributions by 15.90% to 30 cents/share. Williams has raised distributions for 10 years in a row. Yield: 4%

Assurant, Inc. (AIZ), through its subsidiaries, provides specialized insurance products and related services in the North America and internationally. It operates in four segments: Assurant Solutions, Assurant Specialty Property, Assurant Health, and Assurant Employee Benefits. The company increased its quarterly distributions by 16.70% to 21 cents/share. Assurant has raised distributions for 8 years in a row. Yield: 2.20%

Safeway Inc. (SWY), together with its subsidiaries, operates as a food and drug retailer in North America. The company increased its quarterly distributions by 20.70% to 17.50 cents/share. Safeway has raised distributions for 8 years in a row. Yield: 3.70%

Northrop Grumman Corporation (NOC) provides products, services, and solutions in aerospace, electronics, information systems, and technical service sectors to government and commercial customers worldwide. The company increased its quarterly distributions by 10% to 55 cents/share. Northrop Grumman has raised distributions for 9 years in a row. Yield: 3.80%

Full Disclosure: Long CLX

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Clorox (CLX) Dividend Stock Analysis

Friday, May 18, 2012

Clorox (CLX) Dividend Stock Analysis

The Clorox Company (CLX) manufactures and markets consumer and institutional products worldwide. The company operates in four segments: Cleaning, Lifestyle, Household, and International. This dividend champion has paid uninterrupted dividends on its common stock since 1968 and increased payments to common shareholders every for 34 consecutive years.

The company’s last dividend increase was this week when the Board of Directors approved a 6.70% increase to 64 cents/share. Clorox ‘s largest competitors include Procter & Gamble (PG), Colgate Palmolive (CL) and Kimberly-Clark (KMB).

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 4.70% in annual EPS growth since 2002. Analysts expect Clorox to earn $4.08 per share in 2012 and $4.41 per share in 2013. In comparison Clorox earned $2.07/share in 2011. The low earnings in 2011 were caused by a $1.85/share one-time non- cash Goodwill Impairment charge related to Burt’s Bee’s business. The EPS growth comes out to 12.40% per year if the effects of this goodwill impairment are excluded.

The company has a strong brand name, which helps in having strong pricing power for its brand name products. As a result, it should be able to pass on commodity price increases to customers. Future earnings growth could be driven by innovation driven new product launches as well as international expansion. US accounts for 79% of revenues. In 2007 the company introduced its Centennial Strategy where the company is focused on achieving double-digit annual growth in economic profit. A key driver of the strategy is to accelerate sales by growing existing brands, including expanding into adjacent categories, entering new sales channels and increasing penetration within existing countries. The company also anticipates using its strong cash flow to pursue growth opportunities and increase shareholder returns. Basically the company will try to deliver further growth through an ongoing focus on consumer megatrends. In addition to that the company will be targeting a 2% sales growth through product innovation. The company projects sales growth of 3-5 percent, excluding acquisitions and expansion into new geographies through 2013. Last but not least Clorox will target margin expansion and maximizing cash flow through implementation a continued robust cost-saving program and maintaining price increases the company has taken.

The company has managed to maintain a consistently high return on assets except for 2002 and 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 11.30% per year over the past decade, which is lower than to the growth in EPS.

An 11% growth in distributions translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1983 we see that Clorox has managed to double its dividend every seven years on average.

Over the past decade, the dividend payout ratio has remained below 50%, with the exception of 2002 and 2011. Excluding the goodwill impairment, the payout ratio for 2011 would have been 56%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Clorox is attractively valued at 16.80 times earnings, has a sustainable dividend payout and yields 3.50%. I would consider adding to my position subject to availability of funds.

Full Disclosure: Long CLX, CL, KMB, PG

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Wednesday, May 16, 2012

Replacing appreciated investments with higher yielding stocks

In my entry criteria, I look for great stocks with sustainable dividend payout, long histories of dividend growth and strong competitive advantages. I also have a minimum entry yield of 2.5%. There come times however, when the company I own keeps increasing its earnings and dividends, but the stock price rises faster than fundamentals. As a result, while my yield on cost is attractive, my current yield is less than my entry criteria.

