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

Thursday, April 18, 2013

The right time to sell dividend stocks

With the market hitting fresh 17 month highs, investors have to look hard in order to find attractively valued opportunities. Plenty of stocks such as Aflac (AFL), Emerson Electric (EMR), 3M (MMM) and Realty Income (O) ,which in early 2009 rewarded enterprising dividend investors with their highest yields in a decade, are now yielding much less. Many stocks are also trading at rich valuations, which suggests that investors these days are willing to pay a premium for future growth.

The rapid increase in prices since March 2009 lows has many dividend investors wondering whether they should lock in some or all of their gains today. Investors who were able to purchase stocks in 2008 and 2009 might be sitting at gains, which seem equal to the dividend payments they could expect from a stock for several years to come. The issue with this thinking is that dividends typically increase over time on average while cash in the bank typically loses its purchasing power over time. As a result the investor who takes profits today might lose on any increases in dividends as well as on any future price gains. They would also have to find a decent vehicle to park their cash, which is getting harder and harder to find these days.

Because of the reasons stated above I would not consider selling even if my position went up 1000%. It would not be a wise idea to sell a stock which was purchased as a long term holding and its business hasn’t changed much. What is important is that the original yield on cost that has been locked with the purchase in 2008 or 2009 is there to stay, as long as the dividend is at least maintained. I would only consider selling when the dividend is cut. If a stock you purchased had a current yield of 8%, your yield on cost of is 8%. The nice part about this is that you keep receiving 8% on your original cost as long as the dividend is maintained. Then it doesn't really matter if the stock is currently yielding 1% or 2% - you still earn 8% on your cost. If the dividend payment is increased then your yield on cost rises as well. Companies like Johnson & Johnson (JNJ) or Abbott Labs (ABT) for example have low current yields of 3%, but their growing dividend payments produce substantial yields on cost over time.

If you were thinking of selling a stock which generates great yield on cost, you should remember that currently the market is overvalued. But the market could keep getting overvalued for a far longer period than you or I could remain sane. Retirees need income, and in the current low interest environment dividend stocks seem to be the perfect vehicle for an inflation adjusted source of income in retirement.

Back in the late 1980s Procter & Gamble (PG) yielded less than 3% for the first time in decades, which was much lower than the 4% average yield that investors received in the mid 1980s. In early 1991 the stock traded at 10.50, yielded 2.40%, and paid 6.25 cents/quarter. Although bonds yielded at least three times what P&G yielded at the time, they couldn’t provide rising income payments and the possibility for high capital gains as well. By early 1994 Procter & Gamble stock increased to $14, after a 2 to 1 stock split, paid 8.25 cents/quarter and yielded 2.20%. In early 1999 Procter & Gamble traded at $46.50 and had split 2:1 in 1997. The company paid out 14.25 cents/share but yielded only 1.30%. The yield on cost for the early 1991 investor was a more comfortable 5.50%. Fast forward to 2010 and Procter & Gamble is trading close to $64 and yielding 2.80%. The yield on cost on the original 1991 purchase is 16.80%. This example goes on to show that selling Procter & Gamble (PG) when it became overvalued, was not a very good idea, because the company kept generating higher earnings and kept increasing its dividend payment. While investors could have found other stocks to reinvest Procter & Gamble (PG) dividends or allocate any new cash, they would have been well off simply holding on to Procter & Gamble (PG) and other dividend raisers despite them being overvalued for extended periods of time.

Right now Procter & Gamble (PG) looks like it could again stay below 3% for the foreseeable future. This time I am planning on adding to my position around $59 ,even though it is not exactly trading at a 3% yield.

Full Disclosure: Long ABT, AFL, EMR, JNJ, MMM, O, PG

Note to Readers: This article was originally published on March 24, 2010. The basic ideas behind it however are still valid, three years later.

