Showing posts with label diversification. Show all posts
Showing posts with label diversification. Show all posts

Monday, April 4, 2016

How many individual stocks do I need to consider myself diversified?

As an investor, I have always believed in diversification. I would rather err on the side of caution, rather than swing for the fences. It makes no sense to take excessive risks on a concentrated portfolio of stocks, particularly once you are financially independent or very close to it. In my case, diversification means not only owning a lot of individual dividend paying stocks, but also holding some fixed income such as government bonds and certificates of deposit that are insured.

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

Dividend Growth Stocks by Sector - Retail

Dividend growth investing is a strategy where investors purchase stock in quality companies, which have committed themselves to raising dividends for long periods of time. Dividend growers and initiators have been found to outperform the market over the past 40 years according to Ned Davis Research studies. I have previously discussed these studies in this article.

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)

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 champion has raised distributions for 34 years in a row. The ten year annual dividend growth rate is 10.10%. Yield: 1.40% (analsyis)

Technically however, using Standard & Poor's classifications, Wal-Mart, Walgreen's are Consumer Staples, while Lowe's, Family Dollar and Target are examples of Consumer Discretionary stocks. The companies that are attractively priced today include Lowe's (LOW), Walgreen (WAG) and Wal-Mart Stores (WMT). Target (TGT) and Family Dollar (FDO) could be decent additions on dips below $48 and $36 respectively.

Full Disclosure: Long WMT, LOW, WAG, FDO

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Wednesday, July 13, 2011

Best Canadian Dividend Stocks

As a dividend growth investor, I typically hold mostly US based dividend stocks. There are several reasons behind that, which I outlined in this article on the best international dividend stocks. Another reason why I hold US based multinationals has been outlined in this article.
Canadian dividend stocks seems to be having characteristics that make them similar to their US counterparts. First, most Canadian stocks pay a regular distribution every quarter. Second, most Canadian blue chips pay a stable or rising dividend. This is unlike most European companies for example, which typically target a payout ratio based off earnings. Last, US investors get 15% of their Canadian dividend income withheld at the source. At tax time however, US investors get an offsetting credit against this tax withholding in taxable accounts. So the net effect is zero for most high income investors.

In order to find the best Canadian dividend stocks, I obtained a list of Canadian Dividend Achievers. These are Canadian companies, which have increased dividends for the past five or more consecutive years.

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.

On a side note, I was surprised that none of the Canadian banks appeared on this screen. Despite the fact that the Canadian banks such as Bank of Montreal (BMO), Toronto-Dominion Bank (TD), Royal Bank of Canada (RY), Bank of Nova Scotia (BNS) and Canadian Imperial Bank of Commerce (CM) were not affected by the financial crisis of 2007 - 2009, they did freeze dividends for almost 2 years. Chances are however, that within a few short years, these companies would be able to build another streak of consecutive dividend increases.

Full disclosure: Long TD

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This article was included in the Carnival of Personal Finance #318: The Breaking Bad Edition

Wednesday, September 8, 2010

Four International Dividend Stocks to Consider

International diversification is often cited as a must have for US investors, especially during periods when the dollar index is weakening and the US economy is soft. The rationale behind this idea is that a recession in the US is less likely to lead to recession in all countries. With the increased globalization and ease of capital movements across borders however the benefits of diversification can be rather elusive. This being said however, there might still be an ounce of truth behind the idea of diversifying globally, which might be beneficial to dividend portfolios.

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.

Relevant Articles:

- Best International Dividend Stocks
- International Over Diversification
- International Dividend Achievers for diversification
- Buy and hold dividend investing is not dead

Wednesday, August 11, 2010

33 Dividend Champions to Consider

As a dividend growth investor, two of the best dividend lists for further research that I have focused on have been the S&P Dividend Aristocrats and the Dividend Achievers Indexes. The first list focuses on stocks which have increased dividends for 25 consecutive years in row, while the second list focuses on stocks which have consistently raised distributions for over one decade. The Dividend Aristocrats index has supposedly outperformed the stock market over the past five years. In my research I have uncovered many dividend stocks however which have raised dividends for more than 25 years in a row, yet they are not included in the Dividend Aristocrats Index. I discussed this in dividend conspiracies.

