Consolidated Edison (ED) Dividend Stock Analysis

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. It provides electric service to approximately 3.3 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County, as well as provides steam service to office buildings, apartment houses, and hospitals in parts of Manhattan.

Consolidated Edison is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 35 consecutive years. For the past decade this dividend stock has delivered an annual average total return of 6.30 % to its shareholders.

At the same time the company has managed to deliver a 0.80% average annual increase in its EPS since 1999. For the next two years analysts expect EPS to increase to $3.11 and $3.30 respectively. The main problem for utility companies is that they are very capital intensive and are highly regulated. In order for utilities companies to increase rates, they have to seek regulatory approval. In addition to that investing in such projects such as the smart grid is subsidized through federal programs, although companies like Con Ed typically put in at least a portion of the needed amount.

The return on equity has declined slightly over the past decade, although it is at 10% currently.
Annual dividend payments have increased by an average of 1.00% annually over the past 10 years, which is higher than the growth in EPS. The company has increased the amount of the stock outstanding by an average of 2.6% per year over the past decade. Despite the slow dividend growth, the company might be a good pick for investors who are seeking current retirement income.

A 1% growth in dividends translates into the dividend payment doubling almost every 72 years. If we look at historical data, going as far back as 1975, we would see that Con Edison has actually managed to double its dividend payment every eleven years on average. The current dividend payment is double what it was in 1985 however.

Over the past decade the dividend payout ratio has ranged between a low of 57% and a high of 97%. Currently the dividend payout ratio is at 69.6%. While this would be high for a company like McDonald’s (MCD) or Procter & Gamble (PG), a payout ratio of 70% is not uncommon for utilities. 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 guarantee 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.

I believe that Consolidated Edison is attractively valued with its low price/earnings multiple of 14, as well as an above average dividend yield at 5.60%. The high dividend payout should not be a concern because of the industry the company is in. Because of the slow dividend growth of the stock however, I would only invest in it for current income within the next decade. I do own ED mainly for diversification within the utility industry and for a current yield boost to my dividend income.

Disclosure: Long ED

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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

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Eight Companies Rewarding investors with higher payments

Most investors believe that successful dividend investing consists of identifying the highest yielding stocks in the market and then generating double digit returns on investment each year. The problem with this strategy it that it often overlooks the fact that such dividend yields are most often unsustainable in the long run. A much better strategy that could eventually produce double digit yield on cost to investors is dividend growth investing. Using this strategy a patient investor accumulates a diversified portfolio of stocks which have a long history of consistently growing dividends. The positive factor is that any investor can implement this strategy, especially now that brokerage commissions are almost zero.

As long as an investor is willing search for the best stocks that fit their criteria and do the work, focusing on dividend growth stocks should pay off in the long run. I identified the following dividend raisers for the past week.

Automatic Data Processing, Inc. (ADP), which provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers, increased its quarterly dividend by 3% to 34 cents per share. The increased cash dividend marks the 35th consecutive year in which this dividend aristocrat has raised its dividend. . The stock currently yields 3.10%. (analysis)

MDU Resources Group (MDU) operates in six segments: Electric, Natural Gas and Oil Production, Construction Services, Pipeline and Energy Services, Construction Materials and Contracting, and Other. The company increased its quarterly dividend by 1.60% to 15.75 cents per share. MDU Resources Group is a dividend achiever, which has raised distributions for 19 years in a row. The company also boasts 72 consecutive years of uninterrupted quarterly common stock dividend payments. The stock currently yields 2.80%.

Tennant Company (TNC), which engages in the design, manufacture, and marketing of cleaning solutions, increased its quarterly dividend by 6% to 14 cents per share. Tennant Companyis a dividend champion, which has raised distributions for 38 years in a row. The stock currently yields 1.90%.

Vodafone Group (VOD), which is engaged in providing service, such as voice, messaging, data and fixed line and others, increased its interim dividend by 3.5% to 2.66 pence per share. The final dividend for 2009 was 5.2 pence/share. Vodafone Group is an international dividend achiever, which has raised distributions for over one decade. The stock currently yields 5.80%.

DeVry Inc. (DV), which owns and operates DeVry University, Advanced Academics, Ross University, Chamberlain College of Nursing, and Becker Professional Review, increased its annual dividend by 25% to 20 cents per share. DeVry Inc. started paying dividends in 2006 and has been raising distributions consistently ever since. The stock currently yields only 0.30% however."The dividend increase and continuation of the share repurchase program reflect our strong financial position and outlook for the future," said Daniel Hamburger, DeVry’s president and chief executive officer. "We will continue to put our students first and invest in academic quality, which we believe leads to sustainable, long term growth and increased shareholder value.”

Span-America Medical Systems, Inc. (SPAN), which engages in the manufacture and distribution of various polyurethane foam products for the medical, consumer, and industrial markets in the United States and Canada, increased its quarterly dividend by 2.2% to 47 cents per share. Span-America Medical Systems doesn’t have a consistent history of raising distributions however. The stock currently yields 2.20%.

Baxter International Inc. (BAX), which develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions., increased its quarterly dividend by 12% to 29 cents per share. Baxter International Inc. has only started raising distributions since 2007. The stock currently yields 2.00%.

AmerisourceBergen Corporation (ABC), a pharmaceutical services company, offers drug distribution and related services to healthcare providers and pharmaceutical manufacturers in the United States, the United Kingdom, and Canada, increased its quarterly dividend by 33% to 8 cents per share. AmerisourceBergen Corporation has raised distributions since 2005. The stock currently yields only 1.00%.

Checking the weekly pulse of dividend growers is an important part of the dividend investor’s routine. It is generally a bullish sign when a company which has raised distributions for over 3 decades keeps raising them even through a recession. It also might help investors in identifying any future dividend growth stories, before they become mainstream holdings.

Full Disclosure: Long ADP

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Dividend Grouping for Dividend Income

Most dividend investors are influenced by the current yield when they enter a particular stock investment. Dividend growth investors are no different either. It is hard to blame either of these groups, as there is no point in a company that strongly raises its dividend payments, yet it might take up to two decades for the yield on cost to reach any meaningful level. Add in to that the fact that a double digit dividend growth could only be supported by a double digit earnings growth only for so long. If the dividend payout ratio was low at the beginning this could extend the strong dividend growth by a few years after earnings growth slows down to a more reasonable level.

Some of the best dividend growth stocks however would always spot a low current yield, coupled with strong dividend growth for many years to come. As some might typically yield 1% or 2 %, they would be completely ignored by most investors. The trick here is that a company that yields 2% today and raises its dividend by 12% every year would double your yield on cost in just 6 years. In most cases such companies stock prices also tend to follow the changes in the dividend payment, which could lead to strong capital gains over time. Thus, if the stock increased distributions by 12%, it is very likely that the stock price might increase by about 12% as well. This leaves the dividend yield unchanged at 2%, which doesn’t matter much for original investors, who purchased the stock 6 years earlier.

In my experience as a dividend investor I have always implemented a minimum yield criterion of between 2% to 3% when screening for dividend growth stocks. I implemented this control in order to protect myself in the event that the company I am heavily invested in stops raising distributions. That way I could at least receive some return on my investment until I try to unload my position above my breakeven price.

Looking back at the best dividend growth stories of Wal-Mart (WMT) and McDonald’s (MCD) however, my minimum criteria would have prevented me from getting aboard on these success stories. Other investors who are currently seeking high current income might also have missed out on these plays, which are delivering double-digit yields on cost for anyone who purchased Wal-Mart of McDonald’s in the 1980s.

I recently came out with a way to tweak my entry criteria of 3% minimum initial yield by grouping higher yielding and lower yielding investments with my purchase. At the end of the date, one could easily create a dividend portfolio which consists both of high yielders with slow to no dividend growth and low dividend yielders, which have the potential for strong dividend growth. If one manages to allocate the varying dividend components in their portfolio carefully, they would be able to achieve a target initial yield on cost for their stock holdings as a whole.
For example I recently added to my position in Wal-Mart Stores (WMT), which I consider of the best run companies in USA, with a strong position in the retail market and good opportunities for growth. The low current yield of 2.20% however was too low in comparison to the 3% entry criteria I apply for new and existing investments. I do believe however that the strong dividend growth would more than compensate for the low current yield, and I see the yield on cost on an investment in Wal-Mart today doubling to 4.5%-5% by the end of the next decade. That’s why I added the high dividend stock AT&T (T) to my portfolio. For every two shares of Wal-Mart (WMT) stock, I bought one share of AT&T (T). At the current prices this mix yields 3% right now.

I view AT&T (T) as a slow grower, which might end up cutting distributions sometime in the future due to its high payout and stagnant earnings in the highly competitive telecom market. The strong dividend growth at Wal-Mart (WMT) however should more than compensate for any potential dividend cuts at AT&T (T). If AT&T (T) cuts its dividends by 50% to 82cents/share, but Wal-Mart (WMT) managed to raise its distributions by 36%, my total dividend income would be unchanged. I believe that Wal-Mart (WMT) would be able to raise distributions by 36% over the next 3-4 years, assuming that it follows the most recent path of dividend growth.

Other stocks that I could use in dividend grouping for income could be high yielding triple net lease real estate investment trust Realty Income (O) or pipeline operator Kinder Morgan (KMP).

Full Disclosure: Long T, KMR, MCD, O and WMT

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Where are the original Dividend Aristocrats now?

The Dividend Aristocrats index measures the performance of S&P 500 index members that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. (Source: S&P)

Since its inception 20 years ago, the dividend aristocrat’s index has outperformed the S&P 500.


The number of components in the index has ranged between 26 in 1989 to 64 in 2001. I used this list as a primary tool for identifying companies with strong brands, which have raised distributions through both good and bad economic conditions. Check this post Historical changes of the S&P Dividend Aristocrats Index for reference.

Some investors believe that the reason why the index has outperformed the S&P 500 is because of new stocks that have later been added to the index. In a previous post I discussed how the list of original S&P 500 components in 1957 outperformed the index over the next 50 years.

It would be interesting to note what happened to the original Dividend Aristocrats. Here’s a list with 26 of them from 1989. Next to each symbol is a brief outline of the events over the past 20 years, associated with each stock.

American Home Products (AHP) became Wyeth (WYE) in 2002. The company was removed from the index in 2001 when it failed to increase dividends for 2 consecutive years in a row. The company began raising its distributions again in 2005. Currently it is in the process of being acquired by drug giant Pfizer (PFE). One dollar invested in AHP in 1989 would have turned out to $5.80 with dividends reinvested by June 2009. Yield on cost is 8.9%.

