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

Friday, March 21, 2008

Dividend Growth Stocks Watchlist

The two lists that I am concentrating right now are the S&P 500 Dividend Aristocrats and the S&P High Yield Dividend Aristocrats Index.
I created custom watch lists in Yahoo! Finance in order to summarize the two groups of dividend achievers by a variety of criteria such as Symbol, Yield, P/E , Div/Shr, Last Price,EPS (ttm) ,PEG Ratio ,Dividend Payout, 5 year dividend growth rate.
What I did was first exclude any stocks which had a dividend payout ratio of more than 50%. That gives me some reasonable assurance that the company is less likely to cut its dividends. I also look at P/E ratios, since I do not want to overpay for a company. Anything with a P/E of over 20 is out of my watchlist.
I also look for the PEG ratio but just to find stocks which might be expensive in terms of their growth prospects.
A third thing that I look for is a dividend yield of at least 2%, which is a little bit over than the current yield of 2.00% that SPY is rewarding its shareholders.
The last but not least criteria that I screen for is the 5 dividend growth ratio. I am looking for an average annual dividend growth of at least 5% over the past 5 years. The reason why I selected dividend growth in the end is because I want to decrease to a minimum the rush to buy a stock that simply increased its dividend for whatever reason, whose fundamentals cannot support any significant further increases in the dividend payments.
Based off of this screen, here is my stock lists that I follow :

I would continue screening for potential stocks to add to my buy watchlist on a monthly basis. I might add or remove stocks from my watchlist depending on how undervalued/overvalued I perceive them to be. If I stock in which I have a position drops off my buy watchlist, I would keep holding it, but I won’t be adding to that position until the technical’s and the fundamentals match my criteria.

Thursday, March 20, 2008

3M dividend analysis

3M Company, together with its subsidiaries, operates as a diversified technology company worldwide. It operates in six segments: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security, and Protection Services; and Electro and Communications.

It 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 11.20% to its shareholders. The company has managed to deliver an impressive 17.90% average annual increase in its EPS through organic growth and share buybacks. Management has consistently bought back 1.2% of outstanding shares each year for the past 10 years, spending a little over $9.9 billion in the process.

The ROE has been increasing steadily over our study period, rising from a low of 20% in 1998 to 35% by 2007.

Annual dividend payments have increased over the past 10 years by an average of 6.20% annually, which is significantly below the growth in EPS. The company is moving aggressively into growth markets and has been fairly active on the acquisition front, which explains the relatively low dividend growth rate. A 6 % growth in dividends translates into the dividend payment doubling every 12 years. If we look at historical data, going as far back as 1970, MMM has actually managed to double its dividend payments on average every eight and a half years.

If we invested $100,000 in MMM on December 31, 1997 we would have bought 2437 shares (Adjusted for 2:1 stock split in September 2003). Your first quarterly dividend check would have been $670.17 in February 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $1455.84 by November 2007. For a period of 10 years, your quarterly dividend payment has increased by 75 %. If you reinvested it though, your quarterly dividend income would have increased by 128%.

The dividend payout has been in a downtrend over the past 10 years, falling from 76% in 1998 to 34% in 2007. Normally this is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. In 3M’s case cash is being invested in new business ventures which could provide nice payoffs for shareholders if executed properly. 3M is the ultimate dividend aristocrat but also growth stock.

I think that MMM is attractively valued with its low price/earnings multiple of 14 and above-average yield at 2.50%.
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Wednesday, February 13, 2008

Long term returns of S&P high-yield aristocrats versus the S&P 500

In my previous article I discussed the performance of the S&P Dividend Aristocrats.
We found that the list outperformed the S&P 500 index through good and bad years with a significantly lower volatility. The reality is that there is another list with dividend aristocrats generated by the S&P – it’s the High Yield Aristocrats list, which picks the 50 highest yielding stocks in the S&P 1500 index that have increased dividends for at least 25 consecutive years.