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)

Basic Materials

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)

Consumer Goods

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)

Industrial Goods

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.


This article was included in the Carnival of Personal Finance #271 – The Secret to Successful Budgeting eBook Edition

Relevant Articles:

- 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

Highest Yielding Dividend Stocks of S&P 500

Many novice investors get in the world of dividend investing because of the belief that it is possible to generate double digit current yields. They purchase these securities in pursuit of current income, only to see these distributions cut after a few months. The truth is that few companies can afford to pay high dividends, unless they are pass-through entities such as master limited partnerships or real estate investment trusts to name a few.
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.

Long gone are the days when telecom companies had a natural monopoly in the territories they served, which was why they were included in the list of stodgy utilities. Customers can nowadays switch carriers on a whim, once their contracts expire. Customer service is uniformly the same for the major carriers such as AT&T (T), Verizon (VZ), Sprint-Nextel (S) and T-Mobile, part of Deutsche Telecom (DT). Most customers are looking for the next “cool” phone, such as the iPhone, made by Apple (AAPL). The number of cell phone customers in the US has reached its saturation point, and most of the carriers are fighting hard for customers. Most of the additions for AT&T (T) and Verizon (VZ) seem to have been at the expense of losses at Sprint-Nextel (S). Once Sprint stops bleeding, it could potentially make it harder for competitors to take customers away.

I am generally a believer in utility stocks, since they have relatively safe cash flows and are natural monopolies in their designated areas. That being said, even when utilities cut dividends, they typically start raising them again after a few years. Utilities are subject to interest rate risk however, which would make cost of capital expensive for them at a time when investors will demand a higher yield on new stock or bond issuances.

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.

In general investors should not have an excessive allocation to a particular sector of the market, regardless of the high current yields. An above average allocation to high yielding sectors could lead to steep losses in current income when distributions are cut. If you purchase a $100 worth of stock yielding 8%, your expectations are for an annual dividend income of $8. If the company cuts distributions by 50% however, your dividend income would fall to $4. Many investors in financial shares suffered steep losses in income and capital after buying shares of Bank of America (BAC) or Citigroup (C ) when they had high yields.

While holding a high yielder could boost your overall portfolio yield, it is essential to create a diversified dividend portfolio representative of most sectors in the economy. This would reduce risk to the dividend income stream, and to the capital base. For ideas on companies with sustainable dividends with long histories of dividend growth check the dividend aristocrats and the dividend achievers lists.

Full Disclosure: Long MO and T
This article was included in the Carnival of Personal Finance 264th Edition

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Wednesday, April 7, 2010

Three Dividend Strategies to pick from

Most new investors typically tend to focus on the companies with the highest dividend yields. I am often being asked why I never write about companies such as Hatteras Financial (HTS) or American Agency (AGNC), each of which yields 16% and 19% respectively. While some of my holdings are higher yielding companies, I typically tend to invest in stocks with strong competitive advantages, which have achieved a balance between the need to finance their growth and the need to pay their shareholders.
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

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- 2010’s Top Dividend Plays
- Six Dividend Stocks for current income
- Best Dividends Stocks for the Long Run
- Capital gains for dividend investors
- Dividend Growth beats Dividend Yield in the long run

Monday, March 15, 2010

Bank Shareholders: Forget About Dividend Increases

The most important dividend events of the past week included news that have regulators warned financial companies to restrict dividend increases and stock buybacks for the near future. According to Reuters, executives from Goldman Sachs (GS) and JP Morgan Chase (JPM) have had talks with regulators about returning more cash to shareholders. US Bancorp (USB) CEO was quoted saying that his bank has the ability to pay a higher dividend, although it is waiting for the green light by regulators. The issue is that once solid financial institutions such as US Bancorp (USB), Goldman Sachs (GS) and JP Morgan Chase (JPM) begin returning cash to shareholders, weaker companies might be forced to return cash to shareholders as well. Otherwise such companies might be at a disadvantage. Before the financial crisis hit Wall Street, banks and other financial institutions were favored amongst dividend investors for their dividend growth and solid dividend yields, fueled by their believed to be solid business models. The major financial institutions which were forced out of the Dividend Aristocrats list, after cutting dividends in response to TARP included Bank of America (BAC), State Street (STT) and US Bancorp (USB). The lesson that investors should have learned is to never fall in love with a certain sector so much that it represents a substantial chunk of your portfolio – always diversify risk across sectors.

