Showing posts with label dividend growth. Show all posts
Showing posts with label dividend growth. Show all posts

Monday, October 10, 2011

Ten Top High Dividend Growth Stocks for Long Term Returns

Dividend Growth Stocks are one of the best kept secret in the investing world. After all, these are high quality companies which have strong competitive advantages that allow them to generate rising earnings over time. As a result, most of these companies generate so much in excess cash flow, that they are able to pay a higher dividend over time without sacrificing long term growth.


Companies which raise dividends at a high rate could easily generate double-digit yields on cost for investors who bought early and at the right time.

I have highlighted the following dividend champions with the highest consistent dividend growth rates:

Lowe's Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer in the United States and Canada. The company has boosted distributions for 49 years in a row. Ten year Annual Dividend Growth Rate: 27.60%. Yield: 2.80% (analysis)

McDonalds’ Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company has increased distributions for 35 consecutive years. Ten year Annual Dividend Growth Rate: 26.50% Yield: 2.80% (analysis)

Raven Industries, Inc.(RAVN), manufactures various products for industrial, agricultural, construction, and military/aerospace markets in the United States and internationally. The company has boosted distributions for 25 years in a row. Ten year Annual Dividend Growth Rate: 18.20%. Yield: 1.50%

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has increased distributions for 37 consecutive years. Ten year Annual Dividend Growth Rate: 17.80% Yield: 2.80% (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company has boosted distributions for 49 years in a row. The company has increased distributions for 34 consecutive years. Ten year Annual Dividend Growth Rate: 16.90%. Yield: 3% (analysis)

Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. The company has increased distributions for 36 consecutive years. Ten year Annual Dividend Growth Rate: 16.50%. Yield: 2.50% (analysis)

Sigma-Aldrich Corporation (SIAL), together with its subsidiaries, develops, manufactures, purchases, and distributes a range of chemicals, biochemicals, and equipment worldwide. The company has boosted distributions for 35 years in a row. Ten year Annual Dividend Growth Rate: 15.20%. Yield: 1.10%

Becton, Dickinson and Company (BDX) is a medical technology company which develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company has increased distributions for 38 consecutive years. Ten year Annual Dividend Growth Rate: 14.90%. Yield: 2.10% (analysis)

Target Corporation (TGT) operates general merchandise and food discount stores in the United States. The company has boosted distributions for 44 years in a row. Ten year Annual Dividend Growth Rate: 14.90%. Yield: 2.40% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has increased distributions for 48 consecutive years. Ten year Annual Dividend Growth Rate: 12.40%. Yield: 2.70% (analysis)

Dividend investing is not an automatic process. Investors should analyze the stocks in detail in order to decide whether they stand a chance of increasing distributions in the double digits over the next decade. Investors should analyze not only quantitative factors such as earnings, dividend sustainability and ROE but also qualitative factors such as business model, competitive advantages, etc.

Full Disclosure: Long MCD, WMT, MDT, WAG, CL, LOW

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Wednesday, October 13, 2010

Why dividend investing beats US Treasuries today?

With yields on 10 year and 30 year US Treasuries reaching their lowest levels since 2008, investors are left with one less potential source of income in retirement. Currently, investors who purchase a $1000 bond that matures in 30 years are expected to receive an annual yield of $38. Investors who lock their money in a 10 year Treasury bond will receive $24. The reason for the low yields is low expected inflation for the near future, and the fear of a double dip recession which could even lead to deflation. The risk behind investing in treasuries today is that the low yields would not compensate investors even for a small inflation of 3% per year until maturity. In other words, the purchasing power of the interest income from an investment in fixed income will be much lower five, ten or thirty years from now. So how can investors manage to generate income from their nest eggs, which they have worked so hard and for so long to accumulate?

What investors need, is an instrument, or an asset class, that not only provides decent current yields, but also generates an income stream that meets or exceeds inflation over time. One such class is dividend paying stocks. Stocks in general have been mostly flat over the past decade, with the majority of returns coming from dividends. One of the reasons why stocks didn’t perform so well over the past decade is because they were grossly overvalued in 2000. Investors who want to generate income in retirement however should focus only on a select number of companies which have the following characteristics:

1) A history of consistent dividend increases. I prefer companies which have raised dividends for at least ten consecutive years.

2) An adequately covered dividend from earnings. I search for companies where annual earnings per share are at least twice the amount of annual dividends

3) A low price earnings ratio and at least some earnings growth. Overpaying for stocks could turn costly, and lead to low returns over time. I prefer stocks which have a P/E of less than 20.

4) A current yield of at least 2.50%. While some investors see this yield as “low”, they tend to forget that with regular dividend increases, the yield on cost would increase over time. By stacking companies with varying yield and dividend growth characteristics it is possible to create a portfolio yielding 4% where dividend increases match or exceed the rate of inflation.

There are only 300 or so stocks trading on US exchanges that have a history of growing their distributions for at least ten years. By applying a simple screen where P/E ratio is less than 20, the current yield is 2.50% or more and where the dividend is sustainable, investors could end up with a manageable list of stocks for further research.