Fuse Maker AMP Inc (AMP) was acquired by Tyco in 1998.

Baxter International (BAX) was part of the index until 1997. The company spun off Allegiance Healthcare Corporation in 1996, issuing a certain amount of stock in the new company to existing shareholders. As a result its distributions fell slightly for the past three quarters of 1997 in comparison to the same period in 1996. One dollar invested in BAX in 1989 would have turned out to $8.03 with dividends reinvested. The yield on 1989 cost is 8.3%.

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)

CSR was deleted from the index in 1998. I couldn’t find any additional information on this stock.

Dover (DOV), which recently announced its 54th consecutive annual dividend increase, is still part of the index. A dollar invested in DOV in 1989 would have turned out to $5.45 with dividends reinvested. The yield on cost is 11.6%. (analysis)

Emerson Electric (EMR) is still part of the index. The company has increased its dividends for 52 years in a row. One dollar invested in EMR in 1989 would have turned out to $8.17 with dividends reinvested. The yield on cost is 17.7%. (analysis)

FPL Group (FPL) was deleted from the index in 1995, after the Florida Utility cut its distributions by one third, ending a 48-year streak of dividend increases. The company resumed its policy of regular dividend increases in 1995. One dollar invested in FPL in 1989 would have turned out to $7.56 with dividends reinvested. The yield on cost is 10.4%.

Genuine Parts Co (GPC) was removed from the index in 2002. It is unclear as to why the company was booted out, since both yahoo finance and the company’s website show no interruptions to the dividend increases. The company’s most recent dividend increase marked 53rd consecutive years of increased dividends paid to our shareholders. A dollar invested in GPC in 1989 would have turned out to $5.20 with dividends reinvested. The yield on cost is 12%.

(HI) was acquired by HSBC in 2002. I couldn’t find any information about this component.

International Flavors and Fragrances (IFF) was removed from the index in 2001, after the company cut its dividends by 60% in 2000. While International Flavors and Fragrances started raising dividends in 2003, its current distribution rate is still lower than what it was in 2000. A dollar invested in IFF in 1989 would have turned out to $3.52 with dividends reinvested. The yield on cost is 6%.

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)

Kellogg (K) was removed from the index in 2003 after the company failed to raise its quarterly dividend for 2.5 years in a row. Since 2005 the company has started to increase dividends once again. A dollar invested in K in 1989 would have turned out to $4.59 with dividends reinvested. The yield on cost is 8.9%.

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)

(LDG) was booted out of the index in 1995. I couldn’t find any information about this component.

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%.

Masco Corp (MAS) was booted out of the index in 1996. It is unclear as to why the company was booted out, since both yahoo finance and the company’s website show no interruptions to the dividend increases. A dollar invested in MAS in 1989 would have turned out to $1.31 with dividends reinvested. The yield on cost is 2.5% after the recent dividend cut; it went up to 7.7% in 2008.

3M (MMM) is one of seven original components still part of this elite dividend index. The company has consistently increased its dividends for 51 consecutive years.
A dollar invested in MMM in 1989 would have turned out to $5.33 with dividends reinvested. The yield on cost is 10.3%. (analysis)

NSI Company (NSI) was kicked out of the index in 1998. I couldn’t find any information about this component.

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)

Parker-Hannifin (PH) only stayed in the index for one year. The company failed to increase its dividend in 1989, which is why it was kicked out of the index in the first place. A dollar invested in PH in 1989 would have turned out to $11.13 with dividends reinvested. The yield on cost is 17%.

Rubbermaid (RBD) was acquired by Newell to become Newell-Rubbermaid in 1999.

Torchmark (TMK) was booted out of the index in 1996. It is unclear as to why the company was booted out, since yahoo finance shows dividend increases in 1995 and 1996. A dollar invested in TMK in 1989 would have turned out to $5.64 with dividends reinvested. The yield on cost is 4.3%.

Texas Utilities Company (TXU) was a member of the index until 1994 it failed to increase its dividend for a second year in a row in 1994. The company consequently cut its distributions the next year and after a brief increase it cut them again in 2002. The dividend payments briefly returned to 1994 levels in 2005, before an investor group led by Kohlberg Kravis Roberts & Co., TPG and Goldman Sachs Capital Partners bought out the company.

(WIN) was a member of the index until it filed for chapter 11 bankruptcy in 1999.

Warner Lambert (WLA) was a component until Pfizer acquired it in 1999.

Seven of the original 26 components in the dividend aristocrat index are still part of it. The seven survivors have managed to outperform the index average over the past twenty years.
It seems that most of the companies that leave the index as a result of mergers and acquisitions. Sometimes companies take on too much debt in an acquisition, which proves costly over time, leading to freezing or cutting of the dividend payments. Blogger Yielder notes that:

“Regardless of whether a company has a long history of dividend growth, a large acquisition financed by debt is cause for alarm bells to go off. Excessive debt can choke the company especially if the new asset requires "fixing". Unless a company has a great deal of experience with acquisitions, a quick & successful integration can be a problem especially if the company being acquired involves new areas of expertise.”

It would have been next to impossible to predict which ones were to remain the index back in 1989. It would be almost impossible to predict which ones would remain in the index 20 years from now as well. However, by diversifying your risk by spreading your bets to several stocks from as many market sectors as possible, investors would have a higher chance of finding the best dividend stocks, which would generate the most returns for them for the future.

Full Disclosure: Long PG, JNJ, MMM, EMR, KO

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Four Dividend Raisers in the news

Many investors are being sold on the idea of generating income in retirement by solely focusing on fixed income securities. That way they would have a stable income pretty much for life and there is a high likelihood that the principle would be returned intact after the bond matures. The main problem with this strategy is that while the income would remain unchanged over time, its real purchasing power would decline. If however investors purchased a diversified list of dividend growth stocks, they would be able to generate enough income and also enjoy the growing stream of distributions over time. That way investors would not have to worry too much about inflation eroding the purchasing power of their passive income. By focusing on such lists as dividend aristocrats, dividend achievers and checking the list of dividend increases regularly, investors could find the right dividend picks for their portfolios.

The following companies announced dividend increases last week:

Universal Corporation (UVV), which operates as the leaf tobacco merchants and processors worldwide, increased its quarterly dividend by 2.2% to 47 cents per share. Universal Corporation is a dividend champion, which has raised distributions for 39 years in a row. In addition to that the company’s Board of Directors approved a program for the repurchase of up to $150 million of the company’s common stock, which represents approximately 3% of its outstanding shares issued at current prices.The stock currently yields 4.50%.

Kimco Realty Corporation (KIM), which engages in acquisitions, development, and management of real estate properties, increased its quarterly distributions to 16 cents per share. Kimco Realty Corporation cut its dividends in 2009 from 44 to 6 cents/share after 16 years of consistent increases. The stock currently yields 5.40% based off the new distribution amount.

Microchip Technology (MCHP), which develops and manufactures semiconductor products for
various embedded control applications, increased its quarterly dividend by a nominal amount from 33.9 to 34cents per share. Microchip Technology has raised distributions since 2002. Despite the appealing yield of 5.60% and the possibility for gaining diversification in the technology sector, the high payout ratio is a red flag at the moment.

Aaron's, Inc. (AAN) which operates operates as a specialty retailer of consumer electronics, computers, residential and office furniture, household appliances, and accessories, increased its quarterly dividend by 5.9% to 1.8 cents per share. Aaron's, Inc has only raised distributions since 2003. In addition to that the stock currently yields only 0.30%. With EPS of $1.58 in 2008, the company could definitely afford to set up its dividend payments to shareholders a notch.

Of all the stocks raising dividends last week, only Universal Corporation (UVV) looks like an interesting and attractively valued stock that I will consider for further research. Thus do not margin your way into the stock. One problem is that since I already have an allocation to tobacco stocks like Altria (MO) as well as Philip Morris International (PM) however, I do not want to be over allocated to tobacco stocks in general.

Full Disclosure: Long PM and MO

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Estimating future Dividend Growth

Estimating future dividend growth is difficult if not impossible. Companies which might have had a long history of consistent double digit increases might stop raising dividends and might even cut them. It is easy to predict whether or not a company’s dividend is sustainable in the short run, by evaluating EPS trends, dividend payout ratios and cash flows. It is difficult to forecast however whether the dividend won’t be cut several years down the road.

Financial companies such as Bank of America (BAC) and US Bancorp (USB) are two prime examples of this. After raising distributions for several decades, and always spotting above average dividend yields, the companies had to cut dividends amidst the global financial crisis of 2007-2009. The stocks were often priced attractively before 2006-2007, with adequately covered dividends, attractive valuations and very good current yields at the time. Fast forward two years and these former dividend darlings have cut their dividends sending retiree’s alternative incomes into a tailspin.

While it is somewhat easier to predict short term movements in dividends, based off the actions in recent years, astute dividend investors need to be aware of the warning signs of a potential dividend cut or freeze.

First, if a company stops producing earnings growth, then chances are that dividend growth would be limited.

Second, if the company has taken on too much debt, it might end up cutting dividends in order to free some cash flows to repay creditors and avoid going under. If the company is already spotting an unsustainable dividend payout ratio out of earnings, chances are that dividends are due for a cut.

Third, while sometimes companies fall on hard times, management could keep raising distributions. This could be due to management’s vision that this setback in company’s fortunes is temporary. In such cases it might be unwise to sell your position, as long as the dividend is at least maintained. If management keeps borrowing money however for over 2 years in a row in order to finance the dividend, this is a warning sign.

And last but not least, while a company might look as a great promising addition for your dividend portfolio, remember to diversify across sectors, yield/growth characteristics and even countries, in order to reduce your portfolio’s systemic risk. Investors who were heavily invested in the financial sector in 2007 and 2008 suffered huge drops in income; investors who held a more balanced mixture of stocks from a variety of industries suffered lower drops in dividend income.

I recently added to my positions in the following stocks, which have recently raised distributions, trade at attractive valuations and have a long history of dividend growth.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company, which has rewarded shareholders with consistent dividend raises for 47 years, currently yields 3.20%. Using the ten year dividend growth rate for the company at 13.3%, yield on cost on an investment today would double almost every five and a half years on average. (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 raised distributions for 53 years in a row, and currently yields 3.10%. Using the ten year dividend growth rate for the company at 10.7%, yield on cost on an investment today would double almost every seven years on average. (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has raised dividends for 33 consecutive years and currently yields 3.90%. Using the ten year dividend growth rate for the company at 27.4%, yield on cost on an investment today would double every two and a half years on average. (analysis)

Emerson Electric Co. (EMR), is a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. Emerson, which currently yields 3.40%, has raised distributions for 52 years in a row. Using the ten year dividend growth rate for the company at 6.3%, yield on cost on an investment today would double every eleven and a half years on average. (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. Pepsi has raised distributions for 37 years in a row, and currently yields 2.90%. I would consider adding to my position there on dips below $60. Using the ten year dividend growth rate for the company at 12.8%, yield on cost on an investment today would double every five and a half years on average. (analysis)

Full Disclosure: Long JNJ, PG, MCD, EMR and PEP

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The Dividend Investment Journey

Most investors have specific goals in mind they pick a certain strategy to utilize. They then get to pick strategies that could help them achieve those goals. The end result from this exercise is that too often investors end up bailing out on strategies at the worst possible times. The reason for that is that they weren’t prepared for the rocky rides that would ultimately lead them to reach their goals later.

