Monday, April 4, 2016
As I have been talking about my plan, I often hear someone who tells me that I am not diversified. This statement is surprising, because my dividend portfolio includes something like 100 individual names. The 60 largest components account for most of the portfolio however. Someone always comes and tells me that I need to own thousands of individual stocks, in order to consider myself diversified. I disagree with that statement. I do not really have to look far, in order to refute this statement with actual data.
For example, I looked at the total performance of three stock market indexes over the past few decades from Morningstar.
Friday, November 11, 2011
Just because one has a strategy which gives them an edge, or the ability to generate consistent returns, does not mean that all caution should be thrown to the wind. In order to be successful, investors should focus on companies with solid fundamentals, which are attractively priced and have sustainable dividend payments. In addition to that, investors should build diversified dividend portfolios, where companies from different sectors are being included.
Today I am going to discuss the companies in the retail sector. The dividend growth stocks which are representative of the sector include:
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend champion has raised distributions for 37 years in a row. The ten year annual dividend growth rate is 17.80%. Yield: 2.80% (analsyis)
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has raised distributions for 44 years in a row. The ten year annual dividend growth rate 14.90is %. Yield: 2.40% (analsyis)
Lowe's Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer in the United States, Canada, and Mexico. This dividend champion has raised distributions for 49 years in a row. The ten year annual dividend growth rate is 17.60%. Yield: 2.80% (analsyis)
Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. This dividend champion has raised distributions for 36 years in a row. The ten year annual dividend growth rate is 16.50%. Yield: 2.50% (analsyis)
Full Disclosure: Long WMT, LOW, WAG, FDO
Wednesday, July 13, 2011
I then screened the list based off my entry criteria:
1. Dividend Yield of at least 2.50%
2. P/E Ratio below 20
3. Dividend Payout Ratio less than 60%
Only one of these stocks is traded on NYSE, and the rest are traded on the OTC market. The symbols used above also include the ones for the Toronto Stock Exchange.
Full disclosure: Long TD
Wednesday, September 8, 2010
Investing internationally does come with its own peculiarities however. For example the rest of the world seems to be following IFRS accounting standards, while US companies report under US GAAP. In addition to that, US investors could be subject to withholdings on foreign dividends received, which could only be deducted in taxable accounts. Furthermore, most foreign companies pay dividends in local currency, which is then translated into US dollars, before being remitted in investors’ brokerage accounts. This could lead to volatility in the US dollar dividend incomes of investors, whereas the dividend income could have been flat or rising in the foreign currency.
In order to make investors comfortable with investing internationally, I typically focus mostly on foreign shares which trade on US exchanges. That way investors would not have to worry about setting up foreign accounts with brokers abroad. However if you wish to start a portfolio consisting of telecom stocks from all countries in Eastern Europe, then this article is not for you. The differences between US and foreign based companies traded on US exchanges are the most I would like to worry about.
The starting point in a dividend growth portfolio selection could be found in the International Dividend Achievers index. It consists of shares of foreign companies traded on US exchanges which have consistently increased dividends for at least five consecutive years. Enterprising investors could also scour lists of major companies and check dividend histories in order to uncover stocks which might not be in this index, while still being traded on US markets. I have highlighted several foreign companies I own, which have a history of consistent dividend increases:
Diageo PLC (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine. This international dividend achiever has raised dividends for over one decade and yields 3.50%. (analysis)
Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and Latin America. This international dividend achiever has raised dividends for over one decade and yields 4.10%. (analysis)
Royal Dutch Shell Plc (RDS.B) operates as an oil and gas company worldwide. The company explores for, and extracts crude oil and natural gas. The company is not on any dividend indices, despite its long history of consistent dividend increases. The yield is 6.20%.(analysis)
Nestle (NSRGY) engages in the nutrition, health and wellness sectors. This international dividend achiever has raised distributions each year since 1997. The stock currently yields 2.80%.
When I select international dividend stocks I typically use the foreign currency to determine whether the dividend was being increased for several consecutive years. I find that relying only on US dollar amounts for dividends paid produce volatility in income which could mostly be attributed to exchange rate fluctuations. While Investors in ADR’s such as the ones listed above will receive their dividend in US dollars, the history of dividend increases was generated in their respective foreign currencies.
Another issue that I have uncovered is that some companies pay distributions on a different schedule than US companies do. Nestle for example pays dividends once per year, while Diageo (DEO) pays dividends twice per year. Diageo’s first half dividend is always lower than its second half dividend, which somehow always manages to scare novice investors, who tend to assume that the distribution was cut.
