Friday, June 29, 2012

Air Products and Chemicals (APD) Dividend Stock Analysis

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend aristocrat has paid distributions since 1954 and increased dividends on its common stock for 30 years in a row.

The company’s last dividend increase was in March 2012 when the Board of Directors approved a 10.30% increase to 64 cents/share. The company’s largest competitors include Airgas (ARG), Praxair (PX) and Air Liquide (AIQUY).

Over the past decade this dividend growth stock has delivered an annualized total return of 7.10% to its shareholders.


The company has managed to deliver 10% in annual EPS growth since 2002. Analysts expect Air Products and Chemicals to earn $5.57 per share in 2012 and $6.35 per share in 2013. In comparison Air Products and Chemicals earned $5.59/share in 2011.

Air Products and Chemicals is expected to post a 5% growth in sales, due to strong demand for industrial gases in rapidly growing economies in Asia. Long term growth will be driven by acquisitions, expansion into rapidly growing markets in South America and Asia. In addition, new business initiatives such as its Tonnage Gases Business will lead to 10 – 15% increases in EPS by 2013.

While European divisions have been operating in a tough environment, Air Products and Chemicals is attempting to streamline operations and manage costs strategically.

The return on equity has increased from 16% in 2002 to 22% 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 11.70% per year over the past decade, which is higher than to the growth in EPS.

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 1985 we see that Air Products and Chemicals has managed to double its dividend every seven years on average.

The dividend payout ratio remained at or below 40% over the past decade, with the exception of two brief spikes in 2003 and 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, Air Products and Chemicals is attractively valued at 14 times earnings, yields 3.20% and has an adequately covered dividend. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long APD

Relevant Articles:

Dividend Aristocrats List for 2012
Three Companies Boosting Distributions
Why I am a dividend growth investor?
Diversified Dividend Portfolios – Don’t forget about quality

Wednesday, June 27, 2012

How long does it take to manage a dividend portfolio?

One of the most important goals that I try to achieve in my dividend growth portfolio include stock quality, valuation and diversification. I have written extensively on diversification before, and why it is an important stepping stone in structuring your dividend portfolio. I believe that even if one has an investing edge through a strategy such as dividend growth investing, investors need to have fail safe mechanisms such as diversifying among at least 30 quality stocks, while paying a reasonable price for them. Thus, if investors end up purchasing the next Bank of America (BAC), the blow to their portfolio and dividend income would not be sizeable enough that they would have to go back to work at an old age.

In each of my articles on diversification however, there are always readers who express concerns about the amount of time it would take to keep current on all events in a 30+ stock portfolio. This is a valid concern, since it could potentially take more effort to act on a news of a dividend cut in a 30 stock portfolio than a 10 stock portfolio. I do believe however, that the added safety of spreading your risk between 30 or more income stocks is well worth the effort it would take to disseminate new information regarding one of your holdings. So how can dividend investors achieve adequate portfolio diversification, while also having a life?

In my stock picking, I use quantitative and qualitative screening criteria. In general, it takes 15- 20 hours on average to thoroughly analyze a dividend growth stock that fits my entry criteria. This could include reading annual reports, analyst reports, any notable news articles, looking at trends in dividends, earnings, stock prices, sales and familiarizing yourself with the company in general. In a portfolio of 30 stocks, this translates to several hundred hours of research and analysis. The good part about this is that once an understanding of a company’s business is done, there is typically very little work involved in learning new information about it. Typically, a company like McDonald’s (MCD) or Wal-Mart (WMT) is not going to change their business model every year. As a result, an investor who understands the business of each of these corporations today, will likely still have a good understanding of these businesses 10 years from now.

In addition, some investors already have a circle of competence in certain income stocks. This could be due to work they might have already done in researching these companies due to their occupation, through previous interactions or due to their accumulated level of knowledge in general. As a result, it might take them much less than 15 hours to analyze a stock, given the level of experience they have accumulated. For example, I have experience in the telecom industry, which lets me analyze a company like AT&T (T) much faster than analyzing a stock in the apparel industry such as V.F. Corp (VFC).

After the initial analysis has been achieved, investors who focus only on the important events surrounding the companies on their list, will not spend too much time on each individual investment. It is important however to spend approximately ten hours each week in researching new candidates for your income portfolio, screening the market for attractive opportunities and looking for important developments in the companies you own. Chances are that there is less than one important development per year per each stock on your list. In addition, certain events outside of your analysis framework could provide you with additional information. For example, everyone who paid any attention to news in 2007 – 2008 heard about the financial crisis affecting the banks. Thus, any bank stock investor should have known to look after their financial stocks with a more detailed lense.

Another positive of analyzing companies with strong competitive advantages is that there are few major developments that happen. I choose to ignore the daily market noise, and try to focus on important things such as acquisitions, dividend announcements and earnings releases. Because of this, once the investor has accumulated a comfortable level of knowledge about a company, it can mostly still be relevant 5 – 10 years from now. It could allow the investor to accumulate a good amount of knowledge on the 100 or so dividend champions or on most of the 300 dividend achievers out there, during the span of their investing career. Remember that a portfolio of 30 individual stocks takes a few years to build. Similarly, your knowledge of the dividend growth stocks of our day will take time to accumulate. As you gain experience, you will be more efficient in analyzing companies from different industries much faster.