Some investors are comfortable utilizing strategies that deliver small positive results to them in a consistent manner. Dividend investing is one such strategy, where investors are frequently rewarded for holding a portfolio of the best dividend stocks, by receiving dividends. Selling covered calls is another example of a strategy where investors are rewarded frequently with small gains.

Other investors however are more comfortable to shoot for the big payout coupled with a lot of small losses. The big payout could erase any small losses previously incurred. Purchasing out of the money call or put options, which is what Nassim Taleb does, or purchasing speculative biotech stocks hoping for a positive FDA announcement are two examples of such approaches.

It is important to understand your strategy very well in order to make sure that it fits your investor profile. Dividend investing is a pretty slow and sometimes boring process of selecting companies that have raised distributions for a define set of years, provided that they are trading at attractive valuations. It involves a little bit of work when dollar cost averaging at regular intervals, rebalancing portfolio weightings and reinvesting dividends selectively. Other than that however it is nothing “exciting” to talk about in the first few years of employing this strategy. Only after a few years later however, as the stream of dividend income becomes larger and exceeds what you could be making at a part time job, does the enterprising dividend investor begin to see a material effect of employing this strategy.

In the meantime the boredom could play mind tricks on dividend investors, which are constantly bombarded with news about the stock market and the economy. Sometimes the information overload could generate intense urge for meaningless action, which would be disastrous to investment returns over time.

For example, some investors consider yields on cost of 10% as a pretty good thing. The way that most novice investors deal in attaining this goal however is by purchasing companies yielding 10% or more, without checking the fundamentals and sustainability behind this dividend payment. Back in the summer of 2008 Bank of America (BAC) was yielding over 10% on several occasions. Investors hoped that the dividend won’t get cut and that a rise in the stock price would bring the yield back to normal levels. Little did they know that the company would cut dividends twice in 6 months and end up yielding less than 0.25%.

The strategy that has worked best for many dividend growth investors is to purchase stocks in strong brand names such as Procter & Gamble (PG), Johnson & Johnson (JNJ), Wal-Mart (WMT) and Pepsi Co (PEP). Such stocks have the ability to generate strong earnings growth, which then trickles back to increased dividend payments. Some investors still ignore such investments however, since they have dividend yields of 3% - 4%. What these investors fail to see is that if these companies could grow their distributions at least at a rate of 7% annually, they would end up doubling their distributions every decade. A 4% yielder with sustainable dividend payout ratio today would likely generate an 8% yield on cost after ten years.

The followin dividend aristocrats are good starting positions for many dividend investors:

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 increased distributions for 47 years in a row. (analysis)

PepsiCo, Inc.(PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. This dividend aristocrat has increased distributions for 37 consecutive years. (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. This dividend aristocrat has increased distributions for over 53 consecutive years. (analysis)

Wal-Mart Stores, Inc. (WMT) operates the largest chain of retail stores in various formats worldwide. This dividend aristocrat has consistently increased distributions for 35 years. (analysis)

At the end of the day, what truly matters is that you reach your financial goals, not when you started investing or how fast you were going. There truly aren’t any short cuts to investing other than the fact that slow and steady always wins the race, while the hare would most likely spend most of their time catching up.

Full Disclosure: Long JNJ, PEP, PG and WMT

Relevant Articles:

- What Dividend Growth Investing is all about?
- 10 by 10: A New Way to Look at Yield and Dividend Growth
- Why do I like Dividend Aristocrats?
- Dollar Cost Averaging

Nine stocks with increasing distributions

I typically try to summarize each week’s dividend increases in the news by outlining the company that raised distributions and whether it is an achiever or not. Just because I list a stock in an article however does not mean I am recommending it. Identifying the dividend raisers each week however helps me in finding out quality dividend stocks which either should be bought on dips or after they have raised distributions for at least a decade. Even if a list contains some interesting stock ideas however, this does not mean that one should blindly enter a position in such securities. Only after one understands whether such a stock could grow earnings into the future in order to support a growing dividend, should they start accumulating a position over time.

Questar Corp (STR), which engages in gas and oil exploration and production, midstream field services, energy marketing, interstate gas transportation, and retail gas distribution businesses, increased its quarterly dividend by 4% to 13 cents per share. Questar Corp is a dividend aristocrat, which has raised distributions for 30 consecutive years in a row. The stock currently yields only 1.30%.

Stryker Corporation (SYK), which operates as a medical technology company worldwide, has declared a cash transition dividend of $0.10 per share, payable December 16, 2009, to shareholders of record at the close of business on November 18, 2009. The transition dividend will increase the total dividends paid in 2009 to $0.50 per share, up 52% from the $0.33 per share paid in 2008. Subject to further action by the Company's Board of Directors, the Company anticipates the first quarterly dividend to be paid in January 2010 at a targeted quarterly rate of $0.15 per share. Stryker Corporation is a dividend achiever, which has raised distributions for 16 consecutive years in a row. The stock yields 1.30%, based off its new quarterly rate of 15 cents/share.

Middlesex Water Company (MSEX), which operates as a food company in North America and internationally, increased its quarterly dividend by 2.5% to 20.50 cents per share. Middlesex Water Company is a dividend champion, which has raised distributions for 36 consecutive years in a row. The stock currently yields 4.60%.

Inergy Holdings GP LLC (NRGP), the general partner of propane supplier Inergy LP, on Monday said it will increase its quarterly cash distribution 9 percent for the three-month period ended Sept. 30. The company will raise its distribution to 85 cents per limited partner unit, up from the previous quarter's distribution of 78 cents per limited partner unit. Separately, Inergy GP LLC (NRGY), managing general partner of Inergy LP, said its board of directors increased its quarterly cash distribution to 67.5 cents per limited partner unit for the quarter ended Sept. 30. This represents the 32nd consecutive quarterly increase and an approximate 6.3% increase over the distribution for the same quarter of the prior year. Inergy, L.P., with headquarters in Kansas City, Mo., is among the fastest growing master limited partnerships in the country. The company’s operations include the retail marketing, sale, and distribution of propane to residential, commercial, industrial, and agricultural customers. Inergy Holdings GP LLC (NRGP), currently yields 7% , while Inergy GP LLC (NRGY) yields 8.80%.

The following stocks announced their intent to raise distributions to shareholders:
Visa, Inc. (V) which operates retail electronic payments network worldwide increased its quarterly dividend by 19% to 12.50 cents per share. The stock currently yields 0.70%.

Strayer Education Inc. (STRA), which provides various academic programs in traditional classroom courses and online via the Internet, increased its annual dividend by 50% to $3 per share. Strayer Education Inc. has consistently raised distributions since 2005. The stock currently yields 0.90%.

SouthWest Water Company (SWWC), which provides water and wastewater related services principally in the United States, doubled its quarterly dividend to 5 cents per share. SouthWest Water Company is a dividend achiever. The weird part here is that the previous dividend of 2.5 cents/share was below the quarterly dividend of 6 cents/share paid in 2008. The stock currently yields 3.70%.

American Financial Group (AFG), which engages in property and casualty insurance business in the United States, increased its quarterly dividend by 5.8% to 13.75 cents per share. American Financial Group has consistently raised distributions only since 2006. The stock currently yields 2.10%.

Full Disclosure: None

Relevant Articles:

- Another aristocrat raising distributions
- Four Notable Dividend Increasers in the news
- The return of the financial dividends
- Best Dividend Picks for 2009, 3Q update

The Best Trades could be the ones not entered

I often analyze individual stocks on the dividend growth blog. Some if not most of the times however, after guiding readers through the company story I end up stating that the stock is either a hold or sometimes even a sell. This irritates most investors, who see the practice of reviewing a stock which results in a negative or neutral recommendation as a waste of their time.

I definitely understand the frustration for those readers. Most investors typically want to be told what to buy, when to buy it and how much they would make when selling. This strategy always works in get rich quick books, but it seldom generates any profit in the real world. The reason why so many investors lose money on a consistent basis is because they fail to educate themselves and instead end up following gurus which don’t even trade the ideas they are pitching to their followers.

The value of a stock analysis is that it should give investors ideas about what they want to see in a stock, versus what they don’t want to see in a stock. A prime example is my analysis of Paychex (PAYX), which is overvalued relative to its competitor Automatic Data Processing (ADP). In addition to being overvalued, Paychex currently distributed most of its earnings out as dividends, which is clearly unsustainable in the long run. Thus, the relatively higher dividends yield of 4% on PAYX versus 3.3% for ADP is not enough to compensate the risk of a potential dividend cut.

Another reason why a neutral stock analysis is beneficial is that it provides investors with some insight into a company which could be temporarily overpriced. Since entry price matters to some extent, it would be unwise to pay top dollar for stocks, when there are companies with similar characteristics that are priced attractively. An investor, who does his or her homework early in the game, would be well prepared from reading the analysis to enter a position on dips, should the stock fall on general market weakness or on negative news.

The urge for constant action and the inability to wait for the best entry setups might be the difference between making money and losing money in the long run. Jesse Livermore, a famous trader from the 1920’s is known for his saying that “The big money is made by sitting, not thinking. Men who can both be right and sit tight are uncommon”

I completely agree with this assertion. Investors who purchased stocks in the late 1990’s when dividend yields were at their lowest have suffered inferior returns over the past decade. Other investors who finally saw some gains in their portfolios in 2009 might have been quick to take a profit too early, thus missing out on the majority of the rally off the March 2009 lows.

Even if you purchased great stocks such as Johnson & Johnson (JNJ) or Procter & Gamble (PG) while their yields were at multi year lows, you would have seen no capital growth at best, although your dividend income would be higher than it was a decade ago.

At the end of the day what truly matters is that investors develop a sound strategy that fits their personality and go with it. The strategy should incorporate entry and exit rules, diversification and hopefully some sort of position sizing methods such as dollar cost averaging.