For example, my yield on cost on W.W.Grainger (GWW) is 4%, whereas the current yield is 1.60%. My yield on cost on Family Dollar (FDO) is 3.40%, while the current yield is 1.20%. My yield on cost on Higham Institution for Savings (HIFS) is 3.60%, while the current yield is 2.20%.

The common characteristic behind these three positions is that each has delivered solid capital gains since my initial purchase.

Some investors question whether owning these stocks would make sense, given the low current yields that they are exhibiting. Replacing my positions in W.W.Grainger and Family Dollar with stocks which yield 3% currently would provide an almost doubling of my dividend income from each position.

This would be a mistake however, since nothing has fundamentally changed with these businesses. In addition, both companies have excellent growth prospects ahead of them, which will likely lead to further increases in earnings, dividends and stock prices over time. Stocks can deliver low current yields, even while the underlying business keeps growing. This will lead to a higher dividend income stream coupled with a solid potential for capital appreciation.

For example, current yields on certain quality stocks such as Procter & Gamble (PG) and Johnson & Johnson (JNJ) and Abbott (ABT) were low during the last few years of the 1990’s bull market. Investors who sold and purchased higher yielding shares would have most probably missed on the upside potential for both capital gains and dividend income. While adding to position which are overvalued might not be the best idea, holding onto these positions might be perfectly appropriate.

As a dividend investor, I expect to hold my holdings for as long as possible. This is until one of my exit rules kick in. I expect that at least several of my long term portfolio holdings will generate total returns of several hundred percent over the next decades. This will compensate for the ones that cut dividends or get bought out for example. By selling stocks simply because the current yield is low, I might risk reducing my long-term returns.

In addition, I am not a big fan of chasing yield. If I were actively replacing my income stocks with higher yielding ones, this would increase the risk to dividend income, as most higher yielding stocks have higher payout ratios. In addition, most of the higher yielding securities come from a concentrated number of sectors.

Full Disclosure: Long all stocks mentioned above

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Monday, May 14, 2012

Searching for Hidden Dividend Stars

As a dividend growth investor, I try to maintain a disciplined approach to buying attractively valued companies. I do maintain a list with entry criterion, which I apply against a list of dividend growth stocks. I usually use the dividend champions and dividend achievers groups of stocks in my screening process. However, I try to get familiar with the story of as many companies as possible, which would help me pull the trigger once price goes into my buy territory. One process I follow in order to learn more about dividend stocks is by focusing on the weekly group of companies with consistent dividend histories which have recently announced increases in distributions. By reading the press releases indicating a dividend hike, I get to gauge the companies’ sentiment and learn more about their business.

One such company that attracted my interest is National Bankshares (NKSH), which seems to have solid fundamentals and would likely deliver good dividend growth in its semi-annual dividends for years to come. It’s a small bank that few income investors have heard of. In an environment where large banks have consistently delivered losses to shareholders, I consider small size to be a virtue of the 21st century American Bank.

The companies which announced increases in dividends over the past week include:

National Bankshares, Inc. (NKSH) operates as the bank holding company for the National Bank of Blacksburg, which 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 to 53 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. Yield: 3.60%

FactSet Research Systems Inc. (FDS) provides financial and economic information to investment community worldwide. The company raised its quarterly dividend by 14.80% to 31 cents/share. This marked the 14th consecutive annual dividend increase for this dividend achiever. Yield: 1.20%

Mine Safety Appliances Company (MSA) engages in the development, manufacture, and supply of products that protect people’s health and safety in the fire service, homeland security, oil and gas, construction, and other industries, as well as military worldwide. The company raised its quarterly dividend by 7.70% to 28 cents/share. This marked the 41st consecutive annual dividend increase for this dividend champion. Yield: 2.60%

NACCO Industries, Inc. (NC) engages in lift trucks, small appliances, specialty retail, and mining businesses worldwide. The company raised its quarterly dividend by 2.80% to 54.75 cents/share. This marked the 27th consecutive annual dividend increase for this dividend champion. Yield: 2 %

Costco Wholesale Corporation (COST) operates membership warehouses that offer a selection of branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities. The company raised its quarterly dividend by 14.60% to 27.50 cents/share. This marked the 9th consecutive annual dividend increase for Costco. Yield: 1.30%