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Monday, January 10, 2011

Eight Dividend Stocks Expected to Raise Dividends in 2011

With the low number of quality companies raising distributions in the last week of the year, I decided to focus on the companies which have a high chance of growing distributions in 2011. The companies that manage to grow distributions for a long period of time have a very high chance of continuing their streak of consecutive dividend increases, until something unexpected happens. In order for a company to be able to grow dividends for over one decade it has to have recorded earnings growth. Consistent earnings growth is only possible if the company has a wide moat or a strong competitive advantages based on price, quality or a combination of both. Most dividend growth stocks also boast high returns on equity and generate so much in excess cash, that prudent managers allocate a portion of it back to shareholders in the form of dividends. The companies which I expect to boost dividends to shareholders in 2011 and beyond include:

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. Wal-Mart Stores last raised its quarterly dividend by 11% to 30.25 cents/share in March 2010. Wal-Mart has increased its dividend for 36 years in a row. This dividend aristocrat company boasts a ten year dividend growth rate of 18.10% annually. Yield: 2.20% (analysis)

Walgreen Co. (WAG) , together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. The company’s drugstores sell prescription and non-prescription drugs, and general merchandise. Walgreen last raised its quarterly dividend by 27.30% to 17.50 cents/share in July 2010. Walgreen has raised its dividend for 35 consecutive years This dividend aristocrat boasts a ten year dividend growth rate of 14.30% annually. Yield: 1.90% (analysis)

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. Medtronic last raised its quarterly dividend by 9.80% to 22.50 cents/share in June 2010. Medtronic has raised its dividend for 33 years in a row. This dividend champion has a ten year dividend growth rate of 18.40% annually. Yield: 2.40% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. McDonald’s last raised its quarterly dividend by 10.90% to 61 cents/share in September 2010. McDonald’s has raised its dividend for 34 consecutive years. This dividend aristocrat boasts a ten year dividend growth rate of 26.50% annually. Yield: 3.20% (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. Kinder Morgan Energy Partners last raised its quarterly distributions by 1.80% to $1.11 per unit in October 2010. Kinder Morgan has raised its distributions for 14 consecutive years. This dividend achiever boasts a ten year dividend growth rate of 11.70% annually. Yield: 6.40% (analysis)

Kimberly-Clark Corporation (KMB) , together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. Kimberly-Clark last raised its quarterly dividend by 10% to 66 cents/share in March 2010. Kimberly-Clark has raised its dividend for 38 consecutive years. This dividend aristocrat boasts a ten year dividend growth rate of 8.70% annually. Yield: 4.20% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. Coca-Cola last raised its quarterly dividend by 7.30% to 44 cents/share in February 2010. Coca-Cola has raised its dividend for 48 consecutive years. This dividend aristocrat boasts a ten year dividend growth rate of 9.90% annually. Yield: 2.70% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. Colgate-Palmolive last raised its quarterly dividend by 20.40% to 53 cents/share in February 2010. Colgate-Palmolive has raised its dividend for 47 consecutive years. This dividend champion boasts a ten year dividend growth rate of 11.30% annually. Yield: 2.60 % (analysis)

In dividend investing, it is important to keep a close look at the long term picture behind each company you are investing in. As a result, the stocks mentioned above should purchased only after investors analyze them and assess that the probability for future dividend growth of over one year is high. I would not purchase a stock just because it would raise a dividend for one year. I would purchase a quality dividend stock only if I see it fit to generate higher yield on cost in the future for me.

Full disclosure: Long all stocks mentioned above

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- What Dividend Growth Investing is all about?
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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 26, 2010

A dividend portfolio for the long-term

As a dividend growth investor you would find that over time some stocks tend to fall off your radar and no longer fit the rising income stream criteria that you purchased them for in the first place. Thus it is important to monitor your portfolio on a regular basis and place such stocks on your sell radar. M&T Bank (MTB) and British Petroleum (BP) are two companies which I am closely monitoring, since they have both frozen dividends for several quarters in a row.