A sample of seven dividend growth stocks which met these criteria include:

Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company is a dividend achiever, and has consistently raised its dividends for 23 years in a row. Annual dividend payments have increased by an average of 8.30% annually since 2000. Yield: 3.40% (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. Clorox has paid uninterrupted dividends on its common stock since it was spun out of Procter and Gamble (PG) in 1968 and increased payments to common shareholders every year for 32 years. The company is a member of the elite S&P Dividend Aristocrats Index.Annual dividends have increased by an average of 13% annually since 1999. Yield: 3.20% (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. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. Annual dividend payments have increased by an average of 28.20% annually since 2000. Yield: 3.20% (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. This dividend champion has raised distributions for 33 years in a row. The annual dividend payment has increased by 17% per year since 2000. Yield: 2.70% (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. The company is a member of the S&P Dividend Aristocrat index, after raising distributions for 38 years in a row. Annual dividend payments have increased by 13.60% on average since 2000. Yield: 2.90% (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. SYSCO Corporation is a dividend champion as well as a component of the S&P 500 index. It has been increasing its dividends for the past 40 consecutive years. Annual dividend payments have increased by an average of 17% annually over the past 10 years. Yield: 3.50% (Analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company is a dividend achiever, and has been consistently increasing its dividends for 16 consecutive years. Annual dividends have increased by an average of 15.80% annually since 2000. Yield: 2.30% (analysis)

It is important to also hold a diversified portfolio of dividend stocks, in order to avoid concentration to particular segments, which could jeopardize dividend income in retirement. As a result holding at least 30 individual stocks representative of the ten industry groups of the S&P 500 makes sense.

Last but not least, while investing in dividend stocks would likely lead to a higher income stream in ten or thirty years, which would be much better than the fixed income from US Treasuries, dividend investing still has its risks. One of the biggest risks for dividend investors is that companies could cut or eliminate dividend payments. A diversified portfolio of stocks would soften the blow to total dividend income of course. However there have been times like during the Great Depression, when most companies cut dividends substantially. During those times investments in government bonds produced not only decent income, but also decent total returns as well. In addition to that, investors in Japan in the 1990’s were also faced with low yields on the long term government bonds. However this was a much wiser investment than buying Japanese stocks as represented by the Nikkei 225 index.

While dividend stocks would likely do much better than US Treasuries, investors should understand risks of dividend paying stocks before investing. This could provide them with the edge against investors who chase unsustainable yields and overpay for income streams.

Full Disclosure:

Relevant Articles:

- Living off dividends in retirement
- Four Percent Rule for Dividend Investing in Retirement
- Inflation Proof your income in retirement with Dividend Stocks
- The case for dividend investing in retirement

Wednesday, September 15, 2010

Six companies with 20% yields on cost

I often get asked by new readers about the reasoning behind my fascination with companies that have a long history of consistent dividend increases. Often readers would see how a company like Wal-Mart (WMT) has raised distributions for many years, and yet still yields 2.40%. The answer to their question is as simple as understanding yield on cost.

Before we begin with yield on cost, it is important to understand how current dividend yield is calculated. By dividing the annual dividend payment by the stock price, one gets the current dividend yield. For example Wal-Mart (WMT) trades at $49.43, and pays a dividend of $1.21/share. As a result the current dividend yield is 2.50%. Given the fact that the company has raised dividends for over 36 years however, to the novice investor this might not look like a big achievement. After all, it is easy to purchase a high yielding master limited partnership such as Kinder Morgan (KMP) and get a yield which is almost three times the amount of yield one could generate by purchasing Wal-Mart (WMT) stock.

The truth is that today’s investor will generate 2.50% dividend yield over the next year. In other words an investor who puts $100 in Wal-Mart (WMT) today will generate $2.50 in annual dividend income. As a result if the price of Wal-Mart (WMT) doubles from here, but the dividend payment remains unchanged, our investor will keep receiving $2.50 in annual dividend income, despite the fact that current yield would be 1.25%. What the current yield doesn’t tell is what the yield on cost over the next year or decade is going to be. If the price of Wal-Mart (WMT) stock doubles over the next decade, but the dividend payment doubles as well, the current yield would likely stay around 2.50% in ten years. The yield on cost of the original investor with the $100 investment would be a cool 5%. Most novice investors in ten years would likely still ignore Wal-Mart (WMT) because of its supposedly low yield, while missing the important fact that rising dividends will lead to rising yield on cost over time.

The investor who purchases stocks with yield on cost in mind will be able to generate yields on cost on his original investment that will be much higher than the current yields on even high yielding stocks such as mortgage reits American Capital Agency (AGNC) or Hatteras Financial (HTS), with just a fraction of the risk. The key component is selecting stocks with strong competitive advantages, which grow earnings and could therefore grow distributions. Last but not least, investors should also allow some time in order to generate high yields on cost. Some dividend investors prefer waiting for a decade before attaining an yield on cost of 10%. Others, myself included, simply focus on finding strong companies with long histories of dividend growth, and let yields on cost increase for the maximum periods of time possible, without setting any targets. Needless to say, purchasing high quality dividend stocks is more of an art than science. By focusing your attention on such lists as the dividend achievers or the dividend aristocrats however, dividend investors have a high chance of succeeding in their quest for growing income.

Most of the original dividend aristocrats were able to achieve substantial yields on cost for a period of 20 years. Even those that managed to freeze distributions were able to generate high yields on cost over time, in addition to generating capital gains as well.

Colgate Palmolive (CL) was deleted in the index in 1990 for no apparent reason. According to yahoo finance the company increased its distributions in 1989. In addition to that the company’s own web page claims that it has increased payments to common shareholders every year for 46 years. One dollar invested in CL in 1989 would have turned out to $16.94 with dividends reinvested. The yield on cost is 27.70%. (analysis)

Johnson & Johnson (JNJ), which recently announced its 47th consecutive annual dividend increase, is still part of the index. A dollar invested in JNJ in 1989 would have turned out to $10.84 with dividends reinvested. The yield on cost is 26.4%. (analysis)

Lowe’s Companies (LOW) is still a component of the index after 20 years. The company has increased its dividends for 47 consecutive years. A dollar invested in MAS in 1989 would have turned out to $25.40 with dividends reinvested. The yield on cost is 39%.