CSX Corporation (CSX), together with its subsidiaries, provides rail-based transportation services. The company raised its quarterly dividend by 16.70% to 14 cents/share. This marked the 8th consecutive annual dividend increase for CSX. Yield: 2.60%

G&K Services, Inc. (GKSR) provides branded uniform and facility services programs in the United States and Canada. The company raised its quarterly dividend by 50% to 19.50 cents/share. This marked the 8th consecutive annual dividend increase for G&K Services. Yield: 2.50%

NV Energy, Inc. (NVE), together with its subsidiaries, engages in the generation, transmission, distribution, and sale of electric energy in Nevada. The company raised its quarterly dividend by 30.80% to 17 cents/share. NV Energy has increased dividends since 2008. Yield: 4%

Franklin Electric Co., Inc. (FELE), together with its subsidiaries, engages in the design, manufacture, and distribution of groundwater and fuel pumping systems. It operates in two segments, Water Systems and Fueling Systems. The company raised its quarterly dividend by 7.40% to 14.50 cents/share. This marked the 20th consecutive annual dividend increase for this dividend achiever. Yield: 1.20%

Full disclosure: None

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Friday, May 11, 2012

T. Rowe Price Group (TROW) Dividend Stock Analysis

T. Rowe Price Group, Inc. (TROW) is a publicly owned asset management holding company. The firm primarily provides its services to individual and institutional investors, retirement plans, and financial intermediaries. This dividend champion has paid uninterrupted dividends on its common stock since 1986 and increased payments to common shareholders every for 25consecutive years.

The company’s last dividend increase was in February 2012 when the Board of Directors approved a 9.70% increase to 34 cents/share. T. Rowe Price ‘s largest competitors include Blackrock (BLK), Franklin Resources (BEN) and Eaton Vance (EV).

Over the past decade this dividend growth stock has delivered an annualized total return of 14.70% to its shareholders.

The company has managed to deliver 16.10% in annual EPS growth since 2002. Analysts expect T. Rowe Price to earn $3.19 per share in 2012 and $3.64 per share in 2013. In comparison T. Rowe Price earned $2.92/share in 2011.

In a previous article I mentioned that I am bullish on asset management stocks, which are riding the long-term trends in retirement planning, which many Baby Boomers increasingly need. Long term growth in earnings is dependent on several factors including attracting new assets under management, maintaining management fees on assets under management and the overall performance of financial markets. When the stock market increases in value, assets under management generally tend to increase as well. This brings in more revenues to companies like T.Rowe Price. Mutual Funds that also perform at least as well as the average, would likely keep investors holding on to their fund shares. The costs of running a mutual fund do not increase proportionately with the amount of money under management. As a result higher amounts of assets under management provides the investment adviser with a sufficient scale that would allow them to charge lower management fees than peers, which could potentially entice investors to switch over, without hurting profitability.

T.Rowe Price is strategically positioned to make money from the wave of Baby Boomers that will be retiring between 2008 and 2024. Given the widespread appeal of such plans as the 401 (K) or IRA’s, I expect a larger portion of the population in the US to keep saving for retirement. As a result, companies like T.Rowe Price could only benefit from that trend as well. Two thirds of the company’s assets under management are in retirement accounts, which generally tend to have a lower turnover rate. A potential growth market includes Target-Date Retirement funds, which investors are finding increasingly easy to invest in. Another source for future growth could include international expansion of the company.

The company has managed to maintain a high return on equity in the high teens to low twenties. 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 15.80% per year over the past decade, which is higher than to the growth in EPS.

An 15.80% growth in distributions translates into the dividend payment doubling almost every four and a half years. If we look at historical data, going as far back as 1990 we see that T. Rowe Price has managed to double its dividend every four and a half years on average.

The dividend payout ratio has remained below 45% , with the exception of 2008 - 2009. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently T. Rowe Price is overvalued at 20.49 times earnings, has a sustainable dividend payout and yields 2.20%. I would consider initiating position in the stock on dips below $55.