The four important characteristics of successful dividend portfolios include entry and exit criteria, diversification, dollar cost averaging and selective dividend reinvestment. I have built my dividend portfolio around those important characteristics over the past few years. I have grouped the stocks I own by sector. I have also included additional information about each company, and I have also marked any companies which I do not find attractive at the moment with "HOLD". Just because a company is not attractively valued at the moment however does not mean that it is automatically a sell. Any companies which I have considered to be a sell have been sold off.

Consumer Discretionary

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores for low to lower-middle income consumers in the United States. This dividend aristocrat has raised dividends for 33 consecutive years and yields 1.50%. (analysis) HOLD

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. This dividend aristocrat has raised dividends for 33 consecutive years and yields 3.20%. (analysis)

The McGraw-Hill Companies (MHP), Inc. provides information services and products to the education, financial services, and business information markets worldwide. This dividend aristocrat has raised dividends for 37 consecutive years and yields 3.30%. (analysis)

The Sherwin-Williams Company (SHW) engages in the development, manufacture, distribution, and sale of paints, coatings, and related products in North and South America, Europe, and Asia. This dividend aristocrat has raised dividends for 32 consecutive years and yields 1.90%. (analysis) HOLD

Consumer Staples

Archer-Daniels-Midland Company(ADM) procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. This dividend aristocrat has raised dividends for 35 consecutive years and yields 2.40%. (analysis) HOLD

The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. This dividend aristocrat has raised dividends for 32 consecutive years and yields 3.20%. (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. This dividend aristocrat has raised dividends for 38 consecutive years and yields 4.30%. (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. This dividend aristocrat has raised dividends for 48 consecutive years and yields 3.40%. (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. This dividend aristocrat has raised dividends for 37 consecutive years and yields 3%. (analysis)

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. This dividend aristocrat has raised dividends for 53 consecutive years and yields 3.10%. (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrat has raised dividends for 35 consecutive years and yields 2.40%. (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. This dividend aristocrat has raised dividends for 47 consecutive years and yields 2.70%. (analysis)

McCormick & Company, Incorporated (MKC) engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. This dividend achiever has raised dividends for 24 consecutive years and yields 2.70%. (analysis)

Universal Corporation (UVV), together with its subsidiaries, operates as the leaf tobacco merchants and processors worldwide. This dividend champion has raised dividends for 39 consecutive years and yields 3.90%. (analysis)

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. This dividend stock yields 6.70%. (analysis)

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 3.80%. (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. This dividend stock yields 5.20%. (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. This dividend champion has raised dividends for 40 consecutive years and yields 3.40%. (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)

Energy
BP p.l.c. (BP) provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. This international dividend achiever has rewarded shareholders with dividend raises for 16 consecutive years and yields 7.70%. (analysis) HOLD

Chevron Corporation (CVX) operates as an integrated energy company worldwide. This dividend achiever has raised dividends for 22 consecutive years and yields 3.90%. (analysis)

Enbridge Energy Partners, L.P. (EEQ) owns and operates crude oil and liquid petroleum transportation and storage assets, as well as natural gas gathering, treating, processing, transmission, and marketing assets in the United States. This dividend stock yields 8.80%.

Kinder Morgan Management, LLC (KMR) operates as an energy transportation and storage company in North America. This dividend achiever has rewarded unitholders with regular distribution increases for 13 years in a row and yields 8.10%. (analysis)

Financials
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. This dividend aristocrat has raised dividends for 27 consecutive years and yields 2.60%. (analysis) HOLD

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. This dividend aristocrat has raised dividends for 45 consecutive years and yields 2.90%. (analysis)

Cincinnati Financial Corporation (CINF), through its subsidiaries, offers property, casualty, personal, and life insurance products to businesses and individuals in the United States. This dividend aristocrat has raised dividends for 49 consecutive years and yields 5.90%. (analysis)

Hingham Institution for Savings (HIFS) provides various financial services to individuals and small businesses in Massachusetts. The company currently has nine branches and several ATM locations in Boston and southeastern Massachusetts. The board of directors has raised annual dividends for sixteen years in a row. The stock yields 3%. (analysis)