Procter & Gamble (PG) is one of the original 26 members still present in the index. The company has raised dividends for over 53 consecutive years. A dollar invested in PG in 1989 would have turned out to $9.05 with dividends reinvested. The yield on cost is 20%. (analysis)

Coca Cola (KO) is still a member of the dividend aristocrat’s index. The company has increased its dividends for 47 consecutive years. A dollar invested in KO in 1989 would have turned out to $7.15 with dividends reinvested. The yield on cost is 17%. (analysis)

As for Wal-Mart (WMT), investors who purchased shares 26 years ago when it became a dividend achiever received a paltry yield of 0.60% at the end of 1984. Split adjusted the shares ended $1.18 that year. The yield on cost on those investors would be over 100% today. For an investor who purchased the stock when it reached the status of a dividend champion in 1999 however, the yield was still paltry at 0.30%, but the price was steep at $69.12/share. Eleven years later their shares are yielding 1.80% on cost, while their shares are still underwater. So while a lot of money could be made with the dividend growth strategy, investors should not overpay for stocks today. (analysis)

This goes to show that a company could achieve high growth rates, while still being able to pay increasing dividends.

Full Disclosure: Long all stocks mentioned above

Relevant Articles:

- Yield on Cost Matters
- Dividend yield or dividend growth?
- Dividend Aristocrats List for 2010
- How to increase your dividend income with these four stocks
- Why do I like Dividend Aristocrats?

Monday, July 12, 2010

Will higher taxes bring dividend stocks down?

Back in 2003 the Bush administration cut the top rates on dividends and capital gains to 15%. After seven years the preferential treatment of investment income is set to expire. If congress doesn’t extend the tax cuts, the top rates on dividend income could increase to as much as 39%. This leaves many investors wondering whether dividend stocks will be negatively affected by the tax hike.

Since 2003 there has been great interest in dividend paying stocks. Many companies such as Yum Brands (YUM) initiated dividends for the first time ever, while companies like Microsoft (MSFT) paid onetime special dividend payments to shareholders. In addition to that several dividend focused exchange traded funds such as iShares Dow Jones Select Dividend index (DVY) and SPDR S&P Dividend (SDY) were formed, attracting millions in assets under management. In addition to that many long time dividend payers such as PepsiCo (PEP) started increasing distributions at a higher pace than before, which further benefited their shareholders.

As a result, some dividend investors are concerned that the increase of tax rates on dividends will negatively affect payouts, which would negatively affect dividend stock prices for the next few years. In general the future tax rates on investment income for 2011 and beyond are still not set in stone by Congress, which makes most assumptions on taxation of dividends or capital gains pure speculation. It is possible that the top rate on dividend income could only increase to 23.60%, as 20% was the highest tax on dividend income for which Obama campaigned in 2008, while the 3.60% comes as the extra tax for high income earners which generate investment income.

So should dividend investors worry about the potential increase in taxes on dividend income? The answer is that it depends. While some companies might cut dividends as a result of the tax hike, many dividend payers would keep following a strategy of regularly raising distributions, provided that these companies can generate enough in free cash flow. Most dividend growth investors would not be affected by much, particularly since most dividend achievers and dividend aristocrats have increased distributions for over 10 and 25 years, which was before the Bush tax cuts were initiated. The companies that are less likely to cut distributions than grow them include:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide.Johnson & Johnson is a major component of the S&P 500, Dow Industrials and the Dividend Aristocrats Indexes. One of the company’s largest shareholders includes Warren Buffett. JNJ has been consistently increasing its dividends for 48 consecutive years.(analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. (analysis)

The Procter & Gamble Company (P&G), together with its subsidiaries, provides branded consumer goods products worldwide. The company operates in three global business units (GBU): Beauty, Health and Well-Being, and Household Care. Procter & Gamble is a dividend aristocrat as well as a component of the S&P 500 index. One of its most prominent investors includes the legendary Warren Buffett. Procter & Gamble has been increasing its dividends for the past 54 consecutive years. (analysis)

Wal-Mart Stores, Inc. (WMT)operates retail stores in various formats worldwide. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. Wal-Mart Stores has consistently increased dividends every year for 36 years. (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company is member of the S&P 500, Dow Jones Industrials and the S&P Dividend Aristocrats indexes. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for 48 years. (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company is a component of the S&P 500, Dow Jones Industrials and the Dividend Aristocrats indexes. Exxon Mobil has been consistently increasing its dividends for 28 years in a row, and has paid dividends for over one hundred years. (analysis)

In addition to that, investors could avoid paying taxes on dividend income by investing through tax-deferred accounts such as the ROTH IRA. There is a contribution limit of $5000 for taxpayers, and there is also an additional catch up contribution for taxpayers over the age of 50. Those contributions should come from earned income (such as employee income) and are phased out for high income individuals. While a ROTH IRA would not generate any tax savings today, any money put in it compound tax free forever, there are no required minimum distributions and any distributions from it are tax free.

Furthermore I doubt that quality dividend stocks such as the dividend achievers or dividend aristocrats would be affected much even if tax rates increase, because not every individual would pay top rates on dividend income. In addition to that dividend returns are much less volatile than stock price returns, which is the reason why retirees prefer dividend stocks in retirement. Focusing too much on just one aspect of the investment process could lead to subpar returns over time. Many investors who wait for a few months longer before they sold their stock in order to qualify for long-term capital gains treatment could see their paper gains evaporate and turn into massive losses. This is just one reason why focusing just on tax rates while ignoring business or market fundamentals of the companies one is invested in is a dangerous exercise.