Full Disclosure: Long EV
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Wednesday, May 9, 2012

Variability in Dividend Growth Rates

One of the reasons why investors are attracted to dividend paying stocks is the consistency in the amount and timing of dividend payments. Unless companies are operating in a challenging economic environment, a portfolio of well chosen blue chip dividend stocks should be able to provide a stable dividend stream of cash in investors’ brokerage accounts, which should also grow over time. Unfortunately, the rate of growth in distributions can vary significantly depending on a variety of factors, including corporate policy and overall state of the economy to name a few.

Companies do not increase dividends at the same rate every year. This is true, even for corporations which have managed to build long records of consecutive distributions increases. Each year, Boards of Directors convene in order to determine the near-term outlook for the business, as well as long-term strategic plans such as capital expenditures, acquisitions, divestitures and strategy. Nobody has a better gauge of the pulse of the business than management. As a result, after all is set and done, the board allocates a certain portion to dividends. Depending on various factors, the distribution could grow at differing rates or it could even be decreased or completely eliminated.

This is particularly true when looking at the historical dividend growth of such otherwise outstanding dividend aristocrats like PepsiCo (PEP), Emerson Electric (EMR), McDonald’s (MCD) and 3M (MMM).

Over the past decade, PepsiCo (PEP) has managed to boost annual distributions by 13.30% per year. The rate at which annual dividends increased ranged from a low of 3.50% in 2002 to a high of 20.54% in 2007. Between 1998 and 2002, PepsiCo’s distributions increased by 4% per year, followed by a 5.10% increase in 2003, before resuming their increase at double digit rates of growth. The company has boosted payouts for 41 years in a row and currently yields 3.10%. (analysis)

Over the past decade, McDonald’s (MCD) has managed to raise dividends by 27.40% per year. The rate at which annual distributions were raised ranged from a low of 4.40% in 2002 to a high of 70.20% in 2003. Between 2000 and 2002, McDonald’s distributions increased by less than 5% per year. The 70% distribution hike in 2003 started a trend of strong dividend growth. The company has boosted payouts for 35 years in a row and currently yields 2.90%.(analysis)

3M (MMM) has a ten year average dividend growth rate of 6.20% per year. The company’s dividend growth has oscillated between a low of 2% in 2009 to a high of 16.70% in 2005. The company is one of a dozen or so corporations in the world which have managed to boost dividends for over half a century. The slow distributions growth has lead to a decrease in dividend payout ratio, which increases the odds that higher dividend growth will be in place within a few years.The company has boosted payouts for 54 years in a row and currently yields 2.70%.(analysis)

Just like 3M (MMM), Emerson Electric (EMR) has managed to boost distributions for over half a century. Over the past decade, the company has managed to boost distributions by 6.40%/year. The company raised distributions by 1.40% in 2002 and 2003, which was followed by faster dividend growth through 2009. After that the company managed to boost annual distributions at a rather anemic 2%. The reason for decline in distribution growth was mostly due to weakness from its business segments, due to the tough economic position of the world economy. The company has boosted payouts for 55 years in a row and currently yields 3.30%.(analysis)

In general, there is variability between dividend growth rates in different years. Good years are followed by slow years and vice versa. At the end of the day however, future dividend growth will depend on the long-term success of the company. By properly executing its strategy, a company should be able to generate a sufficient amount of profits in order to grow and paying a higher dividend to its loyal shareholders.

Full Disclosure: Long EMR, MCD, PEP, MMM

Relevant Articles:

-  Eleven Dividend Kings, Raising dividends for 50+ years
-  Build your own Berkshire with dividend paying stocks
-  Should income investors worry about higher dividend taxes?
-  Dividend Stocks for Inflation Adjusted Income Stream of Income

Monday, May 7, 2012

Eighteen companies sending more cash to their shareholders

There were eighteen consistent dividend growth stocks, which announced plans to boost distributions for their shareholders over the past week. Besides my screening process, my compilation of weekly dividend increases helps me stay up to date on any dividend and business developments for companies I own or for companies I might be interested in purchasing down the road. In this article, I focused only on companies which have been able to boost dividends for at least five years in a row. In the past, this process has helped me identify opportunities which I would have otherwise missed. It has also been instrumental in my accumulation of knowledge about companies, business and dividends in general.