M&T Bank Corporation (MTB) operates as the holding company for M&T Bank and M&T Bank, National Association that provide commercial and retail banking services to individuals, corporations and other businesses, and institutions. This former dividend aristocrat ended its 27-year streak of consistent dividend increases in 2008. The stock yields 3.30%. (analysis) HOLD

National Retail Properties (NNN), Inc. is a publicly owned equity real estate investment trust. This dividend achiever has raised dividends for 20 consecutive years and yields 6.90%. (analysis) HOLD

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This dividend achiever has raised dividends for 16 consecutive years and yields 5.60%. (analysis)

The Toronto-Dominion Bank (TD), together with its subsidiaries, provides retail and commercial banking, wealth management, and wholesale banking products and services in North America and internationally. This international dividend achiever has raised dividends for 15 consecutive years and yields 3.60%. (analysis) HOLD

Health Care

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has raised dividends for 47 consecutive years and yields 3.50%. (analysis)

Teleflex Incorporated (TFX) primarily develops, manufactures, and supplies single-use medical devices used by hospitals and healthcare providers worldwide. This dividend champion has raised dividends for 31 consecutive years and yields 2.40%. (analysis) HOLD

Industrials

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. This dividend aristocrat has raised dividends for 53 consecutive years and yields 2.90%. (analysis)

W.W. Grainger (GWW), Inc. and its subsidiaries distribute facilities maintenance and other related products and services in the United States, Canada, Japan, and Mexico. This dividend aristocrat has raised dividends for 38 consecutive years and yields 2.10%. (analysis) HOLD

3M Company (MMM), together with its subsidiaries, operates as a diversified technology company worldwide. This dividend aristocrat has raised dividends for 52 consecutive years and yields 2.60%. (analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. This dividend achiever has raised dividends for 17 consecutive years and yields 2.60%. (analysis)

Illinois Tool Works Inc. (ITW) manufactures a range of industrial products and equipment worldwide. This dividend champion has raised dividends for 45 consecutive years and yields 2.70%. (analysis) HOLD

Information Technology
Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. This dividend aristocrat has raised dividends for 35 consecutive years and yields 3.30%. (analysis)

Materials

Air Products and Chemicals, Inc. (APD) offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. This dividend aristocrat has raised dividends for 27 consecutive years and yields 2.90%. (analysis)

Nucor Corporation (NUE), together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. This dividend champion has raised dividends for 33 consecutive years and yields 3.40%. (analysis)

RPM International Inc. (RPM) engages in the manufacture, marketing, and sale of various specialty chemical products to industrial and consumer markets worldwide. This dividend champion has raised dividends for 33 consecutive years and yields 4.20%. (analysis)

Telecommunications

AT&T Inc. (T) provides telecommunication products and services to consumers, businesses, and other telecommunication service providers under the AT&T brand worldwide. This dividend champion has raised dividends for 33 consecutive years and yields 6.80%. (analysis) HOLD

Utilities

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. This dividend aristocrat has raised dividends for 33 consecutive years and yields 5.50%. (analysis)

Dominion Resources, Inc. (D), together with its subsidiaries, engages in producing and transporting energy in the United States. This dividend stock currently yields 4.60%.

There are several companies which I hold, that no longer fit my entry criteria, although they might have fit the entry criteria at some point in the past. Building a dividend portfolio does take some time to implement. I typically have between ten to fifteen stocks which are attractively valued at any time. I also keep a list with stocks I would consider buying on dips. This list typically varies depending on market conditions. Back in 2008 and 2009 this list was rather small, and the list of attractively valued stocks was large due to depressed market prices. If a stock is very close to my entry price I might consider initiating a small position and then build my exposure from there. It is very important however to keep current on the overall market environment in order to scoop up any bargains from the waiting list.


Update Note (July 1, 2011): I have since sold off shares of BP after the dividend cut. I also sold shares in AT&T (T) as well.
Update: (January 1, 2012): I have initiated positions in EPD and OKS over the past year as well.