Full Disclosure: Long all stocks mentioned except MSFT

This article was featured on the Carnival of Money Stories – Starting A Sideline Edition

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Wednesday, May 19, 2010

Dividend Payback from six quality dividend stocks

When investors put their hard earned money to work, they are always hoping that they would receive a positive return on their investment. The profits could come either through capital gains, from dividends or from a combination of both. Dividends have traditionally been more stable than capital gain returns. Stock prices are volatile, and it would not be unheard of experiencing 40% losses in one year, which is then followed by 30% gains in the following year. That’s why many retirees these days are building their retirement income strategies exclusively off of dividend stocks.

The payback that these investors are targeting is mostly from the dividend income stream in order to estimate how long it might take to get their money back. Dividend payback is just that – how long it would take for the dividends from a stock investment to exceed the investment itself. Savers have two options – either go for a higher yielding but slower growing company or go for a stock with a lower current yield but has a huge dividend growth potential.

I compared the two strategies using a few stocks in my portfolio to illustrate my examples. In the first example I used electric utility Con Edison (ED). Right now the company is yielding 5.40%, which means that an investment in the company today could pay off for itself in 19 years. This estimate assumes limited dividend growth for the next two decades. I calculated it by dividing 100 by the current yield in order to come up with the number of years that it would take for the dividend checks to pay me back for the stock.

Based on this exercise, one might believe that in order for dividend checks to pay for the stock in the shortest amount of time possible, one should go for the high dividend stocks of the day. However even a small growth of 1% in the dividend payment however could shorten the time for the dividend payback to seventeen and a half years. If you are able to reinvest your dividends in the company, the payback would probably be even quicker.

That’s why I checked other stocks like Johnson & Johnson (JNJ) in order to estimate whether a low yield of 3% coupled with a dividend growth of 10% annually makes a difference. It seems that for an investment like that it would take fifteen and a half years in order to achieve a dividend payback. In fact if you had purchased Johnson & Johnson in 1994, the dividend income stream would have paid for the stock by 2009, without even reinvesting the dividends. The cost on your investment would have been returned to you, yet you would still maintain ownership.

Being a balanced investor I have highlighted six stocks which I believe would achieve a dividend payback of fifteen years. Some of the stocks mentioned below are high dividend stocks, while others are dividend growth stocks with good potential.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates through three segments: Consumer, Pharmaceutical, Medical Devices and Diagnostics. Johnson & Johnson has consistently increased dividends for 46 years in a row. The stock yields 3.40%. The yield on cost on stock purchased at the end of 1989 is 29.10%. (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. The company has rewarded stockholders with dividend increases for 53 consecutive years. Check my analysis of the stock.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The world’s largest retailer has a 35 year record of annual dividend raises. I would be a buyer of WMT on dips. Check my analysis of the stock.

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company's share of the US fast food market is several times larger than its closest competitors, Burger King (BKC) and Wendy's (WEN). McDonald’s is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. (analysis)

Consolidated Edison (ED) provides electric, gas, and steam utility services in the United States. This dividend aristocrat has raised annual distributions for 36 years in a row. The stock spots a yield of 5.3%, which a good compensation if you seek current income for the next 5 - 10 years. Check my analysis of Consolidated Edison.

Kinder Morgan (KMP) owns and manages energy transportation and storage assets in North America. This dividend achiever has raised annual distributions for the past 14 years. The stock currently yields 6.50%. Check my analysis of Kinder Morgan.


Full Disclosure: Long ED, JNJ, KMP, MCD, PG, WMT

Relevant Articles:

- 2010’s Top Dividend Plays
- Six Dividend Stocks for current income
- Inflation Proof your income in retirement with Dividend Stocks
- Living off dividends in retirement

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

Wednesday, February 10, 2010

Dividend Growth beats Dividend Yield in the long run

As an individual investor and blogger I do what I preach. I have a dividend portfolio which consists of almost 40 individual issues, most of them dividend achievers or aristocrats. I often get criticized by readers for writing about stocks which many seem to have a low current yield, despite having a history of increasing in dividends. Those readers believe that finding a high yielding stock is the best income play for the long term. In other words stocks that pay over 8% but do not raise distributions are viewed favorably than stocks which currently yield 2%-3%, but grow their dividends consistently.

The reason why I consider dividend growth investing a superior investment strategy is because it focuses not only on delivering a rising stream of income but also on total returns. To the untrained eye it might appear that investing in Abbott Labs (ABT) or Johnson & Johnson (JNJ) is a poor choice, especially since these companies yield 3%. The main advantage of these companies of course is that they have always paid a low current dividend yield, but have grown their payment in the process. The stock price typically adjusts upward, which decreases the current yield to a normal range. Thus these dividend growth stocks deliver total returns which high yielders cannot match in the long run. In addition to that the rising dividend payment increases the yield on cost on the original investment.

Let’s illustrate this with an example. Abbott Labs (ABT) is a dividend aristocrat which has raised distributions for 37 years in a row. It yields 3% right now, but has a ten year dividend growth rate of 9%. At this rate the company would double its dividend every 8 years. The growth has slowed over the past decade however – since 1983 the dividend growth was almost 13.1% per annum. The stock yielded 2.2% in 1983, which was hardly under the radar of any yield chaser. In fact the current yield at year-end for Abbott fluctuated between a low of 1.20% in 1998 and a high of 2.89% in 2009. The visionary investor who purchased Abbott at the end of 1983 achieved a yield on cost of 10% in 1992 in addition to holding onto a five-bagger. Twenty six years later this investor would have achieved a yield on cost of 55%, which is something that even the highest yielding stock out there cannot match.


An investor in a high yielding stock in 1983 would have most likely kept on receiving a high current yield for a long period of time. The main issue with this scenario is that the purchasing power of the flat dividend payment would have been cut in half over the past quarter of a century. Similarly an investor in 30 year US Treasury Bonds would have kept receiving the same amount of income each year. Check my analysis of Abbott Labs.