- Best International Dividend Stocks
- International Over Diversification
- International Dividend Achievers for diversification
- Buy and hold dividend investing is not dead
Wednesday, August 11, 2010
The limitations behind the dividend aristocrat’s index are that first a company has to be included in the S&P 500 before it qualifies. In addition to that, S&P requires minimum market capitalization of $3 billion and an average daily trading volume of $5 million. This means that even if a company has managed to raise annual dividends for 25 years in a row, it might not be included in the elite dividend index if it has a low market capitalization or that it is relatively illiquid. As a dividend investor, the last two criteria are irrelevant to me.
Luckily, dividend investor David Fish has created a list of dividend stocks which have raised distributions for 25 consecutive years and has named it the dividend champions list. His list includes 100 companies, which is more than twice the size of the Dividend Aristocrats. I ran a screen on the list in order to identify stocks for further research. My criteria were as follows:
1) Price/Earnings Ratio below 20
2) Dividend Yield > 2.50%
3) Dividend Payout Ratio <60%
(Click image to enlarge)
Air Products and Chemicals, Inc. (APD) offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. (Analysis)
Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. It also involves in the manufacture, transportation, and sale of petroleum products. (Analysis)
3M Company (MMM), together with its subsidiaries, operates as a diversified technology company worldwide. It operates in six segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications. (Analysis)
Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. (Analysis)
The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. (Analysis)
Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care. (Analysis)
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. (Analysis)
PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, (Analysis)
The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. (Analysis)
Sonoco Products Company (SON) provides industrial and consumer packaging products, and packaging services in North and South America, Europe, Australia, and Asia.
Universal Corporation (UVV), together with its subsidiaries, operates as the leaf tobacco merchants and processors worldwide. It engages in selecting, procuring, buying, processing, packing, storing, supplying, shipping, and financing leaf tobacco for sale. (Analysis)
V.F. Corporation (VFC), together with its subsidiaries, engages in the design, manufacture, and sourcing of branded apparel and related products for men, women, and children in the United States. (Analysis)
Weyco Group, Inc. (WEYS) engages in the retail and wholesale distribution of men’s footwear in North America, Australia, South Africa, the Asia Pacific, and Europe. It offers men’s casual, dress, and fashion shoes under Florsheim, Nunn Bush, Stacy Adams, Brass Boot, and Nunn Bush NXXT brands.
Bank of Hawaii Corporation (BOH) operates as the holding company for Bank of Hawaii that provides a range of financial services and products in Hawaii and the Pacific Islands. The company operates in four segments: Retail Banking, Commercial Banking, Investment Services, and Treasury.
The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. (Analysis)
Commerce Bancshares, Inc. (CBSH) operates as the bank holding company for Commerce Bank, N.A. that provides various general banking services to individuals and businesses. It operates in three segments: Consumer, Commercial, and Wealth. (Analysis)
Cincinnati Financial Corporation (CINF), through its subsidiaries, operates in the property casualty insurance business in the United States. It operates in four segments: Commercial Lines Property Casualty Insurance, Personal Lines Property Casualty Insurance, Life Insurance, and Investment. (Analysis)
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. (Analysis)
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. (Analysis)
Eli Lilly and Company (LLY) develops, manufactures, and sells pharmaceutical products worldwide. If the company doesn’t raise dividends in 2010 however, it would be out of the dividend champions list. (Analysis)
Medtronic, Inc. (MDT) develops, manufactures, and sells device-based medical therapies worldwide. The company operates in the following segments:Cardiac Rhythm Disease Management , Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control.
Teleflex Incorporated (TFX) primarily develops, manufactures, and supplies single-use medical devices used by hospitals and healthcare providers worldwide. The company operates through three segments, Medical, Aerospace and Commercial. (Analysis)
Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology, as well as delivering engineering services and solutions to various industrial, commercial, and consumer markets worldwide. The company operates in five segments: Process Management, Industrial Automation, Network Power, Climate Technologies and Appliance and Tools. (Analysis)
Illinois Tool Works Inc. (ITW) manufactures a range of industrial products and equipment worldwide. The company’s segments include Transportation, Industrial Packaging, Food Equipment, Power Systems & Electronics, Construction Products, Polymers & Fluids and Decorative Surfaces. (Analysis)
RPM International Inc.(RPM) engages in the manufacture, marketing, and sale of various specialty chemical products to industrial and consumer markets worldwide. The company operates through two segments, Industrial and Consumer. (Analysis)
McDonald’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. It franchises and operates McDonalds restaurants that offer various food items, soft drinks, coffee, and other beverages. (Analysis)
The McGraw-Hill Companies, Inc. (MHP) provides information services and products to the education, financial services, and business information markets worldwide. It operates in three segments: McGraw-Hill Education, Financial Services, and Information & Media. (Analysis)
Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and
related products primarily to the foodservice industry in the United States. (Analysis)
Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. The drugstores sell prescription and non-prescription drugs, and general merchandise. (Analysis)
Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. (Analysis)
American States Water Company (AWR), through its subsidiaries, provides water, electric, and contracted services in the United States. The company engages in the purchase, production, distribution, and sale of water in California; and the distribution of electricity in San Bernardino Mountain communities.