Full Disclosure: Long all stocks mentioned above

This post was featured in the Carnival of Personal Finance #260: Forces of Nature Edition

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- Living off dividends in retirement
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Wednesday, May 12, 2010

Four Characteristics of The Best Dividend Growth Stocks

Dividends provide investors with a return on investment even when markets are down. As a result investors get paid to hold their stocks through thick and thin. It is important however to pick a stock selection strategy that fits with your financial goals. A good entry strategy is just the beginning however. Investors should also be following the strategy at all times in order to be successful.

Four important characteristics of successful dividend portfolios include entry and exit criteria, diversification, dollar cost averaging and selective dividend reinvestment.

Entry/Exit Criteria

Under my current entry criteria I am looking for companies which have consistently boosted annual distributions for at least one decade. The next step is screening whether the dividend is adequately covered, and that the dividend payout ratio does not exceed 50%. The only exception to this rule is for certain special investment vehicles such as Master Limited Partnerships, Real Estate Investment Trusts or Utilities, where I look at the trend of the dividend payout ratio. I also check to see whether there is earnings growth over the past decade and whether the company has any sustainable competitive advantage. Once the company yields more than 2.50%, has a price earnings ratio of less than 20 and has a dividend payout ratio of less than 50%, I initiate my position in the stock.

I would hold on to the stock as long as dividend payments keep getting increased regularly and would add to the position on dips. An example of an attractively valued dividend stock is Johnson & Johnson (JNJ). I would only consider selling if the dividend is cut for whatever reason. If the company stops raising the dividend I hold onto the stock, but I stop contributing new money. Currently the three stocks I have stopped contributing new money include M&T Bank (MTB), British Petroleum PLC (BP) and National Retail Properties (NNN). The three companies have failed to raise distributions for more than 4 consecutive quarters, which makes them a hold. An example of stocks I sold due to a dividend cut include American Capital (ACAS), which was sold in 2008 when it announced that it would no longer pay a quarterly distribution.

Diversification

Traditional dividend stocks included high yielding utility stocks and financials. Most financial stocks cut or completely eliminated dividends over the past two years. If investors should learn one lesson from the financial crisis of 2007 -2009, it should be to diversify your portfolio, in order to generate sustainable dividend income. Canadian Income Trust investors also learned a similar lesson in 2006, after the government decided to phase out the royalty trust corporate structure in 2011, sending stock prices and distributions per unit nose-diving. It is also important to own more than 30 stocks from as many sectors as possible, in order to prevent an unfortunate downturn in one sector or a few stocks from destroying your chances of generating sustainable dividend income. Owning more than 30 stocks makes your dividend portfolio less exposed to individual company risks, although you will still be exposed to overall market risk.

Dollar Cost Averaging

After selecting the stocks to include in your portfolio, it is important to spread your purchases as a precaution to avoid paying too high prices. Few if any investors could time successfully the exact highs and lows in the stock market, which is why having a consistent strategy of making prudent purchases every so often would be a good idea. Even high quality dividend stocks such as Procter & Gamble (PG) are not immune from market fluctuations. Dollar cost averaging would have been very beneficial to investors in 2007 and 2008, although a lump sum investment in 2009 would have been better.

Selective Dividend reinvestment

Dividends could be either sitting there or get reinvested. The beauty of dividends is that it is under the discretion of the individual investor to purchase more stock, buy equity in a different company/investment or spend it another way. I do re-invest only a portion of my stocks directly; most other times however I let my dividends accumulate and I either re-invest in the same stocks or in new stocks that have been on my watch list.

Full Disclosure: Long PG, MTB, BP, NNN, JNJ



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Tuesday, December 22, 2009

Capital gains for dividend investors

The market is efficient enough sometimes to discount events and experience moves even before important pieces of information are distributed to all market participants. How many times have we seen a large increase in prices on above average volume for companies on virtually no news, only to find out that the company is going to be acquired at a hefty premium several days later?