Other companies which have a long history of raising dividends while also delivering a strong dividend growth, plus being attractively valued at the moment include Johnson & Johnson (JNJ) and Clorox (CLX).

Johnson & Johnson (JNJ) has raised distributions for 47 years in a row. The company has achieved a 10 year dividend growth rate of 13.30%. The latest dividend increase was 6.50% in 2009. The dividend payout ratio is at 43%, which makes it adequately covered. Check my analysis of the stock.

Clorox (CLX) has boosted dividends for 32 consecutive years. The company has achieved a ten year compound dividend growth rate of 9.60%. The company last raised its payout by 8.7% in 2009. Its dividend payout is at 50% right now, which means that the dividend is well-covered from earnings. Check my analysis of the stock.

Full Disclosure: Long ABT, CLX and JNJ

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Wednesday, November 18, 2009

What are your dividend investing goals?

Great investors have goals and strategies are only the tools that help them accomplish their targets. My goal is to generate a rising stream of dividend income, which would allow me to leave the rat race and spend my time doing worthwhile things like education and charity and self-development.
By focusing on dividend growth, I am trying to pick the stocks, which have solid competitive advantages, whose revenues are relatively recession proof but could still grow earnings by innovation, acquisitions, and buybacks. Historical inflation rates have been around 3% for the US over the past one century. Thus, by focusing on companies, which have a long history of dividend increases of over 3%, I would create an inflation proof source of income.
In addition to that, if my stock picks raise dividends faster than the rate of inflation, I would be able to achieve very good yields on cost in the process. A company, which yields only 3% or 4%, might be scoffed at by yield chasing gurus, who wouldn’t even consider a stock unless it yields 8% or 10%. Those yield chasers might get the 10% yield now, but the cost of dividend cuts or no dividend increases makes chasing high yielding stocks a dangerous exercise with negative effects on wealth building.

At the same time a company that yields only 3% or 4% now, but grows its dividend payments at 12% annually, could generate a yield on cost of 6% to 8% in 6 years and yields on cost of 12% to 16% in 12 years. These companies exist in the market. It only takes an attentive dividend investor to uncover them. Examples of such companies are

Johnson & Johnson (JNJ) has regularly hiked dividends for 47 years in a row. The ten-year average dividend growth for the producer of Neutrogena, Tylenol and Remicade is an impressive 13.30% annually. (analysis)

Procter & Gamble (PG) has rewarded shareholders with dividend raises for 53 consecutive years. This consumer good juggernaut has managed to increase distributions at a rate of 10.70% annually over the past decade. (analysis)

Pepsi Co (PEP) has increased its dividends for 37 consecutive years. The producer of Pepsi Cola, Mountain Dew, Lays and Doritos has delivered a 12.80% average dividend growth annually over the past decade. (analysis)

McDonald’ s (MCD) has increased its dividends for 32 consecutive years. The worlds largest fast food chain has boosted dividends by an average of 27.30%/year over the past decade. (analysis)

I believe that even in 20 years people would still have a need to eat, drink, shower, shave and take pills. I would bet that even in 20 years people would still shop at McDonald’s – if not for their burgers then for the salads or whatever food sells the best.

Over time a portfolio of carefully selected dividend growth stocks could not only deliver a consistently increasing stream of dividend income which increases faster than inflation, but could also deliver outstanding total returns. Over the past fifteen, ten, five, three or one years, the dividend achievers index has outperformed the S&P 500. (source Mergent's)

The dividend achievers index consists of US stocks traded on NYSE, NASDAQ or AMEX, which have increased annual regular dividends for at least the past ten consecutive years. This index is a great shopping list for novice dividend investors. Even Peter Lynch, the famous manager of the Fidelity Magellan Fund, which outperformed the S&P 500 by a significant margin in the 1980’s, said : "The Dividend Achievers Handbook is one of my favorite bedside thrillers. Here's a simple way to succeed in Wall Street: Buy the stocks on Mergent's list and stick with them as long as they stay on the list"

As a dividend growth investor my primary objective is growth in dividend income without losing too much of my capital in the process. Capital appreciation is second of importance. I believe that if my portfolio generates enough dividend income for me, I would not have to rely on selling 4% of my portfolio at depressed prices in order to live off my investments.

Full disclosure: Long MCD, JNJ, PG and PEP

This post was featured on the Carnival of Personal Finance #234 – Weirdest Toy Crazes Edition

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Wednesday, October 7, 2009

Emotionless Dividend Investing

Investors often fall in love with stocks, which are synonymous with innovation, growth and have delivered strong total returns up to a point. It is easy to fall in love with a stock, which everyone else is touting as the next great thing, whose products you use or is one which has made many investors rich.

The main problem with such attitude however is that it could cause investors to throw their carefully researched strategies out of the window and engage in careless speculating. This could cause severe losses of capital over time.
Investors have suffered two major blows over the past decade – the tech stock crash in 2000-2002 and the financial meltdown in 2007-2008. The first occasion was a complete euphoria for anything related to technology or dot coms. College dropouts were selling stock of their money losing eyeballs attracting online ventures in IPOs, which were valued at billions by Mr. Market. Needless to say the tech boom turned into a bust that left millions of investors suffering tremendous losses. Even investors in great companies such as Microsoft (MSFT) and Intel (INTC), which were enjoying double digit revenues and earnings growth even after the meltdown, suffered huge losses because they overpaid for future growth.

The financial meltdown was characterized by investors who were holding on to safe income investments such as Bank of America (BAC), Citigroup (C) and General Electric (GE), which had a long history of consecutive dividend increases. As these stocks began their slide, they cut their distributions and had to take billions in aid from the federal government. Investors who kept a cool head and didn’t chase high yielding stocks blindly, right before they cut their dividends would have saved a lot of precious capital to be used for later.