My weekly routine includes compiling a list of dividend increases for the week, which I typically post on my site on Mondays. I also screen the market for companies which are attractively priced, given the fact that I still add money to my portfolio every month. In addition, I also try to update my knowledge of companies I have already analyzed thoroughly by compiling a weekly analysis or two. In the meantime, I have set up a portfolio at Yahoo! Finance, which allows me to scan the market for headlines related to the companies I am interested in. Most companies would typically post their annual reports in February or March, which is when they would be sending those documents to me. All of this takes me 10 - 15 hours per week.

Of course, by intimately understanding the investments I am making, I feel in charge of my own retirement destiny. I would much rather spend the time I spend on my investments, than pay 0.5% annually of my net worth to an investment adviser, while I feel clueless about my financial situation. I also enjoy expanding my knowledge on investment related subjects, which is the same reason that you are reading this website.

Full Disclosure: Long MCD and WMT

Relevant Articles:

- Dividend Growth Investing Gets No Respect
- The Future for Dividend Investors
- How to select dividend stocks?
- Dividend Investors – Do not forget about total returns

Monday, June 25, 2012

Seven Stocks Boosting Investor Payouts

One of the primary reasons I hold quality dividend stocks is the regular distributions I receive in my brokerage account. In fact, as part of my retirement plan, I expect to be able to achieve financial independence in a few years, when my dividend income exceeds my expenses. After this dividend crossover point I would be able to retire and not worry about having a demanding eight to five job. I particularly like dividend growth stocks, since they regularly boost distributions, which enables my passive income to maintain purchasing power over time.

Several consistent dividend growth payers approved hikes in their distributions to shareholders last week. The companies include:

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company raised its quarterly dividend by 7.20% to 26 cents/share. This marked the 35th consecutive annual dividend increase for this dividend champion. Yield: 2.70% (analysis)

Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. The company raised its quarterly dividend by 22.20% to 27.50 cents/share. This marked the 37th 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. The company leases its retail properties primarily to regional and national retail chain store operators. This REIT raised monthly distributions to 14.6125 cents/share. This dividend achiever has boosted distributions for 18 years in a row. Yield: 4.30% (analysis)

Best Buy Co.(BBY), Inc. operates as a retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. The company raised its quarterly dividend by 6.25% to 17 cents/share. This marked the tenth consecutive annual dividend increase for Best Buy. Yield: 3.50%

Dynex Capital, Inc. (DX), together with its subsidiaries, operates as a real estate investment trust or REIT in the United States. The company raised its quarterly dividend by 3.60% to 29 cents/share. This marked the second dividend increase over the past year. Dynex Capital has raised distributions for 5 years in a row. Yield: 11.60%

John Wiley & Sons, Inc. (JW-A) provides content and workflow solutions in areas, such as research, professional development, and education. The company raised its quarterly dividend by 20% to 24 cents/share. This marked 19th consecutive annual dividend increase for this dividend achiever. Yield: 2%

Oil-Dri Corporation of America (ODC) engages in the development, manufacture, and marketing of sorbent products in the United States and internationally. The company raised its quarterly dividend by 5.90% to 18 cents/share. This marked 10th consecutive annual dividend increase for this dividend achiever. Yield: 3.60%

Full Disclosure: Long MDT, WAG, O

Relevant Articles:

- When can you retire on dividends?
- My dividend crossover point
- My Dividend Retirement Plan
- Margin of Safety in Dividends

Friday, June 22, 2012

National Bankshares (NKSH) Dividend Stock Analysis

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. This dividend achiever has increased dividends on its common stock for 12 years in a row.

The company’s last dividend increase was in May 2012 when the Board of Directors approved a 16.70% increase to 53 cents/share.I uncovered this hidden dividend star in my weekly review of dividend increases.

Over the past decade this dividend growth stock has delivered an annualized total return of 12.30% to its shareholders.


The company has managed to deliver 6.60% in annual EPS growth since 2002. Analysts expect National Bankshares to earn $2.56 per share in 2012 and $2.49 per share in 2013. In comparison National Bankshares earned $2.54/share in 2011.

The bank has managed to maintain a high net interest margin of 4.00% – 4.80% since 2002. This period included an increase in Fed Funds rate from 2003 – 2007 followed by a decrease in Fed Funds rate from 2008 – 2009. Net interest margin is the difference between what the bank lends capital at, minus the cost of that capital. As interest rates are expected to remain low until 2014, the company’s cost of capital should be low. The level of profitability is especially noteworthy during current difficult economic environment. The bank is very conservatively run, which has resulted in a very low amount of non-performing assets of 1%. In addition, it has a solid balance sheet, with a tangible common equity of 12.50%, vs 7.50% for peers.