This blog post was included in the Carnival of Personal Finance #230 – New Site Edition

Full Disclosure: Long ADP, JNJ and PG

-Paychex (PAYX) Dividend Stock Analysis
-Automatic Data Processing (ADP) Dividend Stock Analysis
-Emotionless Dividend Investing
-Are High Dividend Stocks worth it?

Five Dividend Stocks for long-term dividend growth

In Six Dividend Stocks for current income I provided a list of higher yielding dividend stocks, which investors could use for current income. With a high current yield, the stock list could provide a decent stream of dividend income for retired individuals. There lies another problem however.

Most younger investors tend to ignore dividend stocks, which typically are mature, slower growing companies with dependable cashflows a portion of which are distributed back to investors. Younger investors view these dependable income stocks as boring and too slow moving, which don’t have anything better to do with their cashflows but send them back to owners in the form of dividends. Instead these investors prefer investing in growth stocks with high price earnings ratios and high expectations for growth. While most companies that distribute a portion of their profits in the form of dividends realize that double-digit growth cannot last forever, most growth stocks sell at rich valuations, supported by analysts who have perfected the art of predicting high growth rates for decades to come. As soon as the music stops, these growths stocks stumble, dragging investors fortunes with them.

On the other hand the dividend stocks would have kept growing, albeit at a slower pace, and would have kept sending a higher stream of dividend income to shareholders, to be used at their own discretion. Many investors do not realize that unlike capital gains, dividends are real cash that bolsters your return. Dividends have also accounted for 40% of the annual average total returns of the S&P 500 over the past century. A company, which grows its dividend year after year, could end up paying a double-digit yield on cost to long-term investors over time.

Companies that regularly pay dividends impose a discipline on managers to treat cash very carefully and thus make better decisions by adopting projects, which would generally improve the bottom line, without sacrificing return on equity.
Thus dividend stocks, which consistently grow their payments, should be in every investor’s portfolio, irrespective of their age. A stock that regularly grows its distributions provides an inflation proof source of income, which is much more reliable than the Consumer Price Index, on which TIPs (TIP) rely on.

A stock could afford to consistently raise distributions by selling products, which have a strong brand image, and thus are not easily substituted by others. Examples of such companies include Procter & Gamble (PG), Clorox (CLX), Pepsi Co (PEP), Wal-Mart (WMT) and Emerson Electric (EMR).

The Clorox Company (CLX) manufactures and markets a range of consumer products such as bleaches; cleaning products; water-filtration systems and filters; auto-care products; plastic bags, wraps, and containers; Over the past decade the company has managed to boost earnings per share at a rate of 13.60% annually. Clorox has paid uninterrupted dividends increased payments to common shareholders every year for 31 years. Dividends have increased at an average rate of 8.60% annually since 1999. Check my analysis of the The Clorox Company (CLX).

Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. The company operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. The company has been able to increase earnings at an average rate of 8.40% annually over the past decade. Emerson Electric Co. has increased payments to stockholders for 52 consecutive years. The ten-year dividend growth rate is 7% per annum over the past decade. Check my analysis of Emerson Electric Co. (EMR).

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. The company manufactures, sells, and distributes Pepsi-cola beverages and is enhancing its distribution channels through its acquisition of key bottlers. The company has been able to increase earnings at an average rate of 9.90% annually over the past decade. PepsiCo has been consistently increasing its dividends for 36 consecutive years. Dividend payments have increased by an average rate of 13.50% annually since 1999. Check my analysis of PepsiCo, Inc. (PEP).

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. The company has been able to increase earnings at an average rate of 12.20% annually over the past decade. Procter & Gamble has been increasing its dividends for the past 53 consecutive years. Dividend payments have increased by an average of 10.90% annually over the past 10 years. Check my analysis of Procter & Gamble (PG).

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International. The company has managed to deliver an impressive 11.60% average annual increase in its EPS. Wal-Mart Stores has consistently increased dividends every year for 35 years. Dividends have increased at an average rate of 18.90 % annually since 1999. Check my analysis of Wal-Mart Stores, Inc. (WMT).

While these companies are poised to deliver strong long-term dividend growth, don’t throw caution away. These stocks should be a part of a diversified dividend portfolio with at least 30 components in it.

Full Disclosure: Long CLX, EMR, PEP, PG and WMT

Relevant Articles:

- The Dividend Edge
- The case for dividend investing in retirement
- Clorox (CLX) Dividend Stock Analysis
- Reinvest Dividends Selectively

Is now the time to sell your dividend stocks?

The strong bullish move off of March 2009 lows has lifted many stocks, thus creating large unrealized paper gains for many dividend investors. While prices have enjoyed a steep run-up, dividend yields, which move inversely to prices, have declined in the process. Many dividend investors are now wondering if they should simply lock in their gains in stocks which are not yielding that much relative to others.

As a dividend investor, one of the items in my entry criteria is to require at least a 3% initial yield when purchasing a stock. Back in the first half of 2009, there were plenty of good quality dividend stocks that fit these criteria. Nowadays even some of my favorites such as PepsiCo (PEP) and Aflac (AFL) are yielding a little less than 3%. Now that those holdings are yielding less than my entry yield criteria, the question is whether I should hold on to them, or switch to stocks with higher current yields. If I were to do this, I would instantly increase my dividend income. If I didn’t however, that wouldn’t really hurt my income either.

First, the reason why I won’t do this is because I am a long term investor. I buy stocks and plan to hold on to them for the long run, or until a company cuts dividends. Over time I expect that a dividend grower would deliver a solid yield on cost. In other words if I purchased Johnson & Johnson (JNJ) at $50 in March, my yield on the original investment would have been 3.68%. After the company raised its annual dividend however to $1.96/year, my yield on cost increased to 3.92%. If JNJ raises distributions at 6% annually for the next 12 years, my yield on cost would double to 8%. More often than not however, the current yield on Johnson & Johnson (JNJ) would remain between 2% and 3% over the next decade. That is, if Johnson and Johnson pay a $4 dividend in one decade, and the stock yields 2%, the stock price would be $200. Most dividend yield chasers would be ignoring the stock simply because the yield is too low. At that moment however, my yield on cost would be 8%, and I wouldn’t care as much about the current yield, except when reinvesting distributions.

Therefore it is important to distinguish between yield on cost, and current yield. If you purchase a stock whose dividend payment increases over time, chances are that your yield on cost would be increasing. Thus, even if the current yield drops to 2%, one should not consider selling. Another example in this situation is Aflac (AFL), which could have been purchased around $12 at its lows in March, yielding about 10%. Despite the fact that the stock is up over 300% since that point and yielding 2.4% currently, this investment would still be yielding 10% on cost to the investor who bought at the time.

Second, you have to take into account the dividend yield and dividend growth characteristics in addition to evaluating the sustainability of the dividend. If you purchased Procter & Gamble (PG), at prices between $45 and $50, your yield on cost is somewhere between 3.50% and 3.90%, despite the fact that the stock currently yields 3.10%. The ten year dividend growth rate for this Cincinnati based manufacturer of consumer goods is 10.60%. Using the rule of 72, the company would double your yield on cost in 7 years. In addition to that the dividend payment is adequately covered from current earnings and cash flows per share.
Let’s assume that you decided to sell your Procter & Gamble (PG) stock today for a higher yielding company such as AT & T (T), which currently yields 6.30%. While you would essentially double your dividend income overnight, you would have to note that AT&T (T) has grown its distributions by 5.3% annually over the past decade. In addition to that, the payout ratio of the telecom company is approaching 80%, which puts the sustainability of the distribution in danger. Last but not least, by switching from Procter & Gamble (PG) into AT&T (T) would lead to your portfolio being overweight to the telecommunications sector and underweight the consumer staples sector.

At the end of the day it is important to understand that investing is more art than science. Thus, while a strategy might look good on paper, does not mean that it would stand the tests of the battle. It is also a balancing act between several known and unknown variables, such as dividend yield, dividend growth, dividend payout, diversification and dollar cost averaging. If your portfolio consists mainly of high yielding securities, there is a very high probability that the dividend payouts on your investments is high, which increases the likelihoods for a dividend cut, and the opportunities for income growth are limited. It is important to view stocks as ownership portions of businesses, and thus concentrate on selecting only those which the investor believes to have solid fundamentals over time.

Two such companies include Johnson & Johnson (JNJ) and Procter & Gamble (PG). Both companies are leaders in their own markets, and possess strong economic moats.

The Procter & Gamble Company 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 raised distributions for 53 years in a row. (analysis)

Johnson & Johnson engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company has raised distributions for 47 consecutive years. (analysis)

Both companies offer not only great dividend growth potential, but also strong capital gains potential as well for the enterprising long term investor. While investing in the short run is mostly affected by strong emotions such as fear and greed, long term dividend investing is all about evaluating long term business trends and then positioning accordingly.


Full Disclosure: Long AFL, JNJ, PEP, PG and T

Relevant Articles:

- Emotionless Dividend Investing
- Procter & Gamble (PG) Dividend Stock Analysis
- Johnson & Johnson (JNJ) Dividend Stock Analysis
- Should you re-invest your dividends?

Six Dividend Stocks for current income

Most novice dividend investors typically are under the impression that successful dividend investing entails finding and purchasing the highest yielding stocks. This strategy is flawed, because it does not take into account the sustainability of the dividend. A company, which yields 20%, might generate a much lower yield on cost over time.

I purchased American Capital (ACAS) in 2008 when this business development company was trading at $30 and was yielding 13%. Just a few months later the company suspended its dividend payment, and I sold it immediately. The thing to learn from this example is that investors have to check the sustainability of distributions in light of cash flows generated by the business, the amounts of debt relative to total assets and the amounts of interest expenses. If you find a high yielding stock, which generates enough cash flow growth and has limited amounts of debt, then it could be a buy on the next dip.

While companies are not contractually obligated to share profits with shareholders, it is nice to see when boards increase dividends and declare stock buybacks, This typically sends positive signals about management’s confidence in projected cashflows, generated by the business.
In my portfolios I like to hold stocks with different yield/dividend growth characteristics. I do tend to focus mostly on the sweet spot of dividend investing, where yields are somewhere between 3% and 5% and dividend growth is in the upper single digits or in the double digits.
I do realize however that some investors are interested mostly in current income generation, and not so much about future dividend growth. Thus recommending Wal-Mart with its 2% dividend yield to an investor who wants to generate as much income as possible now might sound ridiculous. Just because one wants to generate as much income as possible however, doesn’t mean that they should throw caution away with the wind. Sustainability of the dividend should be evaluated, in addition to sustainability of the dividend growth. A stock with a sustainable but unchanged dividend, which yields 9% on cost, would produce a lower inflation adjusted income level over time.