At the end of the day, dividend growth investors expect that a company that regularly increases dividends would also lead to a higher stock price. This would leave current yields little changed for many years.

When the market goes up, 80%-90% of all stocks follow its moves. When it goes down 70% of companies go lower in tandem with it. While dividend investors do care mostly about stability and growth of their dividend income, capital gains are important as well.

While dividends have produced about 40% of average annual returns each year over the past 8 decades, capital gains are important as well. If investors believe that the company’s performance over time would improve, they would bid up the stock price. While the dividend payment would have increased roughly at the same rate as the growth in stock prices, the current yield could be unchanged. This would leave many novice investors wondering why anyone would waste their time and effort purchasing a stock which yields 2% - 4%, when other companies offer much higher current dividend yields. What they fail to notice is that the yield on cost on the original investment several years ago is much higher than the current yield.

If markets believed that the dividend growth is sustainable, the stock price would correct itself and bring the yield to about market level. This brings in some capital gains, which further compounds the wealth of the dividend investor. If investors as a group do not expect that the company’s dividend growth is sustainable, they would simply leave the price unchanged or lower over a period of time.

Mr market might be telling you something about a company that successfully increases its dividends while the stock price is down or flat. Let’s look at Pfizer (PFE). The company used to boast a record of 41 consecutive annual dividend increases. The pharmaceuticals giant cut its dividend in 2009, ending this streak. Investors might have expected that Pfizer’s long term position of a dividend growth stock is in jeopardy, as the stock price dropped from 50 to 13, pushing the yield to 10%. At the end of the day investors not only suffered from the reduced dividend income after the cut, but also from capital losses over the past decade.



A similar situation occurred with General Electric (GE), which also had a long streak of dividend increases, until it also cut its distributions in February 2009. The company’s stock price has had a rough decade, falling from 60 to 6 before partially recovering to 16. In the meantime the company’s current yield increased several times to over 10%, until the company cut its distributions by more than 60%. It definitely pays to listen to the collective wisdom of stock prices most of the times, although not at all times.


Procter & Gamble (PG) in the 1970s tells us a completely different story. The company had already established itself as a solid dividend achiever and kept rewarding shareholders with annual raises, while the stock price appeared uninterested in the general improvement of the company’s finances.

At the end of the day it is important to purchase the best dividend stocks that would throw off a rising dividend income stream. It is also important however to not completely ignore capital gains as well.
Relevant Articles:


Wednesday, December 31, 2008

TARP is bad for dividend investors

TARP allows the United States Department of the Treasury to purchase nonliquid, difficult to value assets from banks and other financial institutions. TARP also allow the Treasury to purchase whole loans and make direct equity investments in banks themselves. The targeted assets are securities backed by mortgages, sometimes described by the government, media, and others as “troubled” or “toxic” assets.
As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated, primarily to the Capital Purchase Program: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group.[
The eight financial companies that were the first to have received TARP funds include:

Bank of America (BAC) (analysis)
Bank of New York Mellon Corp
Citigroup (C )
Goldman Sachs (GS)
JPMorgan Chase (JPM)
Morgan Stanley (MS)
State Street (STT)
Wells Fargo (WFC)

There were 44 other institutions that received TARP money, including USB, CMA, Northern Trust, Suntrust Banks, KeyCorp, RF, BB&T and others. Check out my analysis of USBank or my analysis of BB&T.

There is some talk that a TARP funding to banks essentially marks the end of their dividends.

"Restrictions on Dividends:
For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior
Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.


Common dividends: The UST’s consent shall be required for any increase in common
dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties."
Source TARP Capital Purchase Program

What really showed me that TARP program is serious, is a recent statement from State Street last week, which announced that it wasn’t going to raise its dividends in compliance with the restrictions on dividend rate increases generally imposed on all participants in the U.S. Treasury's TARP Capital Purchase Program.

Before that State Street (STT) was the only dividend aristocrat which had consistently increased its dividends twice per year for almost 27 years in a row.