This conservatively run bank would likely not be found on most investor’s radars.The Dodd-Frank act will likely have an impact on it, as it will have to increase overhead to comply with act and also face limitations on certain fees it can charge its customers. Another factor that would limit income growth is decrease in interest rates on the investment securities the bank owns in its investment portfolio, which account for approximately 33% of total assets.

Only 27% of the company’s stock is held by institutions. This means that investors would not be competing with mutual funds for this stock. When few institutional investors are following a stock, there is an opportunity to uncover a good company and purchase it at a bargain price.

The return on equity has been declining since hitting a high of 15% in 2003, although it has been stabilizing since 2007 - 2008. 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 8.20% per year over the past decade, which is higher than to the growth in EPS. The company pays semi-annual distributions to its shareholders.

An 8% growth in distributions translates into the dividend payment doubling every nine years. The current semi-annual payment is twice the amount of dividends paid 9 years ago.

Between 2002 and 2004 the dividend payout ratio increased from 34% to 40%. Since 2005 however, this indicator has been flat around 40%. 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, National Bankshares is attractively valued at 11.50 times earnings, yields 3.50% and has an adequately covered dividend. I would consider initiating a position in the stock subject to availability of funds.

Full Disclosure: None

Relevant Articles:

Build your own Berkshire with dividend paying stocks
Searching for Hidden Dividend Stars
Hingham Institution for Savings (HIFS) Dividend Stock Analysis
The right time to buy dividend stocks

Wednesday, June 20, 2012

Dividend Investors – Do not forget about total returns

Dividend investors often get into the strategy because the dividend component of total return is more stable. This makes it an ideal strategy for retirees to live off dividends and not be dependent on short term market fluctuations.

Some dividend investors however focus exclusively on yield, which could result in sub-par performance. Choosing a utility yielding 5%-6% today with a high payout ratio and low or no earnings and dividend growth over a dividend growth stock such as Johnson & Johnson (JNJ) might lead investors disappointed down the road. Even if retirees are looking for high dividend stocks for current income, they should not ignore the fact that they would likely remain retired for two or three decades. A stock yielding 6-8% today that does not grow distributions would deliver the same amount each year. The purchasing power of these dollars would be much lower however. In fact even a 3% inflation would decrease purchasing power by 50% over 24 years. This means that a Coca Cola can selling for 75 cents today would likely cost $1.50 in 24 years. On the other hand, a company which yields 3% today, but grows distributions at 6% would pay a yield on cost of 12% in 24 years. Even if the purchasing power is cut in half by inflation, this is still a respectable inflation adjusted yield on cost of 6%.

Utilities are dividend staples, which investors usually purchase in their search for current income. Utilities typically provide above average yields, although their dividend payments do not grow much over time. As a result the purchasing power of these high yields decreases each year. Most of these utilities also pay most of their earnings out in the form of dividends. This means that if these companies could easily cut distributions if cost of capital increases or regulators are not willing to increase rates to provide for sufficient return on new investment. If this happens, investors would suddenly realize a much lower yield on cost on their original investment which would also have much lower purchasing power. Of the 15 companies included in the Dow Jones Utilities index, only a handful have not had dividend cuts over the past 2 – 3 decades.



It is evident, that utility dividends are highly cyclical. In essence, the best time to purchase utility stocks might be right after a dividend cut.

Investors should focus on total returns as well, because increases in share prices would protect the purchasing power of the principal over time. By focusing solely on obtaining the highest current yield, investors could actually risk depleting their principal and suffering from dividend cuts at the worst times imaginable.

The types of companies which are suitable for all investors, no matter what their age, are dividend growth stocks. The types of companies investors should look for include:

The Procter & Gamble Company, together with its subsidiaries, provides consumer packaged goods and improves the lives of consumers worldwide. The company operates through six segments: Beauty, Grooming, Health Care, Pet Care, Fabric Care and Home Care, and Baby Care and Family Care. The company has raised dividends for 56 years in a row, and has managed to boost them by 10.90%/year over the past decade. Yield: 3.60% (analysis)

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company has raised dividends for 50 years in a row, and has managed to boost them by 10.10%/year over the past decade. 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 managed to boost them by 27.40%/year over the past decade. Yield: 3.10% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. The company has raised dividends for 25 years in a row, and has managed to boost them by 8.80%/year over the past decade. Yield: 3.50% (analysis)

Philip Morris International Inc (PM)., through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised dividends since 2008, and has managed to boost them each year since. Yield: 3.50% (analysis)

Full Disclosure: Long ED, KO, PG, MCD, PM ,CVX

Relevant Articles:

Investors Get Paid for Holding Dividend Stocks
Living off dividends in retirement
Don’t chase High Yielding Stocks Blindly
Capital gains for dividend investors

Monday, June 18, 2012

Five Consistent Dividend Payers Boosting Distributions

In my weekly column on dividend increases, I typically focus on companies which have boosted distributions for over five years in a row. I use this list as a starting point in identifying hidden dividend gems, and also familiarizing myself with future great dividend growth stocks. I try to understand how each company listed below makes money, whether it will be able to increase earnings over time. I also try to determine at what price it would make sense for me to initiate a position in a stock.