In addition to that, most studies of portfolio durability show that one should not spend more than 4% of their portfolio value each year. If you have a dividend portfolio valued at $1 million dollars, which generates $40,000/year in dividend income, and whose dividend growth closely matches the inflation rate, you are ok as long as you don’t spend more than 40,000/year. If you spend more than that, you could end up eating your principal.

Thus, even if you found the highest dividend stock, you should not be spending more than 4% of the starting value of your portfolio each year, adjusted for inflation. If you owned a 10% yielder on a $1 million portfolio, and you spend all your dividend income, you would be in trouble when one of two things happen:

1) The company cuts dividends
2) The company fails to increase dividends to compensate for the eroding value of inflation

I do have several ideas on stocks with sustainable dividends that could also afford to grow them over time.

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company has increased dividends for 15 consecutive years. Check my analysis of this REIT.

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. This dividend achiever has rewarded unitholders with regular distribution increases for 13 years in a row. Check my analysis of this MLP.

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 35 years in a row. Check my analysis of Con Ed.

Altria Group, Inc., (MO) through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in the United States. Philip Morris International Inc (PM) on the other hand manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. Before spinning off Kraft (KFT) and Philip Morris International (PM), Altria had an uninterrupted streak of 41 consecutive annual dividend increases. The spun out companies are also likely to return increasing amounts of profits back to shareholders in the form of share buybacks and dividend increases. I like both MO and PM for global exposure to tobacco. Check my analysis of both stocks.

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. Check my analysis of BP.

In order to increase portfolio longevity, I would also consider at least a 25% allocation to fixed income, which would provide some buffer during bear markets and deflationary environments. In addition to that, having an allocation to lower yielding stocks with higher dividend growth characteristics could also provide a buffer for dividend increases if you are lucky enough to spend more time in retirement. After all, the worlds oldest person on record was Jeanne Calment of France (1875–1997), who died at age 122 years. For a person retiring at the age of 60 or 70, this could mean planning for a 50 to 60 year retirement. Your goal should always be for your money to outlive you, no matter what.

Full Disclosure: Long PM, MO, ED, KMP, O, BP

- High yield stocks for current income
- Best High Yield Dividend Stocks for 2009
- Yield on Cost Matters
- The Sweet Spot of Dividend Investing

Another aristocrat raising distributions

With the market up strongly year to date after hitting a multiyear bottom in March, it is hard for investors to get excited about current dividend yields of 3%-4%. It is even harder to convince an investor that a 3% yielder which manages to raise distributions by 10% annually over the next 7 years would lead to a yield on cost which is twice the current yield right now. Just a few months ago however, most investors realized that dividend income is always positive, even in a bear, after stocks tumbled over 50% off their all time highs that were hit in 2007. It is a great to achieve at least some return on investment, even when it feels that the whole world is tearing apart. Companies which maintain and even increase dividends show their confidence in their ability to generate enough in future earnings in order to cover the dividend raises. An especially bullish sign is when a company which has rewarded shareholders with a dividend raise for 37 consecutive years, raises dividends.

Several companies raised their distributions last week:

PPG Industries (PPG), which manufactures and supplies protective and decorative coatings, increased its quarterly dividend by 1.9% to 54 cents per share. PPG Industries is a dividend aristocrat, which has raised distributions for 38 consecutive years in a row. The stock currently yields 3.40%.

Duncan Energy Partners L.P. (DEP), which engages in gathering, transporting, marketing, and storing natural gas, as well as in transporting and storing natural gas liquids (NGLs) and petrochemicals in the United States, increased its quarterly dividend by 4.8% to 44 cents per unit. Duncan Energy Partners L.P. has raised distributions since 2007. The units currently yield 8.20%.

Enterprise GP Holdings L.P., (EPD), a midstream energy company, which provides services to producers and consumers of natural gas, natural gas liquids (NGL), crude oil, and petrochemicals in the continental United States, Canada, and Gulf of Mexico, raised its quarterly distributions to 51.5 cents/unit. This distribution represents a 13.2 percent increase from the $0.455 per unit distribution declared with respect to the third quarter of 2008. Enterprise GP Holdings L.P., is a dividend achiever, which has raised distributions since 2000. This MLP currently yields 7.40%.

Goodrich Corporation (GR), which engages in the supply of aerospace components, systems, and services worldwide, increased its quarterly dividend by 8% to 27 cents per share. Goodrich Corporation has only raised distributions since 2007. The stock currently yields 1.90%.

Full Disclosure: None

Relevant Articles:

- Four Notable Dividend Increasers in the news
- Emotionless Dividend Investing
- Debt coverage for sustainable dividends
- McDonald’s Delivers Strong Dividend Growth

Selling Options is no free lunch

Options are contracts that give their owners the right but not the obligation to buy (calls) or sell (puts) securities at a predetermined price (strike) at a predetermined period in the future.
If an investor is bullish on Microsoft (MSFT) when the stock is trading at $20/share, he/she could purchase calls and profit at options expirations week if the stock price increases above the strike price plus the price paid for the call. The options price consists of time value/time decay and an intrinsic value, which is the difference between the strike price and the current price of the security. Overall in quiet markets the time decay decreases the values of options. The time decay portion of the options price is sensitive to changes in volatility and could increase if volatility increases however.

Most investors believe that by selling covered calls or cash secured puts they could achieve additional income from the securities they own or plan to own. This additional return comes from taking on the additional risk of potentially exercising your options, which could hurt your total returns.

The S&P maintains two options indexes based off the S&P 500. One of them incorporates selling covered calls against the index, while the other incorporates selling naked puts against it.

The CBOE S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write (covered calls) strategy on the S&P 500 Index. The methodology of the BXM Index is based on (1) buying an S&P 500 index portfolio, and (2) writing the near-term S&P 500 "covered" call option, generally on the third Friday of each month. The call is held until it is cash-settled on the 3rd Friday of the following month, at which time a new one-month call option is written.

Ibbotson Associates tested the strategy of selling covered calls against S&P 500 for the 16-year period between 1988 and 2006. According to the findings, the buy write index returned 11.77%, versus 11.67% for the S&P 500 index. The buy-write strategy managed to slightly outperform the broad market with lower volatility, as defined by standard deviations. The standard deviation for the buy write index was 9.29%, which was much lower than the 13.89% volatility of the S&P 500.

Overall for the past 23 years ending in March 2009, the buy-write index did manage to slightly outperform the S&P 500.

The covered calls strategy typically outperforms the underlying in flat and weak markets, while under performing the underlying in strong bull markets.

The chart below shows that as a percentage of the underlying value, premium income on covered calls has ranged between 0.5% to 4.50% and averaged close to 1.70%/month. Investors who dabble in options often see that they could purchase a stock at $20 and then sell a covered call at the next strike for $0.50, which represents a nice 2.50% return. Investors then start projecting and annualizing these kinds of returns. As evidenced by the first chart, these premiums are simply a compensation for foregoing any gains beyond the strike price, while fully participating in any declines in the underlying prices. They did not lead to the generations of any excess returns with any consistency relative to the cumulative performance of the S&P 500.

There are several funds which employ covered call techniques on S&P 500 index. One of the longest standing ones is S&P 500 Covered Call Fund Inc. (BEP). Over the past 4 years it has had a total return of almost zero, despite the fact that it keeps distributing $2 in dividends every year.

Thus on average, it is safe to assume that unless investors possess above average timing skills, selling covered calls is no free lunch, despite what gurus and self proclaimed experts claim this “safe” technique to be.

Full Disclosure: None

- The pros and cons of selling covered calls on dividend paying stocks

- Covered Calls for additional income

- An alternative strategy to covered calls

- Covered Call Options Strategy for cutting losses on USB

Debt coverage for sustainable dividends

Most companies use debt for a variety of reasons in their operations. It could be either short term or long-term obligations. If there’s anything the 2007-2009 financial crisis has taught us, it is that excessively leveraged companies could easily blow up after a chain of negative events. Thus it pays to know what the debt situation for a particular company you are investing in actually is.

Some investors typically focus on debt to total assets to gain a perspective on the amount of the leverage the company has. While this method is widely accepted by some investors, I believe that it has some shortcomings, which might prevent investors from seeing the bigger picture. Most importantly comparing debt to total assets does not tell whether a company could service its debt obligations or not.

When you decide to get a loan from your bank, one of the most important questions they have is what your income has been, rather than provide a list of your assets and debts. Only when you provide a proof that you could service a new line of credit, would your banker provide you with a loan.

One method that I prefer is comparing annual earnings before interest and taxes to the amount of annual interest expense paid. While this ratio would vary for different types of enterprises, it should never the less provide an important glimpse to a company’s ability to service its debts when its trended over several years.

I highlighted the coverage ratios for the 51 components of the Dividend Aristocrats Index. Some of the members of this dividend basket have already cut distributions so I expect them to be booted out by the end of 2009. Here’s the list, which includes company name, ticker, industry, as well as the past 3 years worth of coverage ratios for each company:




Dividend investors should generally look for a higher coverage ratio of interest payments. A lower coverage indicates that a decline in earnings could generally make it difficult for the company to service its debt, which could not only jeopardize its dividend payments but also could lead to bankruptcy down the road.

Full Disclosure: I have a long position in most of the stocks mentioned in this list

Relevant Articles:

- Six things I learned from the financial crisis
- Dividend Aristocrats List for 2009
- Dividend Cuts - the worst nightmare for dividend investors.
- Dividend Investing Resources

Four Notable Dividend Increasers in the news

Investors have typically concerned themselves about maximizing total returns over time. Total returns are the sum of capital gains and dividends received. Over the past two years markets have produced negative total returns to investors, which is especially troublesome for those who were planning to retire in the coming few years. Instead of focusing on total returns however, future retirees could focus on generating sustainable dividend income from their portfolios, which is much less volatile that capital gains. In fact, over the past decade dividends represented the only income that investors have generated in the markets. In essence, stockholders are “paid for waiting” until their portfolios rebound. Especially valuable are those dividend stocks that not only pay reliable dividends, but also raise them regularly. I have highlighted four such companies, which announced their intentions to reward stockholders with dividend raises:

RPM International Inc. (RPM), which operates as a food company in North America and internationally, increased its quarterly dividend by 2.5% to 20.50 cents per share. RPM International Inc. is a dividend aristocrat, which has raised distributions for 36 consecutive years in a row. The stock currently yields 4.30%.

ConocoPhillips (COP), which is the fourth largest integrated oil and gas company in US, increased its quarterly dividend by 6% to 50 cents per share. This is the ninth consecutive annual dividend increase for ConocoPhillips. The stock currently yields 3.80%.