The index is weighted by yield, unlike the equally weighted Aristocrats, which accentuates the equity-income characteristics of the index. It was launched recently, and has been “back tested” to a base value of 1000 on December 7, 1999. The High-Yielder’s offer an average 3.91% dividend yield which is more than a percent better than the Regular Dividend Aristocrats average of 2.93%. The index has significantly outperformed the S&P 500 index and even the regular dividend aristocrats since its launch in late 1999. It achieved average annual total returns of 11.61%, versus 8.85% for the regular aristocrats and a meager 2.77% for the S&P 500. I would not expect the list to outperform the major us stock index benchmark every year, since “fashions” on wall-street seem to be changing every couple of years or so. Over the past 8 years, the index has underperformed S&P 500 only 3 times - in 2003, 2005 and 2007. However if you have an investment horizon of at least 15-20 years I believe that you should be able to outperform the market.

If you are a fan of dividend ETF’s, then today is your lucky day. State Street has launched an ETF that’s covering the High Yield Dividend Aristocrats. It’s trading under the ticker SDY. As of 12/31/2007 financials had the highest sector weight in the index, followed by utilities. The ETF has an annual management fee of 0.35%, which is not that bad for a specialized ETF.

My only issues with this index are that it is not equally weighted and that it has been around for only two years or so. There is a tendency for equity research companies to back test past data in order to find an investment solution that could have worked perfectly through a procedure called data mining. It is a little bit suspicious that the index underperformed S&P 500 after it was launched. So if you are intrigued about buying stocks that have shown very good results in the past please remember the “past performance does not guarantee future results” disclaimer and always do your homework before you put your hard earned cash to work.

Monday, February 11, 2008

Cincinnati Financial – An insurance stock to own

Cincinnati Financial Corporation, through its subsidiaries, offers commercial, personal, and life insurance products to businesses and individuals in the United States.

CINF is on both the Dividend Aristocrats and High-Yield dividend aristocrats lists.

Over the past 10 years this dividend growth stock has delivered an average total return of 3.07% annually to its loyal shareholders. The company has also managed to deliver an impressive 18% average annual increase in its EPS.

The trend in ROE has followed the trend in earnings per share over our study period. This indicator was in a free fall from its 6.35% level in 1997 to its 2000 low 1.97%. After that it has been steadily rising to levels above 12%.

The company recently announced that it would raise its quarterly dividend by 3.5 cents to 39 cents per quarter, which represents a 9.9% increase from 2007. The company has increased its dividend for 48 consecutives years. CINF has averaged a 5 and 10 year dividend growth rates of 11.96% and 11.14% respectively. It’s currently yielding a respectable 4.10% annually. The stock price has been trading in a narrow range over the past 10 years, which has offered a good entry points for dividend reinvestment at bargain prices. An 11% growth in dividends translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1990, CINF has indeed managed to double its dividend payments every seven years.

If we invested $100,000 in CINF on December 31, 1997 we would have bought 2295 shares (adjusted for a 3:1 split). Your first quarterly check would have yieleded $319.19 in dividend income in early 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1016 by December 2007 and you would be expecting to collect $1126.32 dividend income in April 2008. For a period of 10 years, your quarterly dividend income has increased by 155 %. If you reinvested it though, your quarterly dividend income would have increased by 218%.

I also like the fact that the company’s dividend payout has not exceeded 50% over more than twice over the past 10 years in addition to the low P/E ratio which is less than 10 and the above average dividend yield of 4.10%. I think that this financial stock has been unjustfully being punished with the rest of the financial group simply because of its asset class.

Overall I think that CINF is a long-term buy for the dedicated dividend investor. I would be a buyer of the stock as long as P/E ratio is below 20, its yielding above 2% and the dividend payout is below 50%.