The point being taken is that entry price paid for stocks does matter. If you mindlessly reinvest dividends or dollar cost average your way into an index fund you would end up paying top dollar for the inflated future income stream from these investments. Thus, having strict entry criteria might prevent you from chasing hot stocks and losing a lot in the process. This entry criteria could also prevent you from investing in companies, simply because you like their brand or your hope that their business would turn up for the better. Even great brands such as Johnson & Johnson (JNJ) or Procter & Gamble (PG) were not good buys when they traded at more than 20 times earnings and yielded only 1% in the early 2000s. There were other companies, which yielded much more than that and traded at lower price to earnings multiples that should have been on investors’ radars. It is better to sit in cash than overpay for stocks and then have to wait for a decade before you start generating any meaningful return on your investments.

One also needs to have a sell policy, which lets you out of a losing position no matter what. When one buys a stock because it pays a stable dividend, it does not make sense for them to hold onto the stock if the company eliminates its streak of 30 consecutive distribution increases while citing the weak economy. When you take the loss, you would start thinking more clearly. If you hope that it would turn better, you would lose money in the process. When Citigroup (C) cut its dividends for the first time on January 15, 2008 the stock closed at $26.94. Investors who sold at the time would have saved themselves from huge losses in the process.

At the end of the day, only the disciplined dividend growth investor who is careful not to overpay for stocks, and has the discipline to sell when some of his criteria are no longer intact, would be able to generate a sufficient income stream for their future needs.

Full Disclosure: Long JNJ and PG

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Friday, October 2, 2009

The return of the financial dividends

The financial crisis lead to dividend cuts amongst several prominent dividend payers such as Bank of America (BAC), US Bancorp (USB) and BB&T Corp. (BBT). Over the past few weeks however, several financial companies announced that they might reconsider their current dividend policies and start raising distributions in the near future.

US Bancorp’s (USB) CEO is reviewing the company’s dividend payout, after it paid off $6.6 billion in TARP money back to the US Treasury."You will see us take action in the near-term that will be favorable," to the dividend, the company’s CEO said. The company cut dividends in March by 88% and is currently paying a quarterly dividend of 5 cents/share.

BB&T’s (BBT) President and CEO Kelly King informed shareholders the bank will "revist dividend level as soon as appropriate". The company cut its dividend by 68% in May 2009 in order to be able to repay the US Treasury. In addition to that the Winston-Salem, North Calorila based banking institution sold $1.5 billion in stock.

JP Morgan’s (JPM) CFO was a little less optimistic about the future dividend prospects of his company, citing that the company’s goal is to restore dividend only if economy doesn't "double dip". Despite the fact that he is still cautious on restoring the dividend, the CFO said the bank could raise its dividend to $0.75-$1.00/share. The company cut its dividend by 87% to 5 cents/share in February 2009.

Analysts are also expecting Pfizer (PFE) to increase dividends as well in the near future. Deutsche Bank analysts expect Pfizer Inc to increase its dividend in December. Deutsche Bank sees an increase of 15 percent to 25 percent. Pfizer cut its dividend by 50% in January in an effort to conserve cash in order to pay for its acquisition of Wyeth (WYE).

While I am generally very skeptical about companies which cut distributions, I view companies that begin raising distributions within a year of the cut very positively. It is too early to get excited about the companies listed above however. As long as they fail to actually increase distributions by sending bigger checks to shareholders, then the prospect of them raising dividends is a pure speculation.

Full disclosure: None

- BB&T Corporation (BBT) Stock Dividend Analysis
- Should you sell after a dividend cut?
- Is Pfizer (PFE) a value trap for investors?
- US Bancorp (USB) cuts its dividend by 88%

Wednesday, September 30, 2009

Utility dividends for current income

Electric, Gas and Water utilities have always been traditionally regarded as income stocks by investors. Their high current yields, and the relative stability of their distributions made them a preferred choice for investors who are seeking current income from their assets.

Utilities typically pay out a large portion of their earnings as dividends, which explains their slow dividend growth and high dividend yields. Most utilities operate as natural monopolies, which guarantees almost no competition in their specific geographic areas. It would be very costly to run two separate electrical grids, and such investment could take many decades to pay off. Thus utilities tend to generate stable earnings and revenues in any economic conditions, as people keep using water, gas and electricity in their daily lives no matter what.

A main risk factor for many utilities is government legislation in regards to greenhouse gases, which could increase their costs over time. Such legislation could force utilities to purchase CO2 pollution allowances, which could cut into earnings. The heavy government regulation could be the driving force behind future growth however. A recent phenomenon has been the smart grid initiative.

The smart grid initiative integrates information and communication technology into electricity generation, delivery, and consumption, making systems cleaner, safer, and more reliable and efficient. While it would be costly to modernize electric grids, there is some stimulus available from the department of energy. The department of energy plans to distribute $3.9 billion in Recovery Act funds for smart grid projects through two funding opportunities. The first provides $3.3 billion for deploying and implementing smart grid technologies across the country. The second provides $615 million for smart grid pilot projects. (Source: Yahoo Finance)

Because of the stability of their cash flows, utilities could afford increasing their dividends for long periods of time. Most utilities that I have stumbled upon have had a history of dividend increases, followed by a steep dividend cut, which is then followed by another string of dividend increases. More often than not however, dividend cuts in the Utilities Sector are followed by dividend increases for several years until the dividend payment reaches or exceeds the previous levels. Because of this cyclical nature of utility dividends I view the sector as more suitable for current income generation that for solid dividend growth. Thus for a younger investor who has more than 2 decades until they plan on living off their dividend income in retirement, I would not recommend a high exposure to utilities.