Target Corporation (TGT) operates general merchandise stores in the United States. The company raised its quarterly dividends by 20% to 36 cents/share. This dividend aristocrat has regularly boosted distributions for 45 years in a row. Yield: 2.50% (analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company raised its quarterly dividends by 11.50% to 53.50 cents/share. This dividend achiever has regularly boosted distributions for 18 years in a row. Yield: 2.90% (analysis)

Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company raised its quarterly dividends by 13% to 52 cents/share. This dividend achiever has regularly boosted distributions for 19 years in a row. Yield: 2.40%

C. R. Bard, Inc. (BCR) and its subsidiaries design, manufacture, package, distribute, and sell medical, surgical, diagnostic, and patient care devices worldwide. The company raised its quarterly dividends by 5.30% to 20 cents/share. This dividend aristocrat has regularly boosted distributions for 41 years in a row. Yield: 0.80%

Casey’s General Stores, Inc. (CASY), together with its subsidiaries, operates convenience stores under the Casey’s General Store, HandiMart, and Just Diesel names in 11 Midwestern states, primarily Iowa, Missouri, and Illinois. The company raised its quarterly dividends by 10% to 16.50 cents/share. This dividend achiever has regularly boosted distributions for 13 years in a row. Yield: 1.30%

I have recently initiated a small initial position in Casey’s General Stores (CASY). I will post a more detailed analysis of the stock in a few weeks, but generally I find the growth plans to be reasonable. I also see plenty of room for growth in the US. If the stock falls down further from here, I would consider adding to my small position in it.

Full Disclosure: Long UTX and CASY

Relevant Articles:

Target Corporation (TGT) Dividend Stock Analysis
United Technologies (UTX) Dividend Stock Analysis
How to Uncover Hidden Dividend Gems
Why Dividend Growth Stocks Rock?

Friday, June 15, 2012

Family Dollar Stores (FDO) Dividend Stock Analysis

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. This dividend aristocrat has paid uninterrupted dividends on its common stock since for 36 years in a row.

The company’s last dividend increase was in January 2012 when the Board of Directors approved a 16.70% increase to 21 cents/share. Family Dollar‘s largest competitors include Target (TGT), Dollar Tree (DLTR) and Big Lots (BIG).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.20% to its shareholders.



The company has managed to deliver 10.70% in annual EPS growth since 2002. Analysts expect Family Dollar to earn $3.66 per share in 2012 and $4.23 per share in 2013. In comparison Family Dollar earned $3.12/share in 2011.

The company will be able to grow through new store openings as well as same-store sales growth. The company has expanded the number of stores by 3% per year since 2005. The company is targeting 5-7% store growth in 2012. It has been able to increase its assortment of foods, including refrigerated ones, and qualify for inclusion in the food stamp program. Family Dollar’s limited time offerings creates excitement for consumers, and differentiates the chain from its competitors. In addition, it is increasingly accepting credit cards in its stores, which creates convenience for its customers.

The company has been able to increase return on equity from 20% in 2002 to over 30% 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 11.60% per year over the past decade, which is higher than to the growth in EPS.

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 1988 we see that Family Dollar has managed to double its dividend every six years on average.

Over the past decade, the dividend payout ratio has remained steady between 20% and 30%. 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, Family Dollar is overvalued at 21.50 times earnings and yielding 1.20%. I would keep a close eye on the stock however, and would consider adding to my position on dips below $40/share.

Full Disclosure: Long FDO

Relevant Articles:

Avoid Cyclical Dividend Growth Stocks
My Dividend Retirement Plan
Dividend Aristocrats List for 2012
Dividend Growth Stocks by Sector - Retail

Wednesday, June 13, 2012

My dividend crossover point


In my previous article, "When can you retire on dividends", I introduced the idea of the dividend crossover point. This is the point where your dividend income meets or exceeds your expenses. For many dividend investors, this is the point synonymous with financial independence. After all, after years of sacrifice, wise investment and sticking to a plan, investors would finally be able to do be free from a nine to five job.

In order to reach that magical point however, a lot of work needs to be done. Investors need to design a retirement strategy, and then stick to it through thick and thin, while also improving along the way. Some of the biggest dangers to successful dividend investing are not market volatility, dividend cuts or recessions, but investor psychology. The process of accumulating a viable dividend stream will take anywhere from several years for those who are starting out with a large amount in their 401K or ROTH IRA’s to several decades for these young investors who are just starting out in their professional careers. Along the way, many investors will lose track of the goal due to sheer boredom or due to lack of patience. Successful dividend investing is sometimes as exciting as watching paint dry. Unfortunately, investors who enter dividend investing for the sheer excitement, do not stick to it. On the other hand, investors who attempt to find shortcuts to speed up the process of capital accumulation by using options and futures, risky growth stocks or massive leverage will likely be disappointed along the way.