ONEOK Partners, L.P. (OKS) engages in the ownership and management of natural gas gathering, processing, storage, and interstate and intrastate pipeline assets, as well as natural gas liquids (NGLs) gathering and distribution pipelines. This Master Limited Partnership increased its quarterly distributions by 0.9% to $1.09 per unit. ONEOK Partners has consistently raised distributions only since 2006. The MLP’s units currently yield 8.10%.

"The distribution increase reflects the benefit of our recently completed growth projects, which have increased our fee-based earnings, as well as an improved capital market environment," said John W. Gibson, chairman and chief executive officer of the general partner of ONEOK Partners. "As volumes behind these projects continue to ramp up, we anticipate additional opportunities to increase our distributions in the future."

Reynolds American Inc. (RAI), which operates as a food company in North America and internationally, increased its quarterly dividend by 5.9% to 90 cents per share. Despite the fact that Reynolds American Inc. is not a consistent dividend raiser, it has increased distributions by 132% over the past decade. The stock currently yields 7.70%.

ConocoPhillips (COP) looks like an interesting candidate to add to my watchlist. I would keep current on any events in the company and would look to initiate a position there on dips, provided that such opportunities arise.

Full Disclosure: Long RPM

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- 29 stocks with sustainable dividends
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- Master Limited Partnerships (MLPs)
- Eight Dividend Increases in the news

SYSCO Corporation (SYY) Dividend Stock Analysis

SYSCO Corporation, through its subsidiaries, markets and distributes a range of food and related products primarily for foodservice industry.
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 38 consecutive years. For the past decade this dividend growth stock has delivered an annual average total return of 6.20 % to its shareholders.

At the same time the company has managed to deliver an 11.20% average annual increase in its EPS since 2000. For the next two years analysts expect EPS to increase to $1.81 and $1.92 respectively. The main problem for the company right now is the slowdown in sales at US restaurants, which account for more than 60% of revenues for this food distributor. Other than that the growth prospects for the stocks exist not only through internal growth but also through acquisitions as well. Building regional distribution centers and better inventory management are two of several initiatives that the company is applying for internal growth. International expansion could also be another opportunity for Sysco.

The returns on equity have increased slightly over our study period to a very respectable 30.80% in 2009.


Annual dividend payments have increased by an average of 20.30% annually over the past 10 years, which is much higher than the growth in EPS. Some of it came from stock buybacks and some of it was a result of expansion in the dividend payout ratio.

A 20% growth in dividends translates into the dividend payment doubling almost every 3 and a half years. If we look at historical data, going as far back as 1975, we would see that Sysco has indeed managed to double its dividend payment every three and a half years on average.

Over the past decade the dividend payout ratio has more than doubled to 65% in 2008. While the dividend is well covered based off current cash flow/share, the company would most probably have to slow down or stop dividend increases until earnings growth picks up again. The stock buyback program could also be put on hold as a result of this as well. 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 believe that SYSCO Corporation is attractively valued with its low price/earnings multiple of 14, as well as an above average dividend yield at 3.80%. The high dividend payout ratio makes this otherwise great stock a hold for the time being however. I would only consider investing in Sysco at this time as part of a dividend reinvestment program.

Full Disclosure: Long SYY

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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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- General Electric (GE) Cuts the Dividend
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- Reinvest Dividends Selectively
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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%

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Best Dividend Picks for 2009, 3Q update

Back at the end of 2008, I was invited to participate in a stock picking competition by selecting 4 stocks. At the time I simply included the highest yielding stocks in my portfolio – Con Edison (ED), Realty Income (O), Phillip Morris International (PM) and Kinder Morgan (KMP). I believe that as a whole, these stocks would provide dependable income for individuals seeking high current income today. These stocks also possess strong dividend growth characteristics as well, which is essential for investors to keep up with inflation if they spend all of their distributions in a given year.

You could find the reasons for my stock selections below:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company is widely held among dividend investors, and is known as the “Monthly Dividend Company”. Since Realty Income went public in 1994 it has raised dividends consistently, often more than three times per year. Some investors are concerned that Realty Income has a high dividend payout ratio, which stops them from purchasing its shares. The truth is that real-estate investment trusts have to distribute all of their earnings to shareholders in order to avoid being taxed by the IRS. Thus, a more useful gauge for Realty Income’s dividend coverage is its Funds from Operations, which includes earnings per share and certain non cash items such as depreciation expense for example.
This dividend achiever currently yields 6.5%, and is up 18.8% year to date.

Consolidated Edison, Inc., (ED) through its subsidiaries, provides electric, gas, and steam utility services in the United States. People still keep using electricity at the same rate even during recessions, as do businesses as well. This being said, Con Edison’s revenues so far this year have been lower, in comparison to their levels from last year due to the overall weakness in New York’s economy as a whole. The company also recently managed to receive a lower than anticipated increase in its rates to customers. In addition to that there is some uncertainly about the utilities sector as a whole and the smart grid project, which would turn out to be very costly, especially if government subsidies do not cover a major part of those projects. I do like the fact that Con Ed has raised dividends for 35 consecutive years, despite the fact that raises have come at a 1% annual rate as of recently. This dividend aristocrat also spots a healthy 5.7% yield, which a good compensation if you seek current income for the next 5 - 10 years. The stock is up 11.0% year to date.

Philip Morris International Inc (PM) manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. The company was spun out of Altria Group (MO) in 2008. While it does face declining demand in Western Europe, which accounted for a little less than 50% of its operating income, the company could benefit from growth in emerging markets such as China or India as well as from strategic acquisitions. Add in to that the strong shareholder focused culture of Altria Group, which has always tried to deliver strong and consistent dividend growth and buybacks, and you have a recipe for success. Tobacco usage is not going to stop just like that no matter how much taxes are being levied on the products. The stock currently yields 4.8%, and is up 16.4% year to date.

Kinder Morgan, L.P. (KMP) owns and manages energy transportation and storage assets in North America. The company’s business is all about transporting oil and natural gas in the US, and thus it is not as affected from the rise and fall of energy prices as major producers such as Exxon (XOM) or Chevron (CVX) typically are affected. MLP’s in general are mostly indifferent to fluctuations in commodity prices because they are paid to transport not produce commodities. MLP’s like Kinder Morgan (KMP) typically receive a fixed fee for moving a product over a certain distance through their pipelines. In addition to that there is little competition between pipeline companies for business, as they are almost monopoly like businesses. Thus, their revenues tend to be rather stable. Kinder Morgan is eyeing expansion, which would be accretive to distributable cash flows per unit for the near future.
Kinder Morgan has raised distributions for over a decade, and as such it has been included in the dividend achievers index. The company’s units currently yield 7.7%, and are up 25.7% year to date.

Year to date the portfolio has produced a total return of 17.99%, which is not too bad for a conservative basket of stocks. The price return is only 12% however, which goes on to show that holding dividend stocks during a downturn could be especially rewarding if distributions get reinvested at lower prices.

Check out the performance of the other bloggers year to date returns in the table below:


Rank Return

Intelligent Speculator 73.05%

WildInvestor 56.78%

Four Pillars 44.26%

Wheredoesallmymoneygo 43.01%

The Financial Blogger 24.49%

Dividend Growth Investor 12.00%

Million Dollar Journey 8.49%

My Traders Journal -3.16%

ZachStocks -13.17%

I would like to emphasize the fact that successful dividend investing is a long-term process. I strongly doubt that a time frame of less than 15 years is indicative of whether the performance of the stock picks above is sustainable or not. Having a diversified portfolio of at least 30 individual companies from several sectors, sizes and locations is essential in order to be diversified and avoid taking unnecessary risks. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today's post.

This post was included in the Carnival of Personal Finance Edition #227

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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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McDonald’s Delivers Strong Dividend Growth

Several companies raised distributions last week. The most notable raiser was fast food chain McDonald’s (MCD), which surprised investors with a 10% dividend increase. This marked the 33rd consecutive annual dividend increase for this Oak Brook, Illinois based dividend aristocrat.

McDonald's Chief Executive Officer Jim Skinner said, "So far in 2009 we've returned nearly $4.0 billion to shareholders through dividends and share repurchases, bringing total cash returned since the beginning of 2007 to about $15.5 billion. With today's dividend increase, we expect to end the year near the high end of our three-year, $15 billion to $17 billion total cash return target."
Skinner continued, "This achievement reflects the success of our better, not just bigger strategy, which has helped drive sales, profits and, ultimately, cash from operations. Going forward, our philosophy on our use of capital remains unchanged. Our first priority is to reinvest to grow our business and enhance shareholder value. After these investment opportunities, we expect to return all of our free cash flow over the long term through dividends and share repurchases -- while maintaining a strong financial foundation. Today's dividend increase underscores our confidence in the long-term strength of our business and ongoing commitment to returning cash to shareholders."

The golden arches have definitely weathered the economic storm relatively unscattered, with monthly sales consistently marking comparable gains. I recently added to my position in McDonald’s (MCD), as I believe that the company posseses strong dividend growth characteristics. The company has more than doubled its dividends since 2006.

Several other companies announced increase in distributions:

Lockheed Martin Corporation (LMT), Lockheed Martin Corporation engages in the research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services in the United States and internationally., increased its quarterly dividend by 10.50% to 63 cents per share. Lockheed Martin Corporationi has increased its quarterly dividend in each of the past six years. The stock currently yields 2.90%.

Sanderson Farms, Inc. (SAFM), which Sanderson Farms, Inc., an integrated poultry processing company, engages in the production, processing, marketing, and distribution of fresh, frozen, processed, and prepared chicken products in the United States., increased its quarterly dividend by 7% to 15 cents per share. Sanderson Farms, Inc. doesn’t follow a path of regular annual dividend increases that I prefer in a dividend stock.

ConAgra Foods, Inc. (CAG), which operates as a food company in North America and internationally, increased its quarterly dividend by 5% to 20 cents per share. This is the third dividend increase for ConAgra Foods, Inc. since the company cut its distributions in 2006. The stock currently yields 3.50%.

Chimera Investment Corporation (CIM), which invests in residential mortgage backed securities (RMBS), residential mortgage loans, real estate-related securities, asset backed securities (ABS), increased its quarterly dividend by 50% to 12 cents per share. Chimera Investment Corporation is a relativelyshort dividend history, which started in 2007. The dividend payment seems to be fluctuating a lot, which is not something to have when you try to live off your income streams. The stock currently yields 11.80%.