National Fuel Gas Company (NFG), through its subsidiaries, operates as a diversified energy company primarily in the United States. The company operates through four segments: Utility, Pipeline and Storage, Exploration and Production, and Energy Marketing.
Piedmont Natural Gas Company, Inc. (PNY), an energy services company, distributes natural gas to residential, commercial, industrial, and power generation customers in portions of North Carolina, South Carolina, and Tennessee.
Mechanical investing is not what I am writing about here. It is just the beginning step in order to bring the list to a manageable list. The rest is up to investor to determine whether a certain stock is a buy.
Full Disclosure: Long ABT, ADP,APD, CB, CINF, CL, CLX, EMR, JNJ, KMB, KO, MCD, MHP, MMM PEP,PG, RPM, SYY, UVV, WAG, XOM
This article was included in the Carnival of Personal Finance #271 – The Secret to Successful Budgeting eBook Edition
- A dividend portfolio for the long-term
- 14 Dividend Stocks with Dividend Growth Potential
- 16 Quality Dividend Stocks for the long run
- The right time to buy dividend stocks
Monday, June 21, 2010
I have highlighted the top 20 yielding stocks in the S&P 500 index below:
Right off the bat investors could notice that most of these issues are from the telecom, utilities and tobacco sectors. The reason why these companies yield so much is because they are sharing almost all of their profits to shareholders in the form of dividends. This is clearly unsustainable, particularly in the case of telecom carriers, which have high capital expenditure requirements in an industry with high competition. Another risk facing telecom investors is that the wireline (landline) portion of their businesses is destined to decline over the years until its extinction a few years from now. Few households have both a cell phone and a fixed line anymore, and those that still pay for both are beginning to question the benefit of the extra landline phone charges. This dying business would generate less and less in profits, which cannot be offset against cost cuts. The main bright spots for telecom providers is data and cellular phones.
Tobacco is also a dying business, where companies direct all of their cash flows to investors in the form of dividends and stock buybacks. The one positive for tobacco companies is that because of the ban on advertising, it is virtually impossible for new companies to enter the market. In addition to that the product is addictive, and the price increases have so far offset the declines in the number of smokers in the US. The major risk is legislation banning the use of tobacco in the US, which seems to already be priced into the shares of tobacco companies such as Altria (MO). The states need revenues, and the steep excise taxes generated by tobacco products make it very unlikely that these products would be banned in the next decade.
Wednesday, April 7, 2010
After looking at my portfolio, I have been able to identify three types of dividend stocks.
The first type is high yield stocks with low to no dividend growth.
Realty Income (O) (analysis)
Enbridge Energy Partners (EEP)
Kinder Morgan Partner (KMP) (analysis)
Consolidated Edison (ED) (analysis)
It is important not to fall in the trap of excessive high yields, caused by the market’s perceptions that the dividend is in peril. Recent examples of this included some of the financial companies such as Bank of America (BAC). While current dividend income is important, these stocks would produce little in capital gains over time.
The second type is low yielding stocks with a high dividend growth rate.
Wal-Mart (WMT) (analysis)
Aflac (AFL) (analysis)
Colgate Palmolive (CL) (analysis)
Archer Daniels Midland (ADM) (analysis)
Family Dollar (FDO) (analysis)
One of the issues with this type of strategy is that it might take a longer time to achieve a decent yield on cost on your investment. It is difficult to achieve a double digit dividend growth rate forever. Once you achieve an adequate yield on cost on your investment, it might slow down dividend increases. The positive side of this strategy is that many of the best dividend growth stocks such as Wal-Mart (WMT) or McDonald’s (MCD) never really yielded more than 2%-3% when they first joined the Dividend Achievers index. The main positive of this strategy is the possibility of achieving strong capital gains.
The third type is represented by companies with an average yield and an average dividend growth. Some investors call this the sweet spot of dividend investing.
Johnson & Johnson (JNJ) (analysis)
Procter & Gamble (PG) (analysis)
Clorox (CLX) (analysis)
Pepsi Co (PEP) (analysis)
Automatic Data Processing (ADP) (analysis)
There is a common misconception that buying the stocks in the middle, would produce average returns. Actually finding stocks with average market yields, which also produce a good dividend growth could produce not only exceptional yield on cost faster, but also capital gains as well.