The key ingredients to accumulating a sufficient dividend income stream include time, dividend reinvestment and regular contributions to your portfolio. The power of regular contributions is important, because this ensures that investors consciously keep working towards their goal of dividend independence by investing in dividend stocks every month. While markets fluctuate greatly, I have always found at least 15 – 20 attractively valued income stocks at all times. Dividend reinvestment in dividend growth stocks is essential for turbo-charging your passive income. And last but not least, investors need the time to let their income compound to their desired amount.

Dividend investing takes time, before the amount of distributions reaches decent levels. Imagine that someone managed to save $2000/month for one year. Each month, they put $1000 in two stocks. At the end of the first year, they would have about 24 companies, and the portfolio cost will be $24,000. If the average yield were 4%, this portfolio will generate $960/year in dividends, which accounts for roughly $80/month. On the positive side, the dividends from this portfolio will generate enough to purchase one additional stock position per year. In addition, $80/month could pay for utilities, phone or internet bills for the investor pretty much for life. On the negative side, assuming that the investor needs $1000/month to cover their basic expenses, he or she would calculate that they would need to sacrifice almost for one decade, before their income reaches a decent amount. Once they are there however, and their portfolios consist of wide-moat dividend champions with sustainable distributions, investors will be able to live off dividends.

Over the past two years, I have gotten been able to get closer to my target dividend income goal. I am not including an actual number here, because my number would not be relevant to other investors. Different investors will have different target monthly incomes – for some $1,000/month is sufficient, whereas for others even $10,000/month will not be enough. Over the next few years I will be consistently able to meet at least half of my monthly expenses with income from my dividend portfolio.

Accumulating dividend stocks is a long term process. The type of stocks I tend to invest in have wide moats, long histories of dividend increases, attractive valuations and multi-national operations. Five such examples include:

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. This dividend aristocrat has raised distributions for 40 years in a row and has a ten year dividend growth rate of 8.70%/year. Yield: 3.30% (analysis)

Johnson & Johnson (JNJ) engages in the research, development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has raised distributions for 50 years in a row and has a ten year dividend growth rate of 12.40%/year. Yield: 3.90% (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 and has a ten year dividend growth rate of 27.40%/year. Yield: 3.10% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, and neighborhood markets, as well as walmart.com; and samsclub.com. This dividend aristocrat has raised distributions for 38 years in a row and has a ten year dividend growth rate of 17.90%/year. Yield: 2.40%(analysis)

PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. It operates in four divisions: PepsiCo Americas Foods (PAF); PepsiCo Americas Beverages (PAB); PepsiCo Europe; and PepsiCo Asia, Middle East, and Africa (AMEA). This dividend aristocrat has raised distributions for 40 years in a row and has a ten year dividend growth rate of 13.30%/year. Yield: 3.10% (analysis)

Relevant Articles:


Monday, June 11, 2012

Lowe's (LOW) Joins Ranks of Dividend Kings, brings list to 14 companies

Another company joined the elite list of dividend kings over the past week, bringing the list to fourteen companies. So far this year we have had Coca Cola (KO) and Johnson & Johnson (JNJ) join the ranks of dividend kings. This is an elite list of companies which have managed to raise distributions for at least 50 years in a row.

Lowe’s Companies, Inc., together with its subsidiaries, operates as a home improvement retailer. The company raised its quarterly dividend by 14.30% to 16 cents/share. Lowe’s Companies has raised dividends for 50 years in a row, placing it next to Coca Cola (KO) and Prcoter & Gamble (PG) on the dividend king list. Yield: 2.40% (analysis)

Other consistent dividend payers, boosting distributions over the past week included:

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. The company raised its quarterly dividend by 0.80% to 61.50 cents/share. This dividend achiever has raised dividends for 24 years in a row. Yield: 6.20% (analysis)

National Fuel Gas Company (NFG) operates as a diversified energy company in the United States. The company invests in health care and human service related facilities. The company raised its quarterly dividend by 2.80% to 36.50 cents/share.  This dividend achiever  has raised dividends for 23 years in a row. Yield: 3.30%

FedEx Corporation (FDX) provides transportation, e-commerce, and business services in the United States and internationally. It operates in four segments: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services. The company raised its quarterly dividend by 7.70% to 14 cents/share. FedEx Corporation has raised dividends for 11 years in a row. Yield: 0.70%

Flowers Foods, Inc. (FLO) produces and markets bakery products in the United States. It operates in two segments, Direct-Store-Delivery (DSD) and Warehouse Delivery. The company raised its quarterly dividend by 6.70% to 16 cents/share. Flowers Foods has raised dividends for 11 years in a row. Yield: 2.80%

Full Disclosure: Long LOW, UHT, PG, JNJ, KO

Relevant Articles:

Eleven Dividend Kings, Raising dividends for 50+ years
Lowe’s (LOW) Dividend Stock Analysis
Universal Health Realty Income Trust (UHT) Dividend Stock Analysis
Dividend Achievers Offer Income Growth and Capital Appreciation

Friday, June 8, 2012

Realty Income (O) – The Monthly Dividend Company

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company owns 2634 properties, located in 49 states, which are occupied in 136 retail and other consumer businesses in 38 different industries. Realty Income is a dividend achiever, which has increased distributions several times per year since going public in 1994. The company is one of the few which

The company is in the business of acquiring triple-net lease properties from owners, and then leasing them back using long-term lease contracts.