Traditionally, financial shares were one of the best yielding stocks in the marketplace. It seems that TARP essentially is bad news for any dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for individual investors is to diversify across sectors, no matter how great the yields look.

Disclaimer:

Long STT

Relevant Articles:

- My Dividend Growth Plan - Diversification
- My Dividend Growth Plan - Money Management
- Why do I like Dividend Aristocrats?
- Bank of America (BAC) Dividend Analysis
- BB&T Corporation (BBT) Stock Dividend Analysis

Wednesday, August 13, 2008

My Dividend Growth Plan - Money Management

In my previous article I discussed my dividend growth plan in more detail, by focusing on my diversification criteria. Today I will be focusing on the money management part of my plan.

I believe that managing my money is an equally important part of my strategy, in addition to the stock selection and diversification. My money management plan involves owning equal dollar amounts in the 30-100 stocks that I own. However, I won’t be rebalancing by selling shares in companies which take a large amount of my portfolio, but I will be adding to positions that still fit my entry criteria and which are having a lower weight in my portfolio for one reason or another. Since I am still in the accumulation phase with my dividend portfolio, I will be forced to dollar cost average in my positions. This should minimize some of my risk, but it will most probably also decrease my returns at least in the first several years.

A very important money management issue is taxation. Most working Americans who work and invest in the stock market do so through and employee 401K plan or through an IRA plan, which are tax advantages accounts. These accounts have some limitation on the age at which you can start withdrawing money. Since I plan on retiring on my dividend portfolio earlier than most other people, I wouldn’t exclusively use these tax advantages accounts. I do believe however that they are important in terms of overall wealth building.

The price of not owning my dividend growth portfolio in a tax sheltered account that I will pay is that I will be taxed on my dividend income every year. If you plan on withdrawing your funds after the age of 59, you should definitely consider a 401K or an IRA account.

This concludes my series which cover my dividend growth plan.

Relevant Articles:

- My Dividend Growth Plan - Diversification
- My Dividend Growth Plan - Stock Selection
- My Dividend Growth Plan - Strategy
- Some Cheap Stocks to Consider

Wednesday, July 30, 2008

My Dividend Growth Plan - Stock Selection

In my previous article I started discussing my dividend growth plan in more detail, by focusing on my strategy. Today I will be focusing on my stock selection criteria.

The type of investments I am focusing on involve dividend paying companies, which have a history of uninterrupted dividend growth. There are several publicly available lists out there including the dividend aristocrats, high-yield dividend aristocrats, dividend champions and the dividend achievers. The first three lists consist of stocks which have increased their dividend payments to shareholders for more than twenty-five consecutive years. The broad dividend achievers list focuses on companies which have increased their payments for at least ten consecutive years. The companies that have been able to do that are believed to have a solid business model and smart management. In addition to that these companies have a proven track record which shows that their business model is able to consistently support an increase in dividend payments to shareholders. This also shows that management is committed to enriching the shareholders and not enriching themselves. In a period of time where total CEO compensation runs in the millions of dollars regardless of company performance, it pays to know that the executive team is committed to sharing the company’s wealth with its owners - the investors.

The above mentioned lists are only a starting point for the dedicated dividend investor. I do not want to blindly purchase all stocks without understanding their business and without checking several financial characteristics of the companies. In my analysis of dividend stocks I check several parameters:

EPS- The earnings per share indicator is calculated by dividing the total amount of net income for one year to the total number of shares outstanding. I am normally looking for an increase in EPS over the past ten years. A company that cannot increase its EPS over time, will not be able to sustain the growth in its dividend payments to shareholders.

ROE – The Return on Equity is calculated by dividing the total amount of net income for a given year over the amount of owner’s equity on the balance sheet at the end of the previous period. I do not look for specific numbers in this indicator, but focus exclusively on its trend. Most stocks will have a flat ROE over time, which is fine with me. A red flag for me is a decreasing ROE over time.