Hatteras Financial Corp. (HTS), which invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed by a U.S. Government agency or issued by a U.S. Government-sponsored entity, increased its quarterly dividend by 4.5% to $1.15 per share. Despite the fact that Hatteras Financial Corp. has only been around since 2008, its dividends have been pretty stable. The stock currently yields 13.90%.

Triangle Capital Corporation (TCAP), which is a private equity and venture capital firm specializing in buyouts, change of control transactions, acquisitions, growth financing, and recapitalizations in lower middle market companies, announced that its board has approved a 2.5% increase in dividends to 41cents/share. Triangle Capital Corporation has increased quarterly dividends since ever since it went public in 2007. The stock currently yields 14.10%.

I would be careful with the last three stocks mentioned, as they distribute most of their earnings out to shareholders, and thus have to depend on stock sales in order to keep growing the business. More stock sales dilute existing shareholders’ interests and could spell trouble if the capital markets freeze for one reason or another. Successful dividend investing is more than just chasing the highest dividend stocks – it’s more about finding a stock that has adequately covered dividends, whose business model could support future dividend increases.

Full Disclosure: Long MCD

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Toronto-Dominion Bank (TD) Dividend Stock Analysis

Toronto-Dominion Bank, through its subsidiaries, engages in the provision of retail and commercial banking, wealth management, and wholesale banking products and services in North America and internationally. It operates through four segments: Canadian Personal and Commercial Banking, Wealth Management, U.S. Personal and Commercial Banking, and Wholesale Banking. This international dividend achiever and Canadian Dividend Aristocrat has raised dividends for 15 years in a row.

Over the past decade this dividend growth stock has delivered an average total return of 13.20% annually.

The company has managed to deliver a 5.60% average annual increase in its EPS between 1999 and 2008. Analysts expect Toronto-Dominion Bank to earn $4.98 share next year, followed by a 4% increase to $5.17/share in the year after that.

The Return on Equity has recovered from its 2003 lows of 26% and is at a very impressive level at 42%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 20.50% annually since 1999, which is higher than the growth in EPS. Most of the dividend growth came from the expansion in the dividend payout ratio, which more than tripled from 15% in 1999 to 48% in 2008.
A 20 % growth in dividends translates into the dividend payment doubling every three and a half years. If we look at historical data, going as far back as 1973, Toronto-Dominion Bank has actually managed to double its dividend payment every six years on average. The company last raised its dividends in 2008.

The dividend payout ratio has more than tripled from 15% in 1999 to 48% in 2008. In 2002 the company lost money, which is why it is at zero for the year. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently the Toronto-Dominion Bank is attractively valued at 17 times earnings, yields 3.50% and has an adequately covered distribution. The main issue with this dividend investment is that it has failed to increase its distributions for five quarters in a row. The company has until the last quarter of 2010 to raise its dividend, or otherwise it would lose its dividend achiever status. In the meantime it is a solid hold for me. That is unless you are looking for some exposure to the financial sector for your dividend portfolio. As such TD could be a nice small starter position to consider.

Full Disclosure: Long TD

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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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Eight Dividend Increases in the news

The market continued going higher, despite all concerns about valuations, unemployment and the recession. Most analysts are divided on whether the 6 month advance is over or not. Dividend investors on the other hand however are not so concerned about the overall state of the market, as long as dividends are being paid indeed. The main problem with a rising market however is that it leaves fewer attractively valued stocks to enter or reinvest dividends. If you find the right dividend growth stocks however, which tend to raise distributions every year or so, one does not need to rely on dividend reinvestment for growth in their passive income.

Several such prominent dividend players announced that their boards of directors have approved distribution raises for stockholders.

Realty Income Corporation (O), which engages in the acquisition and ownership of commercial retail real estate properties in the United States, increased its monthly dividend to $0.1426875 per share from $0.142375 per share. Realty Income Corporation is a dividend achiever, which has increased its quarterly dividend in each of the past fifteen years. The stock currently yields 6.20%.

Tom A. Lewis, Chief Executive Officer of Realty Income commented, "We are pleased that, despite challenging economic conditions, our operations allow us to once again increase the amount of the dividend we pay to our shareholders. With the payment of the October dividend we will have made 471 consecutive monthly dividend payments."

Philip Morris International (PM), which manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America, increased its quarterly dividend by 7.4% to 58 cents per share. Philip Morris International was spun out of Altria Group (MO) in 2008. Since then the company has raised distributions twice. The stock currently yields 4.90%.

Texas Instruments Incorporated (TXN), which engages in the design and sale of semiconductors to electronics designers and manufacturers worldwide, increased its quarterly dividend by 9% to 12 cents per share. The stock currently yields 1.80%.

W. P. Carey & Co. LLC (WPC), which provides long-term net lease financing for companies, increased its quarterly distributions by 8% to 50 cents per share. This marks the 34th consecutive distribution increase for this dividend achiever. The stock currently yields 7.00%.

The Kroger Co. (KR), which operates as a food retailer in the United States, increased its quarterly dividend by 5.6% to 9.5 cents per share. Kroger began raising dividends in 2006. The stock currently yields 1.70%.

Corporate Office Properties Trust (OFC), which is a real estate investment trust (REIT) that engages in the acquisition, development, ownership, management, and leasing of suburban office properties., increased its quarterly dividend by 5.4% to 39.25 cents per share. Corporate Office Properties Trust is a dividend achiever, which has increased its quarterly dividend in each of the past thirteen years, which it has more than doubled since 2004. The stock currently yields 4.10%.

Agree Realty Corporation (ADC), which is a real estate investment trust (REIT), that engages in the ownership, development, acquisition, and management of retail properties, which are primarily leased to national and regional retail companies in the United States, increased its quarterly dividend by 2% to 51 cents per share. Agree Realty Corporation does not have a consistent history of dividend increases, although it hasn’t cut distributions either since 1994. The stock currently yields 9.30%.

Full Disclosure: Long PM, MO and O

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Paychex (PAYX) Dividend Stock Analysis

Paychex, Inc., together with its subsidiaries, provides payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses in the United States and Germany. This dividend achiever has raised dividends for 19 years in a row.

Over the past decade this dividend growth stock has delivered an average total return of 3.70% annually.

The company has managed to deliver a 12.60% average annual increase in its EPS between 1999 and 2008. Analysts expect Paychex to earn $1.33 share next year, followed by an 8% increase to $1.44/share in the year after that.

The Return on Equity has recovered from its 2002-2006 lows and is at a very impressive level at 42%. This is especially positive given the fact that the company remains virtually debt free. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 23.50% annually since 1999, which is higher than the growth in EPS.
A 24 % growth in dividends translates into the dividend payment doubling every three years. If we look at historical data, going as far back as 1990, Paychex has actually managed to double its dividend payment every two and a half years on average.

The dividend payout ratio has more than doubled from 35% in 1999 to 81%. The company’s dividend payment looks unsustainable, given the slow expected growth in earnings over the next few years. This could not only hinder any near term dividend growth, but also could place the dividend in danger of a cut. The solid dividend growth over the past few years did not come from EPS growth but mainly from expansion if the dividend payout ratio. In addition to that the company failed to increase dividends in July, which marked the fifth consecutive quarter of unchanged distributions.
A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Paychex is valued at 18.70 times earnings, yields 4.40% and has a dangerously high dividend payout ratio. I view its closest competitor ADP as more attractively valued of the two. ADP is larger, has a more diversified business base, its dividend still has room to grow and is adequately covered by earnings.

Full Disclosure: Long ADP

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Are High Dividend Stocks worth it?

As an investor in the accumulation stage, I tend to focus on companies with yields of at least 3% and expectations of future dividend growth. Most of these companies have a history of consistent annual dividend increases which exceeds ten years. I do receive constant criticism from readers however, that I profile very few stocks yielding 5%-6% or more; and then I do feature them I always express my negative opinion on the securities. I am not willing to accept an extremely high dividend payout ratio, which would have been acceptable for a utility or a Master Limited Partnership.

I do realize that most investors want to generate enough income as possible from their nest eggs, which have been accumulated over the spans of several decades’ worth of hard work and sacrifice. The problem with this approach is that investors end up focusing on the end result, without giving much thought about the sustainability and growth of the dividend payment. In other words, although it would take for a 3% yielder 7 years to double your original dividend payment and yield on cost, when the dividend growth is 10%, I believe that investors are better off in a sustainable lower yielder, than in an unsustainable high yielder. The company yielding 6% today that cuts its distributions a few months down the road could end up generating far less income than what you expected.

Some investors also disagree with me that stocks which are yielding 3% – 4% would barely produce enough income to keep up with inflation. The problem with this assumption is that in its goal of chasing the highest yielding stocks, you could end up losing from inflation. For example if you held all of your money in a group of stocks, yielding 8%-10%, and spending all the dividend income produced by your positions, you would lose purchasing power over time. Even worse – if the dividend payment is unsustainable, your yield on cost could even become lower than the current yield on S&P 500, if the company decides to cut distributions. Consider for example Bank of America (BAC), which at the beginning of 2008 would have yielded a cool 6.20%. Fast forward one year later, and the company is currently yielding 0.20%. The worst part is that the yield on your original investment in BAC is now 0.10%.

Compare this to Kimberly-Clark (KMB), which yielded about 3% at the beginning of 2008 but which has raised distributions twice, for a total dividend growth of 13.21%. Your yield on cost is almost 3.5% now, and that is without taking into effect any dividend reinvestment.

A common issue among high yielders is that they have a high dividend payout ratio. This means that the company is paying most of its earnings out as dividends, and doesn’t leave much for reinvestment in the business. If you add in stagnant earnings per share growth, and you basically have a disaster in the making. If that company all of a sudden decides that it needs cash for anything like merger or acquisition or if its earnings drop due to an economic contraction, chances are very high that the dividend payment, which was unsustainable in the first place, would be the first on the management’s chopping block.
Consider Pfizer (PFE) for example. The company spotted a very high payout ratio both in 2007 and 2008. Investors who purchased the stock hoping that this cash rich drug giant would pay a 6%-7% were terribly disappointed when on January 26th Pfizer cut its dividend. The move helped the company save billions, which were much necessary for its acquisition of Wyeth (WYE).

I do realize however that dividend growth is not guaranteed as well. But then I have a requirement of an initial minimum yield of 3% as a margin of safety in case this happens. Chances of a dividend cut are much larger for a company with a current yield of 6%, than for a company yielding 3%. The market is efficient in this section, so you have to understand what risk the high yielders represent, before leaping into the unknown.

Just for the sake of comparison, I identified the components of the dividend aristocrat’s index, which currently yield more than 4%. Of the eleven companies presented, only Kimberly-Clark (KMB) and Cincinnati Financial (CINF) had what somewhat sustainable dividend payouts.