Friday, February 8, 2008

The number one reason why i don't chase high-yielding stocks

During my early days as a dividend investor, I was focusing my attention to stocks which paid me a generous yield. I would be doing calculations, showing me that at a 10% annual yield I would be able to further compound my profits by reinvesting the dividends. One of the first stocks that I noticed was HYF, a closed-end high-yield bond fund which was paying a generous 10-11% annual dividend. I bought some stock immediately, and after several weeks I received my first dividend payment, which was equal to almost a one percent return per month. I was very excited by this opportunity, which allowed me to compound my gains monthly through the regular reinvestment of dividends. The fund didn’t appreciate by much; nor did it depreciate by much. It was trading in a range, which was perfect for me - I kept receiving and reinvesting my fixed monthly payments of 5.5 cents per share.

After a while the price started decreasing, and I happily reinvested my dividends, realizing that now I would receive a higher yield for my investment at the lower prices. Instead of yielding 10%, the stock was now yielding 12%. Pretty soon though, the dividend was cut, and the yield decreased to 10% again. I was worried a little bit, but I decided that with a 10% yield I would be able to recover my losses over time even if the dividend was cut by a little bit again. For a while it did seem to me that I was going to break-even as I kept reinvesting my dividends and the price was slowly but surely climbing to the level at which I made my first investment. Then disaster strikes again - the dividend was cut and the stock fell again. I was starting to get worried, because I was getting a good yield, but my capital gains were pretty dismal. I checked the historical monthly dividend payments at yahoo finance and it seemed that the company actually had a long-term negative dividend growth. The monthly payments had been steadily decreasing ever since the fund was open for investors. In addition to that the price had been in a decline for some time. I finally realized that super high-dividend yields of over 6% annually are not sustainable in most situations. I also learned that if I would buy a stock just for the dividend payments, I should only buy companies/shares that have a solid history of raising their dividends in both bull and bear cycles over the years. In addition, the company should be a fundamentally sound business, which can afford to pay dividends even if business had a slow year. I also learned that I shouldn’t be chasing a stock simply because it offers an attractive very high yield.

As for HYF, it has been trading in a range over the past 10 years assuming that you had reinvested your dividends. A $1000 investment made in late 1998, would have been worth 1280.83 by the end of 2007, which represents a 2.8% annual return. I could have achieved a much better return simply by buying CD’s, without taking on the risk of owning a volatile creature like HYF. By analyzing my trade it seems that I was chasing a stock that had increased tremendously off its 2002 lows, due to the fact that people were looking for anything that would produce any decent return on their investment, even though it had a negative dividend growth, which is a disaster waiting to happen to you. When the stock declined, I bought more. But since the dividend also declined I was buying a depreciating asset. Now I consider myself wiser – I buy stocks that show positive dividend growth. Even if the price declines I buy more, because I feel somewhat safer that the dividend is the last thing that the company would cut.

Wednesday, February 6, 2008

Is Realty Income (O) a good stock to own?