At the end of the day successful dividend investing is much more than finding the highest yielding stocks. It is more about finding the stocks with sustainable competitive advantages which allow them to enjoy strong earnings growth, which would be the foundation of sustainable dividend growth. A company like Procter & Gamble (PG) which yields almost 3% today butraises dividends at 10% annually would double your yield on cost in 7 years to 6%. A company like Con Edison (ED) would likely yield around 6% on cost in 7 years. The main difference would be capital gains – Procter & Gamble (PG) would likely still yield 3%, while Con Edison (ED) would likely yield 6%. Thus the investor in Procter & Gamble would have most likely doubled their money in less than a decade, while also enjoying a rising stream of dividend income.
Full Disclosure: Long all stocks mentioned in the article except HTS and AGNC
This article was included in the Carnival of Personal Finance #252: Famous People With Tax Troubles Edition
- 2010’s Top Dividend Plays
- Six Dividend Stocks for current income
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- Capital gains for dividend investors
- Dividend Growth beats Dividend Yield in the long run
Monday, March 15, 2010
Other than that few notable dividend increases occurred last week. The companies raising distributions were:
Lennox International Inc. (LII), through its subsidiaries, engages in the design, manufacture, and marketing of a range of products for heating, ventilation, air conditioning, and refrigeration markets in the United States, Canada, and internationally. The company raised quarterly distributions by 7% to 15 cents/share. This is the first dividend increase for the company since 2007. The stock yields only 1.30%.
Warwick Valley Telephone Company (WWVY) provides communication services to the residential and business customers in the United States. The company’s board of directors raised quarterly dividend by 9.10% to 24 cents/share. This is the second annual dividend increase for this company since 2009. The stock yields 7.30%.
Birner Dental Management Services, Inc. (BDMS), together with its subsidiaries, provides business services to dental group practices in Colorado, New Mexico, and Arizona. The company’s board of directors raised quarterly dividend by 17% to 20 cents/share. This is the first dividend increase for the company since 2008. The stock yields 5.10%.
Cohen & Steers, Inc. (CNS) manages income-oriented equity portfolios in the United States. The company’s board of directors doubled the quarterly dividend to 10 cents/share. Before you get too excited, investors should note that the new distribution is less than half of the highest quarterly distribution of 22 cents/share paid in 2008. The stock yields 1.70%.
Applied Materials, Inc. (AMAT) provides nanomanufacturing technology solutions for the semiconductor, flat panel display, solar, and related industries worldwide. The company’s board of directors boosted the quarterly dividend by 17% to 7 cents/share. This is the first dividend increase since 2007. The stock currently yields 2.30%.
Medicis Pharmaceutical Corporation (MRX), a specialty pharmaceutical company, engages in the development and marketing of products for the treatment of dermatological and aesthetic conditions in the United States, Canada, and Europe. The company raised its quarterly dividend by 50% to 6 cents/share. This was the first dividend increase since 2008. The stock currently yields only 1%.
Staples, Inc. (SPLS), together with its subsidiaries, operates as an office products company. The company sells various office supplies and services, business machines and related products, computers and related products, and office furniture. The company raised its quarterly dividend by 9% to 9 cents/share. This was the first increase in distributions since 2008. The stock yields only 1.50%.
I typically look for businesses with strong competitive advantages, which generate enough cash flows to not only grow the business, but also to pay increasing distributions. None of the companies mentioned above fit this criterion, as well as my ten year dividend growth requirement.
Full Disclosure: None
- Which Bank will be next? Follow the dividend cuts
- US Bancorp (USB) cuts its dividend by 88%
- Yet Another Financial Company Cutting Dividends
- Dividend Cuts - the worst nightmare for dividend investors
- The ten year dividend growth requirement
Wednesday, September 2, 2009
In order for investors to become better at allocating capital, it is important to learn from ones mistakes. I have identified several mistakes, which could have saved investors billions had they known about them in the first place:
1) Diversify your portfolio. We often hear that diversification is dead and the fact that in a crisis almost all assets go down in sync. While this is somewhat true, a simple diversification strategy where an investor held some allocation to government fixed income, would have resulted in smaller losses. There are several bond ETF’s which hold US Treasuries. Examples include iShares Barclays 20+ Year Treas Bond (TLT) and iShares Barclays 7-10 Year Treasury (IEF). It is also important to understand that simply adding different asset classes in a portfolio may not provide any diversification benefits. For example adding fixed income from High-Yield Bonds would not have provided any diversification benefits, as most junk bonds represent companies with low credit ratings, which have a higher chance of defaulting during a crisis. Several Junk Bond ETF’s such as iShares iBoxx $ High Yield Corporate Bd (HYG) were introduced right before the financial crisis.