The eighteen consistent dividend growers in the news include:

PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. The company raised its quarterly dividend by 4.40% to 53.75 cents/share. This marked the 41st consecutive annual dividend increase for this dividend aristocrat. Unfortunately, this marks the lowest dividend growth for PepsiCo since 2002. Yield: 3.20% (analysis)

Cardinal Health, Inc. (CAH) operates as a healthcare services company that provides pharmaceutical and medical products and services. The company raised its quarterly dividend by 10.50% to 23.75 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. Yield: 2.20%

Airgas, Inc., (ARG) through its subsidiaries, engages in the distribution of industrial, medical, and specialty gases in the United States. The company raised its quarterly dividend by 25% to 40 cents/share. This marked the tenth consecutive annual dividend increase for this dividend achiever. Yield: 1.70%

Chesapeake Utilities Corporation (CPK), through its subsidiaries, operates as a diversified utility company that primarily engages in regulated energy and unregulated energy businesses. The company raised its quarterly dividend by 5.80% to 36.50 cents/share. This marked the ninth consecutive annual dividend increase for this stock. Yield: 3.50%

Weyco Group, Inc. (WEYS) engages in the distribution of men’s foot wear primarily in the United States, Canada, Europe, Australia, Asia, and South Africa. The company raised its semi-annual dividend by 6.25% to 17 cents/share. This dividend champion has raised distributions for 32 years in a row. Yield: 3%

Expeditors International of Washington, Inc. (EXPD) provides logistics services in the United States and internationally. The company raised its semi-annual dividend by 12% to 28 cents/share. This dividend achiever has raised distributions for 18 years in a row. Yield: 1.40%

Reynolds American Inc (RAI), through its subsidiaries, manufactures and sells cigarette and other tobacco products in the United States. The company raised its dividend for the second time in 12 months, to 59 cents/share. Reynolds American has managed to boost distributions for 8 consecutive years. Yield: 5.85%

Boardwalk Pipeline Partners, LP (BWP), through its subsidiaries, engages in the ownership and operation of integrated natural gas pipelines and storage systems in the United States. This master limited partnership raised its quarterly distributions to 53.25 cents/unit. Boardwalk Pipeline Partners has boosted distributions for six years in a row. Yield: 7.70%

DCP Midstream Partners, LP (DPM), together with its subsidiaries, engages in gathering, compressing, treating, processing, transporting, storing, and selling natural gas in the United States. This master limited partnership raised its quarterly distributions to 66 cents/unit. DCP Midstream Partners has boosted distributions for six years in a row. Yield: 5.80%

Alliance Resource Partners, L.P. (ARLP) engages in the production and marketing of coal primarily to utilities and industrial users in the United States. This master limited partnership raised its quarterly distributions to $1.025/unit. This dividend achiever has boosted distributions for ten years in a row. Yield: 6.45%

Alliance Holdings GP, L.P. (AHGP), is the general partner of Alliance Resource Partners (ARLP). This master limited partnership boosted quarterly distributions to 66.75 cents/unit. Alliance Holdings GP has been consistently rewarding its partners with distribution hikes since 2006. Yield: 6%

RLI Corp. (RLI), through its subsidiaries, underwrites property and casualty insurance primarily in the United States. The company raised its quarterly dividend by 6.70% to 32 cents/share. This marked the 37th consecutive annual dividend increase for this dividend champion. Yield: 1.90%

AGL Resources Inc. (GAS), an energy services holding company, distributes natural gas in Illinois, Georgia, Virginia, New Jersey, Florida, Tennessee, and Maryland. The company raised its quarterly dividend by 2.20% to 46 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Yield: 1.90%

Microchip Technology Incorporated (MCHP) engages in the design, development, manufacture, and market of semiconductor products for embedded control applications. The company raised its quarterly dividend to 35 cents/share. Microchip Technology has managed to boost distributions for 11 years in a row. Yield: 4%

Northeast Utilities (NU), a public utility holding company, provides electric and natural gas energy delivery services to residential, commercial, and industrial customers in Connecticut, New Hampshire, and western Massachusetts. The company raised its quarterly dividend by 16.80% to 34.30 cents/share. Northeast Utilities has managed to boost distributions for 12 years in a row. Yield: 3.80%