I was browsing through yahoo finance, and I read an article about a real-estate investment company which has paid increasing dividends for 451 straight months. I looked at the monthly dividend payments over the past 10 years, and they looked promising for a real-estate investment trust. It looks very appealing to receive monthly dividend payments, as opposed to the quarterly ones that almost all dividend achievers worth their salt are paying these days. The dividend growth looked ok at an average of 5.21% annually over the past 10 years and an average of 6.46% annual dividend growth over the past 5 years. The major contributor for the growth is the 13% dividend hike in 2005. Without it, the growth would have been below my 5% dividend growth criteria. It also seems that the company is trying to raise its dividend three to four times per year, which is also a bonus.
I was seriously considering adding this company to my portfolio until I looked into the 10 year trends in its balance sheet, cash flow and net income statements. Looking at the income statement , it seemed that the annual income had tripled from 41.3 million in 1998 to 139.9 million in 2007. The number of shares outstanding had almost doubled though, from 52 million in 1998 to a whopping 92 million in 2007, which was bad news for EPS growth. Earnings per share increased at a slower pace, from 0.78 in 1998 to 1.18 in 2007. After looking at the cash flow statement though, it seemed that the company is financing its capital spending exclusively through debt origination and stock sales. That’s diluting existing shareholders’ interest in the company. It also seems that the growth in the cash flow from existing operations is due to the increased leveraging of the business. The Long-term debt portion of the balance sheet has increased from 110 million in 1997 to 1.47 billion in 2007, which is a 13 fold increase. At the same time the total equity has increased only 3.5 times, from 433 million in 1997 to 1.551 billion in 2007. In addition, the ratio of cash flow from operations to net PPE, which shows the return on investment that the company is generating per dollar of property that it owns has decreased from 9.01% in 1997 to 6.48% in 2007. This indicator does fluctuate between 6 and 12 % normally. It shows that the company cannot operate effectively if there is any large turbulence in the debt and equity markets where it obtains its financing. If these sources of capital dry out for O, then stockholders would expect flat to slightly down EPS.
In conclusion, although the company has managed to increase its dividends and revenues over the past 10 years this is primarily due to the increased use of outside capital from debt and equity markets. This dilutes stockholders equity over the long run and might lead to smaller EPS growth. The huge increase in debt relative to owners’ equity is definitely a red flag for me. If management slows down its debt accumulation and stock sales in order to obtain financing, the company might be in trouble, because its earnings growth will suffer. Even though the yield looks very attractive, the dividend growth is sluggish. In addition, the dividend payout ratio for O and REITs in general is above my 50% rate, which leaves the dividend rate exposed to fluctuations in the company’s earnings. The P/E ratio is above 20, which is a little pricey for me. Thus I would not own this stock at this time.

Monday, February 4, 2008

Why do I like Dividend Aristocrats?

One of my favorite stock lists is the S&P’s Dividend Aristocrats and the S&P High-Yield dividend aristocrats. These lists contain companies which have consistently increased their dividends over the past 25 years, which is a big achievement. These companies have gone through several up and down economic cycles and shown superiority of rewarding their shareholders with increasing payments through dividend growth.
The dividend aristocrats have averaged annual total returns of 12.93% per year since 1989, beating the S&P 500 total return of 11.66% by 1.3 annually. The dividend aristocrats outperformed S&P 500 in 9 out of the 18 years in this study. Investors in the dividend aristocrats suffered almost no losses during the 2000-2002 bear market; whereas the S&P 500 lost half of its value over the same period. While an 18 year period might not be representative of future performance, and future results might be very different, I still like the stocks in the list for their passive income generation potential which is a function of their ability to generate positive dividend growth. I believe that good dividend paying stocks are the only way out there to truly generate passive income streams without any significant amount of work in the future to sustain it. The only catch that involves a lot of work is selecting the stocks that would generate the future income. I think that this list gives you good solid value plays, which have sound fundamentals. Only a company with strong financials can afford to have positive dividend growth over time.
Academic research indicates that a simple buy and hold of an S&P 500 mutual fund outperforms almost any other strategy in the long run. I think though, that on average most baskets of US stocks, which show good diversification and hold at least 30 companies would produce annual returns which are very close to the S&P 500. With only 390 companies paying any dividends to their shareholders, still down from 402 in 1999, and sluggish long-term dividend growth in recent years, it seems to me that investors in the broad benchmark are still relying mainly on capital gains for their long-term performance. They seem to be forgetting that the market, although very rare, could fall for two or more years in a row, or trade in a range for 13 years, just like it did from 1966-1979. Any returns that were generated during that period were primarily due to reinvested stock dividends. Fundamentally speaking dividend paying stocks paying decent dividend yields could produce decent returns in bear markets, flat markets and even bull markets.