DPR- I calculate the dividend payout ratio by dividing the DPS over the EPS. I am generally looking for a DPR that is below 50% in most companies. However, if a corporation has been able to maintain a higher DPR over time due to the nature of its business or the nature of its legal structure, I would consider buying a stock with a much higher DPR. A rising DPR is generally a red flag for me. This shows me that there is not much room for future dividend growth. In addition, stocks which have a highly unusual for them DPR indicate a higher risk for dividend cuts.

DPS – I generally look for an uninterrupted growth in dividends every year for more than ten years, preferably twenty-five. A company which hasn’t been able to at least pay a stable dividend without cutting it in difficult times is automatically off of my radar. General Motors is one stock which I won’t touch, since it has exhibited a lot of fluctuations in its dividend payments over the years.

Valuation- After checking the trends of earnings, roe, dpr and dps I assume that these would continue to be doing ok or not ok for the foreseeable future. I then look for stocks with a price earnings ratio of less than 20, dividend yield which equals at least the yield on the S&P 500 and a dividend payment ratio which does not exceed 50%. After buying a stock, I would “forget” about it and let the dividends reinvest automatically into more shares. Even if a company becomes overvalued in terms of super high P/E ratio, I won’t consider selling. I would consider holding forever in most situations.

For a sample dividend analysis of a stock, check out Analisys of Johnson & Johnson (JNJ).

Next Week I will be discussing the diversification part of my dividend growth plan.

Relevant Articles:

- Long term returns of S&P high-yield aristocrats
- Why do I like Dividend Aristocrats?
- Why do I like Dividend Achievers
- Dividend Champions Watchlist

Wednesday, July 23, 2008

My Dividend Growth Plan - Strategy

Inspired by the dividend growth plans of The Money Gardener and The Dividend Guy, which they posted on The Div-Net last week, I decided to summarize my own plan.

I believe that having a good solid plan is essential in achieving one’s goals. And my goal is to create an increasing stream of dividend income, which would allow me to live off of my investments.

There are several points that have to be covered: Strategy, Stock Selection, Diversification and Money Management.

Today I will be focusing on strategy. My strategy involves buying quality dividend stocks at bargain prices. Dividends have been largely ignored by investors during the 1990’s when internet stocks were increasing across the board. Dividends however are an important part of the total return of stocks as they have contributed almost 40% of the annual total returns in the S&P 500 over the past eight decades. In addition to that, I believe that a stock which pays a dividend gives at least some certainty that the investor will generate a return on their investment. Although it could be argued that there is always the possibility that the dividend may be cut, companies tend to cut the dividends as a last resort of action. Thus I believe that the dividend component provides some stability in income for investors who want to live off of their holdings. Stock price increases on the other hand are more difficult to predict.
And last but not least, a company that has committed to paying a dividend shows its confidence that it will be able to generate a sufficient amount of profits to be distributed to shareholders.

We all learned from Enron and WorldCom that earnings could be manipulated easily. Manipulating the cash situation in a company is more difficult to achieve, because it cannot be created out of thin air. If a corporation does not have a very solid financial position, it won’t be able to commit to a dividend payment. An example of a company that hasn’t committed to paying dividends is PLA. Over the past 20 years, its shareholders have had a wild ride with the stock rising until 1999 and then declining. In comparison to PLA, GM shareholders had a much better total return over the same period.

As a general rule I would consider selling stocks which either cut their dividends or eliminate their dividend altogether.

I am generally looking for a blend of high growth lower yield stocks in addition to higher yield lower growth ones. I won’t be simply chasing yield, which represents a fixed dividend or worse a decreasing dividend.

An important part of my strategy is minimizing expenses. By opening a low cost brokerage account like Zecco or Sharebuilder I would be able to do that. In addition, if I can keep my expenses less than 0.5% per year, that would provide me with better long-term returns.

Next week, I will post more information about my stock selection process.

Relevant Articles:

- The case for dividend investing in retirement
- A comparison of investing in high-yield, low dividend growth stock versus investing in a low-yield, high dividend growth stock without capital gains
- Alternative Streams of Income
- Why dividends?

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