VSE Corporation (VSEC) focuses on providing sustainment services for the legacy systems and equipment of the U.S. Department of Defense (DoD); and professional services to the DoD and federal civilian agencies in the United States. The company raised its quarterly dividend by 14.30% to 8 cents/share. VSE Corporation has managed to boost distributions for 8 years in a row. Yield: 1.30%

AmTrust Financial Services, Inc. (AFSI), through its subsidiaries, underwrites and provides property and casualty insurance in the United States and internationally. The company raised its quarterly dividend by 11.10% to 10 cents/share. AmTrust Financial Services has managed to boost distributions for 6 years in a row. Yield: 1.40%

Regal Beloit Corporation (RBC), together with its subsidiaries, manufactures and sells electric motors and controls, electric generators and controls, and mechanical motion control products in the United States, Asia, and internationally. The company raised its quarterly dividend by 5.60% to 19 cents/share. Regal Beloit Corporation has managed to boost distributions for 9 years in a row. Yield: 1.10%

Full Disclosure:

Relevant Articles:

PepsiCo (PEP): A Better Value than Coca Cola (KO)
Dividend Aristocrats List for 2012
Four dividend paying companies with long term growth plans
MLP’s deliver consistent distribution increases

Friday, May 4, 2012

Four dividend paying companies with long term growth plans

Dividend growth investing is an investing strategy, where investors buy stock in companies which consistently raise distributions. This leads to higher dividend payouts overtime, and also leads to capital gains, as the market adjusts stock prices to reflect the higher income generated by the stock. Dividend growth does not just miraculously appear out of a thin air however. In order to get dividend hikes every year, the company has to generate earnings growth over time.

For example, back in 2001, Chevron Corporation (CVX) earned $1.85/share, paid a dividend of $1.325/share and traded at $44.81/share. Ten years later, in 2011 the company is earning $13.44/share, the dividend is $3.09/share. The stock is trading around very comfortable $100/share. The company is expected to distribute at least $3.24/share in 2012. Investors who purchased the stock a decade ago are sitting at handsome capital gains, and are earning 7.20% yield on cost.

In order to generate high returns from dividends and capital gains, investors need to focus on companies which will be able to earn higher amounts in the future. Corporations that have designated roadmaps to generate higher earnings per share, increase investors odds of receiving higher distributions and enjoying capital gains in the process. Below, you could find a list of four companies which have outlined their corporate strategies of achieving high earnings per share for the next several years:

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend king has raised distributions for 50 years in a row.
Coca-Cola's 2020 Vision Strategy strives for a high single digit annual EPS growth throughout this decade, driven through 5%-6% annual increases in revenues as the company expects 3%-4% yearly increase in sales volumes. The company is focusing more of its attention to still beverages like waters and juices, which stand the chance of delivering strong growth over time. In addition, growth could come from emerging markets such as China and India, where the average number of servings per capita is much lower than that of the US. The company is pursuing differing strategies to capture the imaginations (and dollars) of consumers in emerging, developing and developed markets. While the company might be focusing on growth through innovation and productivity initiatives in the developed markets, it might generate growth in emerging markets by heavy investing and maximizing volumes. In addition, the company is playing on strong long-term demographic trends of continued rise in the global population, increased urbanization as well as the expected rise of the middle class worldwide. Yield: 2.70% (analysis)

The Clorox Company (CLX) manufactures and markets consumer and institutional products worldwide. The company operates in four segments: Cleaning, Lifestyle, Household, and International. This dividend champion has consistently raised distributions for 34 years in a row.
In 2007 the company introduced its Centennial Strategy where the company is focused on achieving double-digit annual growth in economic profit. A key driver of the strategy is to accelerate sales by growing existing brands, including expanding into adjacent categories, entering new sales channels and increasing penetration within existing countries. The company also anticipates using its strong cash flow to pursue growth opportunities and increase shareholder returns. For an update on the results from the strategy, check this press release.
Basically the company will try to deliver further growth through an ongoing focus on consumer megatrends. In addition to that the company will be targeting a 2% sales growth through product innovation. The company projects sales growth of 3-5 percent, excluding acquisitions and expansion into new geographies through 2013. Last but not least Clorox will target margin expansion and maximizing cash flow through implementation a continued robust cost-saving program and maintaining price increases the company has taken. Yield: 3.40% (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in manufacturing and marketing health care products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional and Other, and Health Care. This dividend aristocrat has consistently raised dividends for 40 years in a row. As with other consumer products companies, the growth is likely to come from developing and emerging markets, rather than developed markets. Developed markets could benefit from cost cutting and efficiency profits, which would decrease the total price of doing business. Under the company’s global business plan, announced in 2003, it is looking for annual sales growth in the 3%-5% range, EPS growth in the mid to high single digits and dividend increases in line with earnings growth. For more on the global business plan, check this document. Yield: 3.80% (analysis)