In addition to that, investors who concentrated their portfolios in just a handful of companies (10 – 15) would have under performed their benchmarks even if they had just one AIG (AIG) or Bank of America (BAC) in it. Both companies were considered the best of the best, before the crisis affected them and they had to seek government funds, while reducing or eliminating distributions to shareholders.
2) Build positions over time. While dollar cost averaging provides inferior returns in strong markets relative to a lump sum investment, the chance of a black swan effect ala 2008 makes it preferable for investors to build their positions slowly. This would be another control that would prevent your portfolio from collapsing, in case your stock analysis didn’t work out as planned.
3) Don’t chase high yield stocks blindly. Back in 2008, many financial stocks had very attractive dividend yields in the low double digits. Some of those like Citigroup (C), Bank of America (BAC) and Fifth Third Bank (FITB) had long histories of consistent dividend increases each year. The problem was that these stocks could not sustain paying their distributions, since they were earning much less than what they were paying out. At the end of the day these companies had nowhere else to go but cut their distributions, which was a strong sell indicator for many dividend growth investors. Most of the dividend cuts in the financial sector were followed by massive implosions in shareholders value from companies such as Citigroup (C), Lehman Brothers, Fannie Mae (FNM) and Freddie Mac (FRE).
4) Don’t use excessive leverage. Using leverage means borrowing money to invest in something for the purpose of magnifying your profit potential. When you are right, leverage works in your favor. For example if you purchased a stock on margin, and it increased 10%, your leveraged return would be almost 20%. When you are wrong though, leverage could result in disastrous results and bankruptcy. Using the same example, a leveraged bet on the wrong side of the table where the underlying fell by 10% results in a 20% loss.
The whose housing mess was created by allowing people who cannot afford expensive houses speculating on housing prices enjoying double digit increases for eternity, while being heavily leveraged. Once housing prices started dropping like a rock, panicked sellers helped exacerbate the problem by adding more fuel to the already severe drop in values. This caused interest payments on mortgage backed securities to not be paid, which triggered collapses in financial companies such as Ambac (ABK) and Fannie Mae (FNM) which then sent shockwaves throughout the world.
5) Don’t overpay for stocks. Investors often overpay for stocks because of the recency phenomenon, where they discount double-digit growth indefinitely. This leads to purchasing stocks with unacceptably low dividend yields, high P/E ratios and rosy predictions for strong dividend growth for eternity. Such conditions are simply unsustainable. The so called “Tech Four Horsemen” that CNBC’s “Fast Money” touted in the last quarter of 2007, Apple (AAPL), Research in Motion (RIMM), Google (GOOG) and Garmin (GRMN) all spotted unusually high valuations until growth expectations declined substantially. Investors suffered huge losses in the process.
6) Understand what you are investing into. It is important to understand what one is getting into by reading a prospectus for example. Many mortgage-backed securities were marketed to individuals and institutions as no risk investments. Investors who took the trouble to check the 500-page prospectus of such investments would have avoided severe losses. It is important to keep simple and within your circle of competence. Another example includes some dividend ETFs which were supposed to offer stable income, but which ended up heavily concentrated in financials and REITs. Retirees who depended on those ETFs rather than individual stock selection for income, were caught by surprise. Even the S&P Dividend Aristocrats Index ETF (SDY) and Dow Jones Select Dividend Index (DVY) at some point in time included dividend stocks which shouldn’t have been there. Even now the Dividend Aristocrats Index includes stocks like General Electric (GE), Pfizer (PFE) and Gannett (GCI) which should be avoided by dividend investors.
While this list is not meant to be a comprehensive all-inclusive one, it is a great starting point for both novice and experienced investors. I believe that investing has never been a perfect science, but one could achieve perfection by learning from their mistakes and not repeating them over and over.
Full Disclosure: None
This article was included in the Carnival of Personal Finance: Live From Monticello
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- Which Bank will be next? Follow the dividend cuts
- My Dividend Growth Plan - Stock Selection
- Why do I like Dividend Aristocrats?
- Best Dividends Stocks for the Long Run
Wednesday, August 19, 2009
Due to the horrifying statistics of the overall bleak dividend picture, some reporters are claiming that dividend investing is dead. Just because you read it in the paper however, doesn’t mean it is true for everybody. While the overall statistics have been rather scary, the negative dividend news has been concentrated in the financial sector. Thus a well-diversified portfolio of income stocks should have performed well even during crisis.
Broad statistics on dividends could be misleading however as they focus on all companies, not just on the ones which have a proven track record of raising dividends. Even if the sky truly is falling down, there still are companies, which are generating enough cash flows and are confident enough in their business to increase distributions. In fact the dividend aristocrats index with its 52 components has seen 8 dividend cuts, one buyout and 32 dividend increases so far in 2009.