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

Relevant Articles:

- 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

Six things I learned from the financial crisis

I started blogging about dividend growth stocks in January 2008; right around the time the market started its slide. Fast forward 18 months and we have seen it all: from companies which were once deemed too big to fail and which were later acquired for pennies on the dollar to the blowups of several prominent pyramid schemes and hedge funds. Back in early 2008 most investors were not fully aware of the dangers that the real estate implosion would have on the overall economy. Some aggressive investors lost much more than S&P 500 in 2008 due to their heavy concentration in certain sectors built at the highs of the market, use of excessive leverage and chasing “broken companies” which offered suspiciously high yields, which proved unsustainable.
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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- Dividend Portfolios – concentrate or diversify?
- Which Bank will be next? Follow the dividend cuts
- My Dividend Growth Plan - Stock Selection
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Wednesday, August 19, 2009

29 stocks with sustainable dividends

The financial crisis has been tough not only for stock prices but also for dividends as well. Some former dividend darlings in the financial sector have seen their dividends being cut or eliminated after taking in billions in TARP aid due to severe losses from complex financial instruments. As a result the ratio of dividend increases to dividend cutters has been hovering at almost even for both. This means that so far in 2009, there is roughly one dividend cutter for every dividend raiser. Over the past 5 years this ratio has been more like 6 to 1 in favor of the dividend growers.

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.


This post was featured on 10 Best Roundup for the Week of August 24, 2009 by blogger JLP from AllFinancialMatters.

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- Dividend Aristocrats - YTD dividend raisers versus cutters
- Yield on Cost Matters
- TARP is bad for dividend investors
- Why should companies pay out dividends?

Wednesday, June 10, 2009

Best International Dividend Stocks

In a previous article I provided a list with the best dividend stocks for the long run. Since the list included only US stocks several readers asked for a similar list with international dividend growth stocks instead. Furthermore, I am also looking to expand my portfolio to include at least some allocation to global dividend companies.

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.

Consumer Discretionary

SJR Shaw Communications Inc. (Cl B)
TRI Thomson Reuters Corporation

Consumer Staples

BTI British American Tobacco PLC (ADS)
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)

Health Care

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)

Telecommunication Services

NTT Nippon Telegraph & Telephone Corp. (ADS)
TEF Telefonica S.A. (ADS)
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

Relevant Articles:

- Best Dividends Stocks for the Long Run
- International Over Diversification
- International Dividend Achievers for diversification
- My Dividend Growth Plan - Diversification

Wednesday, May 27, 2009

Diversifying into small and mid cap dividend stocks

As a dividend growth investor, my goal is to generate a rising stream of dividend income. Thus I would have to be selective not only about picking individual stocks, but also about selecting companies from a variety of industries, countries and size, in order to avoid a widespread implosion in overall dividend income.

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


Get an updated Trend analysis for your stocks.

This post was featured on The 208th Carnival of Personal Finance: Lobster Roll Edition

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Wednesday, March 4, 2009

No Risk Stock Market Investing

During the recent market volatility many investors have seen their retirement savings vanish into thin air. With stock markets trading at levels not seen in many years, lots of future would-be retirees are wondering if they could ever stop working. As a result many mutual fund holders are converting the stock portion of their portfolios into fixed income. The selling has left few believers in the stock market’s potential for wealth accumulation. Investors are always reminded that missing the best 10 days of the year in terms of stock market returns will lead to significant underperformance over the long haul, as market timers often fail to predict shifts in market performance.

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

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Friday, December 12, 2008

International Over Diversification

This post originally appeared on TheDiv-Net one week ago

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

Relevant Links:

- International Dividend Achievers for diversification

- Attractively Valued International dividend stocks

- My Dividend Growth Plan - Diversification

- Why should companies pay out dividends?

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