International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. This dividend achiever has rasied distributions for 17 years in a row.
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. The company expects that one third of the gains would come from revenue growth driven by organic growth and acquisitions. The company is relying on growth markets, its business analytics segment, its smarter planet initiative as well as its cloud and next generation data center businesses to deliver revenue growth. Almost one third of the growth would come from share buybacks as well. The remainder would come from increased productivity in its core segments, as well as continuing its focus on offering high value to its customers. Yield: 1.70% (analysis)

Full Disclosure: Long CLX, KMB, KO, CVX

Relevant Articles:

Wednesday, May 2, 2012

Build your own Berkshire with dividend paying stocks

I recently read the book “The Snowball” by Alice Schroeder. I have been a great follower of anything on Buffett for years, and this book definitely provided additional insight in the way the world’s richest investor thinking process.

I have long advocated the idea that Buffett is a closet dividend growth investor. After all, the perfect companies that he typically tries to invests in share the following characteristics:

1) Strong Competitive Advantages, Wide Moats, Strong Brand Names

2) A loyal customer group, willing to pay up for the product/service

3) High Returns on equity

4) Generating excess cashflow

5) Minimal capital requirements

One such perfect business that Buffett was able to purchase in 1972 was See’s Candy. The company was purchased for $25 million, when sales were $30 million, operating profits $5 million and the capital required to operate the business was $8 million. The company was selling 16 million pounds of chocolate in 1972.

Fast forward 35 years, and See's Candy was selling 31 million pounds of chocolate in 2007. This represented a 2% annual growth in sales. Sales were $383 million, while pre-tax profits were $82 million. While the required capital to run the business had increased to $40 million, the business had been able to generate $1.35 billion in pre-tax earnings. In essence, almost $1.30 billion in pre-tax profits were the excess cash flow, which were distributed to Berkshire for Warren to manage.

In fact, this strategy of purchasing businesses which generate cash flows in excess of the business reinvestment requirements, are actively sought after by Buffett. One needs to look no further than the stock portfolio which the Oracle of Omaha manages. Some of the largest holdings include strong dividend stocks such as Coca-Cola (KO), Johnson & Johnson (JNJ), Procter & Gamble (PG) and Wal-Mart (WMT) to name a few. All of these cash machines have been able to generate sufficient earnings to raise distributions to shareholders for several decades in a row. This cash is then used by Buffett to purchase more stocks or more businesses.

In essence, this strategy is similar to what dividend growth investors like to do. By creating a diversified portfolio of world class blue chip dividend paying stocks, investors are essentially creating a cash machine that would throw off enough cash to buy more shares in quality companies or to provide for in retirement.

The building blocks of a successful dividend machine could include companies like:

Johnson & Johnson (JNJ) engages in the research, development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has managed to raise dividends for 50 years in a row. Yield: 3.80% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally.This dividend king has raised distributions for 56 years in a row. Yield: 3.40% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. This dividend aristocrat has raised distributions for 35 years in a row. Yield: 2.90% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrat, has rewarded shareholders with a dividend hike for 38 years in a row. Yield: 2.70% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend achiever has hiked distributions for 25 years in a row. Yield: 3.40% (analysis)

PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. This dividend aristocrat has raised distributions for 40 years in a row, and currently has a better valuation than arch rival Coca-Cola (KO). Yield: 3.10%(analysis)

For more lists of quality dividend stocks, which should be core holdings a in dividend portfolio, check this list.

Full Disclosure: Long JNJ, PG, MCD, WMT, CVX, KO, PEP

Relevant Articles:

Warren Buffett – A Closet Dividend Investor
Seven wide-moat dividends stocks to consider
Strong Brands Grow Dividends
Dividend Investing Misconceptions

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