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Relevant Articles:

- Best Dividends Stocks for the Long Run
- Best High Yield Dividend Stocks for 2009
- Dividend Aristocrats List for 2009
- Yield on Cost Matters
- The Dividend Edge

Dividend Increases in January

Several Dividend Aristocrats have increased their dividends in January. The companies are:
New Old Change
AFLAC Inc – Ticker AFL 0.96 0.82 17.07%
Comerica Inc – Ticker CMA 2.64 2.56 3.13%
Consolidated Edison – Ticker ED 2.34 2.32 0.86%
Family Dollar Stores– Ticker FDO 0.50 0.46 8.70%
McGraw-Hill Companies– Ticker MHP 0.88 0.82 7.32%

From this list, the only company that fits my fundamental criteria is MHP, which has a one year dividend growth rate of 7.32%. In terms of changes within the index I expect that SNV might be removed from the dividend aristocrats list. The reason is that its shareholders have received shares in TSYS, which was completely spun off from Synovus in the transaction at the beginning of 2008. On paper the dividend will be cut, but in reality this reflects a spin off and I guess the dividend aristocrats committee does not take into consideration the cash that stockholders received. I believe that SNV would keep increasing its dividends over time. The same thing happened with Altria group after the spin-off of KFT. Even though the dividend fell from 0.82 to 0.69, it’s crawling back up at the time of this writing and would soon exceed the pre-spin-off levels.

Expected dividend increases in February

Based off historical information from this spreadsheet, I would expect that the following companies increase their dividend in February: MMM ABT ADM CINF KO KMB NUE PBI SHW SIAL WWY. Those dividend aristocrats have increased their dividends during every month of February over the past 4 years. Upon a closer examination of the dividend growth behavior of the 60 dividend aristocrats, it seems that every month there is at least one company that raises its dividend. It’s nice to get a pay raise every month. The only company that has increased its dividend twice in one year is STT- State Street.

Relevant Articles:

- Dividend Aristocrats List for 2009
- Dividend Aristocrats
- Best Dividends Stocks for the Long Run
- Best High Yield Dividend Stocks for 2009
- Best CD Rates

Sunday, January 20, 2008

A comparison of investing in high-yield, low dividend growth stock versus investing in a low-yield, high dividend growth stock without capital gains

I was asked before about the reasoning behind my statement that I would buy a stock whose dividend is increasing even by one percentage point per year, if it has a high yield, rather than invest in stocks which increase their dividend payment by at least 10% per year. To answer this question, lets me walk you through my calculations:

Let’s say that you have 2 stocks- A and B in each of which we invest $100,000. We assume that both stocks will always trade at $10 for simplicity sake. Stock A is yielding 5% per year (50 cents per share), while Stock B is yielding 2% (20 cents per share). The dividend growth in Stock A is a meager 1%, while Stock B’s dividend is growing at 5% annually. We will look at two outputs – total return and changes in annual income. It would take stock B 24 years to reach the same annual income level as stock A. In addition, it would take stock B around 40 years to achieve the same total dollar return as stock A. If however we had a growth stock C, which was yielding .5 % at the start of the experiment, and whose dividend was growing at 10% annually, it would take the annual income around 27 years to reach Stock A’s dividend income. It would also take around 42 years for the total dollar return of Stock C to reach the total dollar return of Stock A. I have also included a $100,000 investment in bonds, which yield 6% every year.

The return from the invested capital though, would have been increasing substantially over time assuming that we didn’t reinvest our dividends back into our stocks. After 10 years the yield on cost for Stock A is 5.5%, Stock B is 3.3% and Stock C is 1.3%. After 10 more years stocks A, B and C are yielding 6.1%, 5.3% and 3.4%. An investor, who simply purchased bonds, would have been making the same 6% over and over. I am attaching my spreadsheet below. This file is for informational purposes only; I just tried to make my point that you have to not only buy a stock which has a high dividend growth rate, but also a one which has a pretty decent yield. A major limitation of this analysis was that I assumed that stocks would not realize any capital gains over the period; that’s why the long-term results of Stocks A, B and C are almost identical to long-term results for Bonds. However it shows you that if you reinvest dividends, stocks achieve a higher compounding power than bonds.
You can see the file here or here.

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