While current yields on utilities tend to be higher than the yields on S&P 500, dividend growth is much slower, which could erode the purchasing power of your utility dividend income over time. I view utilities stocks similarly to fixed income, as they are very sensitive to interest rates and have stable distributions.

Utility stocks typically lag during strong bull markets as investors chase higher growth prospects. In flat or bear markets however utility stocks do not decline as much and they are further helped by their generous dividend yields.

While it is true that some utilities don’t have a strong history of raising distributions, there are several utilities, which have raised their distributions for more than 25 consecutive years, and thus are part of the dividend champion’s list:

It is important to look at the dividend payout ratios, the EPS trends and the EBIT to interest expense ratio in order to gauge the sustainability of the dividend payment over time. The EBIT to interest expense or coverage ratio is an important indicator which shows whether utilities could afford servicing their debt obligations. While some investors focus only on the debt to asset ratios, I view the ability to service interest payments as an important factor that shows how sustainable the company’s ability to operate as a going concern actually is.

Because of the slow dividend growth, I would not consider initiating a position in utilities stocks yielding less than 4% to 5%.

Full Disclosure: Long ED

This post was included in the :The Carnival of Personal Finance #226 – The AFM Turn’s 5 Edition

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Wednesday, September 23, 2009

Dividends Stocks versus Fixed Income

Many retirees who are seeking current income from their assets invest in fixed income securities, most of which provide a stable stream of income. Fixed income investments do have some disadvantages relative to stocks that pay dividends, and thus retirees which fail to account for these, could end up with no income at the worst time possible .

First, while typical fixed income securities provide a dependable income stream, its purchasing power is typically eroded by inflation. Even at 3% per annum, the purchasing power of one dollar decreases by 50% in 24 years. Double that inflation rate to 6% annually and now the purchasing power of one dollar is down by 50% in 12 years and by 75% in 24 years. Stocks that pay rising dividends provide the best inflation proof source of income. Dividend based distributions can grow, interest based distributions usually don't. Unless interest income is reinvested, the interest income cannot grow over time to compensate for the eroding value of inflation.

Second, right now qualified dividend income is taxes at 15% for the highest tax bracket in the US, which is almost half the top tax for interest income in the States. In Canada dividend income also received a preferential treatment relative to fixed income.

Third, bonds typically don’t increase their interest payments if the business is doing well. Stocks, which represent partial ownership of companies, tend to share higher profits with shareholders either through dividend increases or through stock buybacks. Thus stocks tend to provide higher total returns over time as they could provide higher capital gains and higher dividend incomes.

Stocks have disadvantages as well however.

First, if a company goes under and declared bankruptcy, fixed income holders are the only ones that get at least some return of their investment. Stockholders on the other hand typically receive nothing when the company emerges from bankruptcy.

Second if a company faces financial difficulties it could easily afford to cut or eliminate its dividends, but it would have to go through huge hurdles before it could get bondholders to agree to reduce or eliminate their interest payments.

Fixed income securities guarantee a return of your investment some time in the future, whereas stocks don’t provide that.

That being said I do believe that the best strategy for long-term investors is to have an allocation to both stocks and bonds. Fixed income tends to provide dependable income even in the worst bear markets. In addition to that fixed income investments provide diversification in bear markets and are the only asset to provide returns to investors during deflationary periods.

Stocks are great vehicles to own during average and high inflationary periods, and they could provide investors with rising inflation adjusted streams of dividend income over time. There are companies which have long records of raising their distributions. The possibility of receiving rising dividends from stocks, make equities a preferred method of investment for many investors. Some early holders of stocks like Johnson & Johnson (JNJ), Exxon Mobil (XOM), and Altria (MO) are now enjoying double or even triple digit yields on cost on their original investments, even without reinvesting their dividends. Similar investments even in the safest highest yielding fixed income securities would still be generating the same incomes, provided that they have not matured.

Currently I like several dividend stocks, which have the best prospects to grow their distributions over time.

Johnson & Johnson (JNJ) has increased dividends for 47 consecutive years. Johnson & Johnson engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Check my analysis of the stock.

Mcdonald’s (MCD) has increased dividends for 32 consecutive years. McDonald’s Corporation, together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. Check my analysis of Mcdonald’s.

Chevron (CVX) has increased dividends for 22 consecutive years. Chevron Corporation operates as an integrated energy company worldwide. Check my analysis of Chevron.

Abott Labs (ABT) has increased dividends for 37 consecutive years. Abbott Laboratories manufactures and sells health care products worldwide Check my analysis of the company.

Clorox (CLX) has increased dividends for 32 consecutive years. The Clorox Company manufactures and markets a range of consumer products Check my analysis of the stock.

Full Disclosure: Long ABT, CLX, CVX, JNJ, MCD, MO

This post was featured on the Carnival of Personal Finance #225- Planning Winter Edition