In addition to that, most dividend growth strategies tend to evaluate sustainability of dividends on a per issue basis, thus weeding out companies whose dividends are in peril. It really is a no brainer that a company, which generates enough earnings to cover dividend payments by a factor of 2 or 3, is much less likely to cut or eliminate distributions compared to a company, which pays out almost all of its cash flows out as dividends. This simple formula does exclude certain vehicles such as REITs for example, which are required to distribute almost all of their earnings as distributions to shareholders in order to maintain their tax status. Thus, these vehicles (such as REITs) should be evaluated using other criteria, which I would describe in a future post.
I have selected several prominent dividend growth stocks, whose earnings and cash flows provide adequate coverage for their dividends:
Investors should be cautioned that entry price does matter. Thus this list should only be considered as a starting point in the process of analyzing potential dividend stock candidates. Chances are that a dividend growth stock that manages to grow earnings is a likely candidate to continue growing distributions, which will increase yield on cost over time.
Full Disclosure: Long ABT, ADM, ADP, AFL, APD, CLX, EMR, FDO, GW, JNJ, MCD, MHP, MMM, NUE, PG, SHW, WMT
This post was featured on 10 Best Roundup for the Week of August 24, 2009 by blogger JLP from AllFinancialMatters.
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- Why should companies pay out dividends?
Wednesday, June 10, 2009
I do agree that in the globalized society of the 21st century it is important do be able to diversify your stock investments away from the US. By purchasing international stocks one essentially receives income in a different currency, which is a decent hedge against a possible devaluation of the US dollar. Another benefit of shopping for quality dividend stocks abroad is the huge potential for economic growth and development that both established and emerging economies posses.
There are some differences between US and international based dividend stocks. The first is that the dividend payments of foreign dividend stocks closely follow the earnings trend for the corporation. This is a problem for international dividend growth investors as it does not lead to a consistently increasing dividend income stream, which they are used to by investing in US companies. In the US companies are reluctant to cut dividends if the company had a bad year, while in Europe the dividends are more likely to be cut in response to short term fluctuations in earnings.
Another difference with global dividend stocks is that most pay dividends on an annual or semi-annual basis, which decreases the compounding effect of your payments. In addition to that, a certain percentage of your foreign dividends could be withheld directly from your payment, which decreases your income and makes individual dividend investing in a tax-deferred account inefficient. For example dividends paid from Canadian Companies to US investors are subject to a 15% withholding tax. The IRS however does give a tax credit for the current 15% Canadian withholding tax for foreign investors.
Different countries might have different taxation treaties for taxing dividends, thus you might consider hiring a good tax advisor.
Speaking of accounting matters, most foreign companies do not report results using the US GAAP but using IFRS. This could create material differences when analyzing foreign stocks, as there could be distortions in the amounts of net income, balance sheet values and cash flows.
In addition to that, most US based corporations have operations on a global scale, which derive a large portion of their revenues from abroad. I found that the ten stocks with the highest weights in the S&P 500 index derive about 44% of their aggregate financial contributions from foreign operations then the overall contribution to financial performance would be similar for the index as a whole. Thus an investor, who is simply invested in an S&P 500 index fund, is also properly diversified internationally. Adding any further international stocks could increase my international exposure, without adding any further incremental benefits.
I focused my study only on international stocks trading on the US exchanges. This does provide some limitations to the pool of available investments, but the risks to opening a non-US brokerage account in a foreign currency, paying taxes to foreign governments and paying higher brokerage fees for trades are not worth the incremental rewards for individual investors.
The companies I selected were foreign-based corporations, which have increased their dividends for at least five consecutive years. I tried creating a diversified list of foreign stocks, in order to avoid putting all my eggs in one basket.
SJR Shaw Communications Inc. (Cl B)
TRI Thomson Reuters Corporation
BTI British American Tobacco PLC (ADS)
CBY Cadbury PLC ADR
DEO Diageo (analysis)
UN/UL Unilever PLC/Unilever N.V.
BP BP PLC (ADS) (analysis)
ENB Enbridge Inc.
TK Teekay Corp.
TNP Tsakos Energy Navigation Ltd.
TRP TransCanada Corp.
BMO Bank of Montreal
BNS Bank of Nova Scotia
CM Canadian Imperial Bank of Commerce
MFC Manulife Financial Corp.
PRE PartnerRe Ltd.
TD Toronto-Dominion Bank (analysis)
ACL Alcon Inc.
AZN AstraZeneca PLC (ADS)
FMS Fresenius Medical Care AG & Co. KGaA (ADS)
NVO Novo Nordisk A/S (ADS)
MITSY Mitsui & Co. Ltd. (ADS)
BHP BHP Billiton Ltd. (ADS)
SQM Sociedad Quimica y Minera de Chile S.A. (ADS)
NTT Nippon Telegraph & Telephone Corp. (ADS)
TEF Telefonica S.A. (ADS)
TU TELUS Corp.