As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO), which stood at $1.98/share in 2011. Realty Income distributed $1.746 /share in 2011.


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. Once the company’s FFO payout ratio decreases, it should be able to generate higher dividend growth to shareholders.

Over the past decade, dividends have increased by 4.30%/year. Dividend growth has been limited over the past five years, due to the high payout ratio.

The company’s strategy involves:

- Tenants with reliable and sustainable cash flows
- Tenants with revenue and cash flow from multiple sources
- Real estate that is critical to the tenants ability to generate revenue
- Tenants willing to sign long term leases
- Real estate where profits will exceed cost of capital

This strategy has enabled to company to pay a stable and increasing distributions since it went public in 1994. The company has been successful in adapting its business model to changes in the economy. In its property acquisition strategy, Realty Income has exclusively focused on tenant quality. Examples of that include the acquisition of vineyard and winery assets in Napa Valley, which are leased to Diageo (DEO). This shows the company’s willingness to invest in retail industries where there is little competition and that are likely to do well in the future.

Realty income has also managed to continuously re-evaluate its existing group of tenants, using its methodology, and group them into different clusters. It’s team of research staff has evaluated tenants based on a wide variety of factors such as revenue and gross margin trends, profitability, credit rating, including stress tests and what if scenarios if interest rates increased or if tenant revenues declined. This evaluation helps the company identify industries in which it needs to focus its acquisition efforts, while also identifying areas where it needs to scale back or even dispose of existing properties.

Some of the biggest risks that the company faces include decrease in occupancy rates, competition of its tenants and rising interest rates.

The company has managed to proactively acquire properties in promising industries over the years. However, if its team fails to renew leases as they expire, Realty Income might end up with properties which are not generating income and might have to be sold. Between 3% and 4% of leases expire each year, which is why being able to renew or find new tenants is imperative for long-term success. Inability to do so could decrease cash flow available to shareholders, and might even lead to reduced dividend payouts. In addition, deterioration in the financial conditions of its tenants might lead to them breaking leases, depending on the severity of their financial situation. The company’s tenant base does appear to be somewhat diversified, although about ten tenants account for 50% of revenues in 2011. The company does look at its properties, and is not afraid to sell real estate in order to reduce credit risk.

Over the past year, two of its tenants which generated 7% of annual revenues, Friendly’s and Buffets Holding filed for bankruptcy under Chapter 11. Friendly’s accepted 102 out of 121 leases, and received rent concessions and term reductions on some of their leases. The company estimates that it will be able to recover 80% of annualized rent that Friendly’s was paying prior to its bankruptcy. Buffets accepted 79 out of 86 properties, and obtained term reductions and rent concessions from Realty Income. The REIT is expecting to recover 65% of annualized rent that Buffets was paying before its bankruptcy. The rejected properties have been made available for re-lease.

Realty income does face a great deal of competition from other public and private REITS, as well as an array of investors, who are actively looking to increase exposure into the lucrative triple-lease property market. Luckily, the company has been able to proactively pursue opportunities in new markets. In addition, its expertise and experience in the sale-leaseback market has allowed it to uncover opportunities. The decrease in interest rates has led to a decrease in cost of capital, which has been sufficient to compensate for lower yields on new properties.

Another major factor behind Realty Income is rising interest rates. Although expectations are for interest rates to remain low until 2014, a continued increase would diminish investor appetite for high yield REIT’s and their fixed income securities. This will essentially increase cost of capital, and might even cause liquidity issues. Realty income has been able to grow through issuance of equity and bonds, which is why future growth could be in jeopardy if it has to pay higher interest rates to investors.

Currently, I find Realty Income shares to be priced above my buy range. I would consider adding to my position in the company on dips below $35, which is equivalent to a 5% yield. A 6% yield would correspond to a drop in the price all the way to $29.20 /share.

Full Disclosure: Long O and DEO

Relevant Articles:

Four High Yield REITs for current income
Realty Income (O) Dividend Stock Analysis
Dividend Achievers Offer Income Growth and Capital Appreciation
Diageo (DEO) Dividend Stock Analysis 2011

Wednesday, June 6, 2012

The Most Successful Dividend Investors of all time

Dividend investing is as sexy as watching paint dry on the wall. Defining an entry criteria that selects quality dividend stocks with rising dividends over time and then patiently reinvesting these dividends while sitting on your hands is not exciting. While active traders have a plethora of hedge fund managers on the covers of Forbes magazine there are not many well-publicized successful dividend investors. Even value investing has its own superstars – Ben Graham and Warren Buffett.