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Thursday, February 12, 2009

The Dividend Edge

During the 1982-2000 secular bull market, investors were looking for quick capital gains in hot growth sectors. Dividend stocks were viewed as something that is appealing to older investors. As stock prices rose to the stratosphere dividend yields on the S&P 500 fell to as low as 1%, which left long-term investors with a smaller cushion against market declines.
With the 2003 lowering of taxation on dividends, income-producing companies have been in vogue with investors. There are many reasons why dividend stocks are superior to non-dividend stocks.
One reason is that most stocks rise and fall on average at the same pace as the market. Stocks that pay dividends however, offer an extra incentive to hold on to them during tough times.
Another reason to hold on is that most dividend stocks represent mature companies with stable business models that generate much more in earnings than what could be re-invested back into in the business. Slower growth companies will generally experience much lower drops in share prices in comparison to hot growth sectors.
Furthermore the quarterly dividend payment will provide investors with a relatively safe cushion against bear market declines, as most companies keep sending their dividend checks monthly or quarterly to shareholders. During market declines it is very tough to generate any capital gains. The dividend is the only item that increases investors total returns during severe corrections.
Most corporations that pay a portion of their profits to investors prove that earnings are real, and not a result of the manipulation of GAAP rules. More important is the fact that once management has set a dividend policy of a stable or a rising dividend payment, only an unforeseen event or a major fiasco in the company’s business model will derail that commitment. Unlike share buybacks, which could be canceled quietly, a dividend cut or suspension will most likely anger stockholders. When a company commits to paying a dividend, management is much more careful with approving projects that might not yield a sufficient return on investment.
Most investors have heard the headlines in 2008, which included major dividend cuts from companies such as Bank of America, Citigroup and a plethora of other financial stocks. The majority of dividend cuts however, have been concentrated in the financial sector. Even during recessions, most corporations keep their dividends either unchanged or slightly higher. The current recession is no exception so far.
Even during bear markets, dividends have a much lower volatility in comparison to stock prices.
According to Ned Davis Research, dividend paying stocks have also outperformed non dividend paying stocks over the past 35 years.

Even in 2008, despite the financial crisis, dividend payers in the S&P 500 still managed to outperform non-dividend payers, according to Standard & Poors.The same was true for 2007 as well as for 2006.



Investors can gain an even more profitable edge by focusing on dividend growth investing. There are several recession resistant dividend stocks, which should be the cornerstone of any dividend growth portfolio, provided that they are accumulated at bargain prices.

PepsiCo (PEP) – This consumer staple has been increasing its dividends for 36 consecutive years. Over the past decade PEP has managed to almost triple its EPS and deliver a total dividend growth of 227%. The maker of Pepsi Cola and Frito-Lay chips is currently yielding 3.40%. Investors who were lucky enough to purchase this dividend aristocrat 20 years ago at $6.50 are currently generating a 26% yield on the cost of their original purchase. I expect PEP to keep delivering by increasing its dividend in May, as it has been doing for the past several years. Check out my analysis of Pepsi.

Johnson & Johnson (JNJ) is another consumer staple whose product sales are less likely to suffer during recessionary times. This dividend aristocrat has been rewarding shareholders for 46 years with increasing dividends. Over the past decade EPS have grown from $1.47 to $4.57, while dividends have risen by 229%. Investors who purchased JNJ stock 20 years ago are now earning a respectable yield on cost of 34%. Johnson & Johnson currently yields 3.20%. Check out my analysis of Johnson & Johnson.

Procter & Gamble (PG) focuses on brand products in over 180 countries worldwide, by focusing on three major business segments – Beauty and Health, household Care and Gillette. P&G is another consumer staple whose products consumers can’t live without and which they use even during tough times. PG has had a slower dividend growth of 180% over the past decade, while its EPS increased from $1.30 to $3.64 over the same period. PG currently spots a modest dividend yield of 3.10%. Investors who ignore it and focus on the current highest yielding stocks should be reminded that a long-term investment in PG 20 years ago would be yielding almost 30% on cost. Check out my analysis of Procter & Gamble.

Mcdonald’s (MCD), which is the largest fast food restaurant operator in the world, has been somewhat immune from the financial crisis, as it keeps posting solid increases in its same store sales. I especially like the fact that the company always seems to unveil new innovative items on its menu, which consumers can’t get enough of. As a result its earnings per share have almost tripled over the past decade from $1.39 to $3.76, while dividends increased almost 10 times. Long-term shareholders of MCD who purchased stock 20 years ago have seen their yield on cost rise to 34% over the course of their investment. The dividend payout for the golden arches also looks conservative, which increases the chances that the company will continue its uninterrupted streak of 32 consecutive annual dividend increases. Check out my analysis of McDonald's.

Kimberly Clark (KMB) is a slower growing dividend aristocrat, which has nevertheless raised its dividends for 36 years in a row. The slower growth helps explain its high current yield at 4.70%. While revenues and earnings per share have increased over the past decade, the overall net income that KMB has generated has remained stagnant. Dividend payments on the other hand have more than doubled over the same period, which has increased the payout ratio to slightly above 50%. An investment in KMB 20 years ago would be yielding close to 16% on cost. Check out my analysis of Kimberly Clark.

All five stocks are priced attractively at the moment

Full Disclosure: I own shares of PEP, JNJ, PG, MCD, KMB
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Monday, March 24, 2008

Wal-Mart Dividend Analysis

Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International.
The company is a dividend aristocrat as well as a major component of the S&P 500 and Dow Jones Industrials indexes. Over the past 10 years this dividend growth stock has delivered an annual average total return of 10.50 % to its shareholders. The majority of the gains came in the late 1990’s. After peaking at 70.25 in late 1999 though, the stock has gone nowhere for 8 years.
At the same time company has managed to deliver an impressive 16% average annual increase in its EPS.
















The ROE has been hovering in the 18% - 20 % range over the past 10 years.













Annual dividend payments have increased over the past 10 years by an average of 21% annually, which exceeds the growth in EPS. A 21% growth in dividends translates into the dividend payment doubling almost every 3.5 years. If we look at historical data, going as far back as 1993, WMT has indeed managed to double its dividend payments every three and a half years.














If we invested $100,000 in WMT on December 31, 1997 we would have bought 5071 shares (Adjusted for 2:1 stock split in April 1999). Your first dividend payment would have been $197.77 in March 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $1211 by December 2007. For a period of 10 years, your quarterly dividend income has increased by 464 %. If you reinvested it though, your quarterly dividend income would have increased by 612%.














The dividend payout has increased from 20% to 30% over the past 10 years. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.















I think that WMT is attractively valued with its low price/earnings multiple of 17 and yield at 1.90%.

Disclosure: I own shares of WMT
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