VOD Vodafone Group PLC (ADS)
NGG National Grid PLC (ADS)
VE Veolia Environnement (ADS)
The portfolio is not a recommendation to buy or sell any stocks, as it reflects my specific financial risk tolerance. Always do your own research before initiating a position in any financial instrument.
Full Disclosure: Long BP, TD and looking to enter other stocks mentioned here on dips
This post was featured on 209th Carnival of Personal Finance
- Best Dividends Stocks for the Long Run
- International Over Diversification
- International Dividend Achievers for diversification
- My Dividend Growth Plan - Diversification
Wednesday, May 27, 2009
An investor who diversified their holdings across several sectors, shouldn’t have gotten as many dividend cuts in 2008 and 2009, in comparison to an investor whose portfolio was concentrated in certain high-yielding sectors such as financials, Canadian income trusts or business development corporations. In that case diversification mattered.
One troubling fact however is that most of the successful dividend growth stocks that I tend to focus on such as Coca Cola (KO), Johnson & Johnson (JNJ) and Abbott Labs (ABT) are large cap stocks. This could be both good and bad for my portfolio. Most dividend growth stocks have solid competitive advantages as well as large economies of scale, against which few competitors could compete. In addition to that the entry in those markets might be too costly for a smaller producer to challenge the “big guys”. However if I added small or mid cap stocks to my portfolio, my dividend income could be diversified even further.
According to Investopedia, Large Cap stocks are those whose market capitalization is above $10 billions dollars; Mid Cap stocks are those whose market capitalization is between $2 billion and $10 billion dollars while companies whose market capitalization is between $200 million and $2 billion typically represent Small Cap Stocks.
Most large cap companies are the ones, which are mature and stable cash flow generators, which throw off enough cash to expand, reward shareholders and maintain liquidity. It would be difficult for a company with $100 billion in sales to expand at the rate that a company with $1 billion in sales could. Because of this fact stable dividend growth stocks tend to enjoy a lower price earnings multiple. In comparison, most small and mid cap stocks could spend most of their earnings to reinvest back into the business, thus paying little or no dividends to shareholders in the process.
A potential negative for holding the large cap market leader in any industry however is that if the activity in the whole sector declines significantly, chances are that the leader would feel the pinch as well. Despite the fact that the market leader could likely gain market share if competitors go bankrupt or by acquiring weaker rivals, a broad slowdown could hurt it badly.
At the same time a smaller competitor could be flexible enough to gain market share by utilizing some sort of a competitive advantage and actually achieve superior earnings growth and reward dividend investors with higher distributions as its sales skyrocket. Smaller dividend growth companies could have a higher price earnings multiple as the market prices in solid future growth. On the other hand, if earnings growth slows down, the price earnings multiple could shrink, leaving investors with large unrealized losses.
Even if you pick a promising small or mid cap dividend growth stock, chances are it could get acquired by one of the leaders in the industry. Thus, investors won’t be able to fully realize the full growth potential of the small dividend stock. Although shareholders could generate a large capital gain in the process, they would have to find a new promising candidate for their money instead of patiently reinvesting their dividends.
According to Mergent’s, 80% of the constituents of the Broad US Dividend Achievers index are large cap companies, while 14.10% and 5.90% are mid cap and small cap stocks respectively. The Dividend Achievers are corporations, which have increased annual dividends for at least the past 10 consecutive years.
The Dividend Aristocrats, which are S&P 500 constituent stocks with history of increased dividends of more than 25 consecutive years, must have a minimum capitalization of $3 billion dollars before they are eligible to join the elite dividend index. Of the 43 companies presently in the index (after omitting the dividend cutters year-to-date and Rohm & Haas, acquired by Dow Chemical), 21 or almost half have market capitalizations of less than $10 billion dollars.
You could find a list of mid cap Dividend Aristocrats below:
Link to the table
Just remember that not all of the stocks presented below are investment recommendations. At this moment only Stanley works (SWK),Cincinnati Financial (CINF), Dover (DOV), VF Corp(VFC), Sherwin Williams (SHW), Clorox (CLX), Consolidated Edison (ED) and McGraw Hill (MHP) fit my entry criteria to initiate positions or re-invest dividends.
For a full list of the current dividend aristocrats ranked by market capitalization (minus any acquired companies and minus any dividend cutters in 2009), check the chart below:
Link to the table
Full Disclosure: Long CINF, FDO, MTB, GWW, SHW, CLX, ED, MHP, APD, AFL, ADM, ADP, KMB, EMR, MMM, MCD, PEP, KO, JNJ, PG, WMT
Get an updated Trend analysis for your stocks.