I did some research and uncovered several successful dividend investors, whose stories provide reassurance that the traits of successful dividend investing I outlined in a previous post are indeed accurate.

The first investor is Anne Scheiber, who turned a $5,000 investment in 1944 into $22 million by the time of her death at the age of 101 in 1995. Anne Scheiber worked as an IRS auditor for 23 years, never earning more than $3150/year. The one important lesson she learned auditing tax returns was that the surest way to become rich in America is by accumulating stocks. She accumulated stocks in brand name companies she understood and then reinvested dividends for decades. She never sold, in order to avoid paying taxes and commissions. She also never sold even during the 1972-1974 bear market as well as the 1987 market crash because she had high conviction in her stocks picks. She also held a diversified portfolio of almost 100 individual securities in brand names such as Coca-Cola (KO), PepsiCo (PEP), Bristol-Myers (BMY), Schering Plough (acquired by Pfizer in 2009). She read annual reports with the same inquisitive mind she audited tax returns during her tenure at the IRS and also attended annual shareholders meetings. Anne Scheiber did her own research on stocks, and was focusing her attention on strong franchises which have the opportunity to increase earnings and pay higher dividends over time.

In her later years she reinvested her dividends into tax free municipal bonds, which is why her portfolio had a 30% allocation to fixed income at the time of her death. At the time of her death, her portfolio was throwing off $750,000 in dividend and interest income annually. She donated her whole fortune to Yeshiva University, even though she never attended it herself.

The second investor is Grace Groner, who turned a small $180 investment in 1935 into $7 million by the time of her death in 2010. Ms Groner, who worked as a secretary at Abbott Laboratories for 43 years invested $180 in 3 shares of Abbott Laboratories (ABT) in 1935. She then simply reinvested the dividends for the next 75 years. She never sold, but just held on to her shares.

She was frugal, having grown up in the depression era, and was the classical millionaire next door type of person who was not interested in keeping up with the Joneses. Grace Groner left her entire fortune to her Alma Mater. Her $7 million donation is generating approximately $250,000 in annual dividend income.

The reason why dividend investors are not highly publicized is because dividend investing is not sexy enough to be featured in the financial mainstream media. In addition to that, it is not profitable for Wall Street to sell you into the idea that ordinary investors can invest on their own. Compare this to mutual funds, annuities and other products which generate billions in commissions for Wall Street, despite the fact that they might not be in the best interest of small investors.

The third dividend investor is Warren Buffett, the Oracle of Omaha himself. In a previous article I have outlined the reasoning behind my belief that Buffett is a closet dividend investor. He explicitly noted in his 2009 letter that "the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow". His investment in See's Candy is the best example of that.

Some of Buffett's best companies/stock that he has owned such as Geico, Coca Cola , See's Candy are exactly the types of investments mentioned above. He has mentioned that at Berkshire he tries to stick with businesses whose profit picture for decades to come seems reasonably predictable. Per Buffett the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. In addition, his 2011 letter discussed his dividend income from all of Berkshire Hathaway investments, including his prediction that Coca Cola dividends will keep on increasing, based on the pattern of historical dividend increases.

In this article I outlined three dividend investors, who managed to turn small investments into cash machines that generated large amounts of dividends. They were able to accomplish this through identifying quality dividend growth companies at attractive valuations, patiently reinvesting distributions and in two out of three cases maintaining a diversified portfolio of stocks. These are the lessons that all investors could profit from.

Full Disclosure: Long KO, PEP, ABT

Monday, June 4, 2012

Six Dividend Aristocrats Increasing Distributions in a turbulent 2012

One of my favorite lists for dividend growth investing is the dividend aristocrats index. It features companies in the S&P composite index, which have managed to increase distributions for at least 25 consecutive years. There are 51 dividend aristocrats in the list. So far this year, 25 of them have announced dividend increases. A dividend increase signals confidence in the near term financial position in the firm that announces it.

I scrolled through the list, and identified the six companies that managed to boost distributions by more than 10%. If a company boosts dividends by 10% per year, its dividend payment would double in seven years. In other words, if you purchased $1000 worth of a dividend stock yielding 3% today, in 7 years your dividend income would be $60, or a cool 6% yield on cost. I have listed each one below, included some detail about the company as well as an overview.