This post was featured on The 208th Carnival of Personal Finance: Lobster Roll Edition
- My Dividend Growth Plan - Diversification
- Why do I like Dividend Achievers
- Why do I like Dividend Aristocrats?
- My Dividend Growth Plan - Stock Selection
Wednesday, March 4, 2009
So how can an investor protect his principle while at the same time also participate in any potential stock market upside?
One answer is purchasing shares in the best dividend stocks for the long run, which I featured in December 2008. By snapping up shares in some of the friendliest corporations for shareholders at bargain prices and then reinvesting the rising dividend income into more stock, investors are more likely than not to achieve superior long-term total returns.
Another answer for investors who do not want to lose ANY of their principle is investing a portion of their capital in long-term certificates of deposit. One of the best 10-year CD rates is currently a 4.00 APY, offered by Discover Bank. If you need $1000 in 10 years, you could simply put $680 in a 10 year CD yielding 4% today, assuming that the money is reinvested.
If you have $1000 to invest today you could simply put 68% of it in CD’s and the rest in stocks. You could either invest in one of the dividend etf’s out there such as SDY, VIG, PFM, PID or simply in one of the ETF’s covering broad market indexes such as S&P 500 (SPY). You won’t lose any of your principal and you would most certainly have much more than $1000 at the end of the decade, if you also diligently reinvest your dividends.
The risks to this strategy could be that 10 years down the road inflation could have eroded a large portion of the purchasing power of your principal. Furthermore, if the stock market has an excellent performance 10 years from now, you’d be kicking yourself for not investing more in it.
If you want to guarantee a 100% return of your principle for period far longer than what FDIC insured Certificates of Deposit offer, you could turn to US treasury zero-coupon bonds with varying maturities up to 30 years.
The zero coupon Treasury bond, maturing on Feb 15, 2029 currently trades at 45.33% of its face value according to Yahoo finance. On the other hand a zero coupon Treasury Bond that matures May 15, 2038 trades at 37.85% of par. Investors who want a full protection of their principal in 20 or 30 years, should invest up to 55% and 62% respectively of their portfolios in stocks.
Full Disclosure: Long S&P 500 Mutual Fund
- Best Dividends Stocks for the Long Run
- The case for dividend investing in retirement
- Is $1,000,000 enough to retire on?
- Dow 370,000
- Dividend ETF’s for busy investors
- Best CD Rates
Friday, December 12, 2008
Most investors are told that they should hold a diversified portfolio of stocks, bonds and real estate, each of which would have several subcategories for further diversification. Stock investors are typically encouraged to hold at least a certain portion of their share holdings in international shares, rather than stick with domestic only stocks. The rationale behind this idea is that not all economies follow the US economic cycle, which could possibly prevent investors from losing money if the US stock market crashes while international markets decline less or even increase. In fact, investors who had an allocation of foreign stocks over the past decade did outperform the US benchmarks, as international stocks rose more than their US peers.
This year however most global funds are down much more than the major US benchmarks. The reasons for this underperformance include the strong dollar in 2008 as well as falling prices worldwide after a five year bull market. It does feel as if an international exposure could be beneficial in the long run, its positive effects haven’t been felt so far in the credit crisis of 2008. Furthermore, most US investors who are purchasing domestic stocks, are most likely to own several large multinational behemoths which derive a large portion of their revenues from abroad.
In order to conduct my experiment, I selected the ten largest companies by market capitalization from the S&P 500 index. The ten largest S&P 500 stocks account for over 22% of the daily fluctuations in the index. So what is the portion of financial results that these large cap companies derive from abroad?
It is interesting to note that few of the companies listed above broke down the contributions of their global operations in different formats. Some of these breakdowns focused on revenues, while others focused on net income or income from continuing operations. Adding to this is the fact that most of the companies close their books annually on different dates.
Despite the limitations of the data available for public use in relation to actual international operations in some cases, I think that on average the findings present an interesting way of looking into the issue of international over diversification. It seems to me that if the ten stocks with the highest weights in the S&P 500 index derive about 44% of their aggregate financial contributions from foreign operations then the overall contribution to financial performance would be similar for the index as a whole. Thus an investor, who is simply invested in an S&P 500 index fund, is also properly diversified internationally.
As a dividend investor, I have occasionally expressed concerns that I can’t find enough international dividend growers with a history of growing their dividend payments for over one decade. After conducting this experiment, I can see that most of the large cap multinational dividend stocks that I cover in this blog are good proxies for global market performance. Adding any further international stocks could increase my international exposure, without adding any further incremental benefits.
Full Disclosure: I own shares of GE, PG, JNJ and WMT
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