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. The company raised its annual dividend by 10.30% to $2.56/share. This dividend aristocrat has raised distributions for 30 years in a row. The ten year annual dividend growth rate has been 11.10% on average. Air Products and Chemicals is trading at 13.80 times earnings and yields 3.20%. The stock is attractively priced at the moment, and I will look to add to my existing position subject to availability of funds. (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. The company raised its annual dividend by 21.30% to $2.28/share. This dividend aristocrat has raised distributions for 30 years in a row. The ten year annual dividend growth rate has been 7.40% on average. Exxon Mobil is trading at 9.40 times earnings and yields 2.90%. The decline in oil prices, coupled with the fall in the stock market has created a rare buying opportunity for the stock. I would consider adding to my position in the stock, subject to availability of funds. (analysis)

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. The company raised its annual dividend by 16.70% to $0.84/share. This dividend aristocrat has raised distributions for 36 years in a row. The ten year annual dividend growth rate has been 11.80% on average. Family Dollar Stores is trading at 19.80 times earnings and yields 1.20%. The stock is overpriced at the moment, and I am waiting for a dip to add to my existing position in the stock. (analysis)

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 raised its annual dividend by 10% to $1.98/share. This dividend aristocrat has raised distributions for 56 years in a row. The ten year annual dividend growth rate has been 4.80% on average. Genuine Parts Company is trading at 16.50 times earnings and yields 3.10%. I analyzed the company in 2010, but never really bought it, since it didn’t hit my entry price. (analysis)

W.W. Grainger, Inc. (GWW) engages in the distribution of maintenance, repair, and operating supplies, as well as other related products and services for businesses and institutions primarily in the United States and Canada. The company raised its annual dividend by 21.20% to $3.20/share. This dividend aristocrat has raised distributions for 41 years in a row. The ten year annual dividend growth rate has been 13.70% on average. W.W. Grainger is trading at 20 times earnings and yields 1.70%. I would consider adding to my position in the stock on dips below $130.

Sigma-Aldrich Corporation (SIAL), a life science and high technology company, develops, manufactures, purchases, and distributes various chemicals, biochemicals, and equipment worldwide. The company raised its annual dividend by 11.10% to $0.80/share. This dividend aristocrat has raised distributions for 36 years in a row. The ten year annual dividend growth rate has been 15.90% on average. Sigma-Aldrich is trading at 18 times earnings and yields 1.20%. The low yield has prevented me from initiating a position in the stock.

Full Disclosure: Long APD, XOM, FDO, GWW

Relevant Articles:

How to generate $1000/month in dividends
Dividend Aristocrats List for 2012
Margin of Safety in Dividends
Build your own Berkshire with dividend paying stocks

Friday, June 1, 2012

Nestle (NSRGY): A Global Dividend Powerhouse

Nestlé S.A. (NSRGY), together with its subsidiaries, provides nutrition, health, and wellness products worldwide. This international dividend achiever has paid uninterrupted dividends on its common stock since for 16 years in a row.

The company’s last dividend increase was in 2012 when the Board of Directors approved a 5.40% increase 1.95 CHF/share. Nestle ‘s largest competitors include Kraft Foods (KFT), Danone (Danoy) and General Mills (GIS).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.40% to its shareholders in US dollars. A large portion of the gain came from the appreciation of the Swiss franc from $0.60 in early 2002 to $1.10 in early 2012. US investors can purchase the ADR’s of Nestle, which are traded on the pink sheets under symbol NSRGY. (or NSRGY.PK at yahoo finance). The fact that this company is traded on the pink sheets, rather than NYSE, NASDAQ or AMEX should not scare potential investors. Nestle is a global blue chip, based in Switzerland, which has not only managed to increase earnings over the past decade, but also to share the wealth with shareholders in the form of increased dividends and consistent share buybacks.


The company has managed to deliver 7.60% in annual EPS growth since 2001.

Nestle is well positioned to ride the increasing affluence of emerging markets with its strong presence throughout the emerging markets. In fact, 40 % of the company’s sales came from emerging economies. Understanding local markets and strategic acquisitions will be the key to future success.

Another division that could drive future growth is Nestle Health Science division, which began operations in January 2011. This division is an attempt to pioneer a new market between food and pharmaceuticals and to develop science-based personalized nutrition solutions to chronic medical conditions.

The company has been able to generate strong organic growth in key areas such as North America, Europe and Asia through several factors. Some of them include product innovation, leveraging the company’s global scale, investing in building and maintaining the company’s strong brand positions worldwide. The company has 29 billionaire brands, which have delivered strong organic growth over the past few years as well. Nestle’s long term goal is to generate 5% - 6% in annual organic sales growth, achieve sustainable improvement in EBIT and improving the trend in return on investment capital.

A large spike in earnings per share in 2010 was caused by the sale of Alcon to Novartis. I did not account for these one-time effects in this analysis.

The company has enjoyed a return on equity in the low to medium teens. 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 12.50% per year over the past decade, which is higher than to the growth in EPS.

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 1995 we see that Nestle has managed to double its dividend every five and a half years on average. The company pays dividends once per year. US shareholders typically get paid about one month after the company distributes the dividend to domestic investors, and also have 15% withheld at source. However, income investors can get a tax credit on their US tax returns at tax time. This is one reason why holding ADR’s in a taxable account makes sense.

Over the past decade, the dividend payout ratio has increased from 37% in 2001 to 56% in 2011. This was caused by the fact that dividend growth was faster than earnings growth. 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 Nestle is attractively valued at 19.20 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 NSRGY and KFT

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