Full Disclosure: Long CINF and KMB

This article was included in the Carnival of Personal Finance #224 – National Dog Week

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Kraft Foods freezes dividends

Kraft Foods Inc., together with its subsidiaries, manufactures and markets packaged food products and grocery products worldwide. The company has consistently raised dividends since it went public in 2001. It was a part of tobacco conglomerate Altria Group (MO), until Kraft was spun off in May 2007.

As a company whose management shared the values of Altria group (MO) to consistently reward shareholders with dividend increases and share buybacks, Kraft (KFT) has attracted the interests of many dividend investors. While it has raised distributions for only seven consecutive years, many investors didn’t see this as a problem, but believed that the company would soon join the ranks of the elite dividend achievers.

Just last week the company announced that it has would leave its current dividend payment of $0.29/share unchanged for the fifth consecutive quarter. In addition to that there were no share repurchases in first quarter 2009, and the company's authorization to repurchase shares expired on March 30, 2009.

The major news about Kraft has been its attempted takeover of Cadbury (CBY). The board of directors of Cadbury has rejected the offer so far, citing the fact that it undervalues the company. Other issues related to this takeover would include competing bidding from rivals Nestle or Hershey (HSY). This could make the acquisition of Cadbury (CBY) pricier than initially expected, and Kraft might have to pay top dollar if it really wanted to own the British based confectionery company.

Prominent dividend companies which are typically engaged in mergers and takeovers of a large proportion and which end up overpaying might need a lot of cash fast. Thus freezing or cutting the dividend payment should not be an uncommon factor in such situations.

The deal would definitely be accretive to Kraft and its owners in the long run. If the merger with Cadbury were completed, Kraft Foods would expect to revise its long-term growth targets to 5+% for revenue and 9-11% for earnings per share, from its previously announced 4+% and 7-9% respectively. If it overpays however, those estimates not only might have to be revised downwards, but it would be Kraft’s shareholders that would ultimately pay the price in terms of dividend cuts or freezes.

I was planning on initiating a position in Kraft before the announcement on September 8, but I would wait for the acquisition to unfold before I take any action. The company has four more quarters where it can afford to keep the distributions unchanged. Should it increase them within that time frame and also should it manage to earn approximately $1.95-$2.00/share in 2009, I would consider initiating a small position there. Without any dividend growth, even the best yielding stock would eventually erode your purchasing power due to inflation.

Full Disclosure: None

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Automatic Data Processing (ADP) Dividend Stock Analysis

Automatic Data Processing, Inc. provides technology-based outsourcing solutions to employers, vehicle retailers, and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. This dividend aristocrat has raised dividends for 34 consecutive years. Back in November 2008 Automatic Data Processing announced a 13% dividend increase.

Over the past decade this dividend growth stock has delivered an average total return of 0.50% annually. In 2007 ADP spun off its Brokerage Services business, distributing one share of Broadridge Financial (BR) common stock for every four shares of ADP common stock held by shareholders. The total returns calculation for ADP over the past decade includes this transaction.

The company has managed to deliver an 8.00% average annual increase in its EPS between 1999 and 2008. Analysts expect Automatic Data Processing to earn $2.38 share in FY 2009, followed by a small decline to $2.36/share in FY 2010. ADP’s earnings have been constrained by decrease in overall employment levels, closings at small and midsize businesses it services and a general decrease in interest income from funds held for clients. Never the less the company could achieve strong revenue growth of 5%-6% annually, as its markets such as HR management services and Business Process Outsourcing are expected to grow annually in the 5%-6% range over the next five years. The company is a leader in the processing space, and could achieve growth through acquisitions and expansion abroad. There is a high barrier to entry in order to compete in ADP’s business segments. I like the recurring revenue and long term deals structure that ADP’s business enjoys. This leads to stability in cash flow generation, which provides for a good foundation for solid dividend growth over time.

The Return on Equity has remained in a tight range between 17% and 23%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 15.50% annually since 1999, which is higher than the growth in EPS. The company has also managed to decrease the number of dillluted shares outstanding from 636 million in 1999 to 527 million in 2008 through share repurchases.
A 15 % growth in dividends translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1979, Automatic Data Processing has really managed to double its dividend payment every five years.

The dividend payout ratio has doubled to 50%. As the company matures, it has returned most of its earnings back to stockholders in the form of increased distributions and share buybacks. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Automatic Data Processing is attractively valued at 16.00 times earnings, yields 3.40% and has an adequately covered dividend payment. In comparison to its closest competitor Paychex (PAYX), which trades at a P/E of 19 and yields 4.4% with a dividend payout ratio of 80%, I view ADP as more attractively valued. I would be looking forward to adding to my position in Automatic Data Processing (ADP) on dips.

Full Disclosure: Long ADP

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Why now might be a good time to buy Manulife (MFC)

This post is presented by Intelligent Speculator, a blog that discusses the markets, makes some picks, mainly in the ETF asset classes as well as technology stocks.

Making stock picks is never easy, but we are now ready to make another one. Manulife has been in the news for the past few weeks, mainly for negative reasons. On August 6th, it took markets by surprise by announcing a 50% cut to its quarterly dividend, from .26$ to .13$, starting with this year’s September 21st dividend. It is a surprise in the sense that few had expected such a drastic measure. Most investors are aware that Manulife, like many other insurance companies, has been hit very hard by the recent financial crisis. This move will save the company $800 million, in order to recover its historical stability from what has now become a vulnerable financial situation. Naturally, investors did not appreciate the move and the stock price dropped very quickly. This might be an opportunity to get a solid stock at a decent price, for many investors. While in the past we have warned about investing in financials, we believe they are now back on the right track.

Manulife's CEO said: "While we recognize the importance of a cash dividend to many of our common shareholders, we believe that retaining more of our earnings is the most effective means of building capital while still providing an attractive yield for our shareholders who will benefit as we deploy our capital for growth." Most companies would deliver a similar message when dropping their dividend but I do believe that the more positive news is that Manulife did not wait too long to make this move. The company's stock is down 42% over 2 years because of bad hedging decisions that have been very costly.

Big buys, like Jarislowsky Fraser (who holds 49.5 million shares), have already confirmed they would be buying more shares as they deem the drop as exaggerated. "I don't like dividend cuts, but it was the prudent thing". One question, of course, is if you'd prefer investing in an insurance company like Manulife that has already dropped its dividend yield or perhaps take a chance on the banks. They continue to do their best to keep up their dividend yields yet it is still unclear if they will be able to do so.

Personally, I'd go ahead and buy Manulife, the stock seems poised to recover, eventually. Even now, its dividend yield of about 2,4% is not bad considering the current market. For the next 12 months, the estimated earnings per share are 1.244 (according to Bloomberg) so even its current valuation should warrant a purchase of the stock.

What do you think? Agree with the purchase of MFC with a medium to long term time objective?

Full Disclosure: None

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Not all dividend stocks are overvalued

While the market has enjoyed impressive gains ever since it hit a multi year low in March 2009, investors are beginning to get nervous about valuation. If valuation is too high, chances are that investors are overpaying for stocks purchased, which could lead to lower performance over time.
Luckily however, the rally off of March lows has been lead by speculative names from the financial sector. Most of the high quality names that dividend investors follow, such as Johnson & Johnson (JNJ) or Pepsi Cola (PEP), have mainly followed the market higher in its ascend. If we were truly in a new bull market however, then we should expect that most investors would switch to quality blue chip companies. Another positive part is that stock prices are still lower, in comparison to their levels in September 2008.

While entry price does matter, defensive dividend investors should also look at the dividend coverage and the company’s ability to grow the distributions over time. Only after these two prerequisites are met, should investors begin evaluating companies with at least a decade long histories of dividend increases on the basis of valuation.

A minimum requirement for yield should also provide an adequate margin of safety in dividend income to investors in the event that the timing of the purchase was not correct in the short term. Even if the stock price stays below the entry price of dividend investors for a prolonged period of time, they would still be in a position to get paid to hold the stock. Enterprising dividend investors might even be able to re-invest distributions at lower prices.
In addition to that, if the company manages to keep raising distributions even during economic downturns, then it should also be able to increase dividends during economic rebounds. Thus, one could reasonably expect that share prices would increase during a bull market.

I have listed several dividend stocks, which are not overstretched. They are mostly dividend achievers and aristocrats. These are some of the positions I have added to most recently.

Abbott Laboratories (ABT) manufactures and sells health care products worldwide. The company has raised dividends for 37 years in a row. Abbott currently trades at 13.30 times earnings and yields 3.50%, with an adequately covered dividend. (analysis)

Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. The company has raised dividends for 34years in a row . Automatic Data Processing, Inc. currently trades at 14.70 times earnings and yields 3.40%, with a sufficiently covered dividend. (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. The company has raised dividends for 32 consecutive years. Clorox spots a P/E ratio of 15.50 and yields 3.40%. (analysis)

Emerson Electric Co.(EMR), a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. Emerson Electric has raised dividends for a record 52 consecutive years. The company trades at 15.3 times earnings, has an adequately covered dividend and yields 3.50%. (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Johnson & Johnson has raised dividends for a very impressive 47 consecutive years. The company trades at 13.3 times earnings, has an adequately covered dividend and yields 3.20%. (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. McDonald’s Corporation has raised dividends for 32 years in a row. The company currently trades at 14.90 times earnings , has a very well covered dividend payments and yields 3.60%. (analysis)

Just because a company has raised distributions for a long period of time however, this doesn’t mean that the current yield is going to be excessive. It is the fat yield on cost that long-term dividend investors are after. Also remember that companies cannot control its yield, which is a function of the stock price. Companies could however maintain a proactive dividend policy, where they strive to continuously raise distributions year in and year out.

Some dividend investors also completely ignore capital gains in the equation. While it is true that dividends typically account for 40% of the average annual stock market total returns, it is important to note that the remaining 60% have come from capital gains. The companies listed above not only have adequately covered dividend payments and decent current yields, but they also have strong capital appreciation characteristics.

Full Disclosure: Long ABT, ADP, CLX, EMR, JNJ, MCD and PEP

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Verizon Hikes Dividends

With the expectations for the long Labor Day weekend, few companies announced any dividend hikes. The major dividend increase came from Verizon Communications Inc. (VZ) which offers Wireline and Domestic Wireless communication service in the US. The company’s board of directors announced a 3.3% increase in its quarterly dividends to 47.5 cents/share. This is the third consecutive year that Verizon's Board of Directors has approved a quarterly dividend increase in September.

Verizon chairman and CEO said: "This increase reflects the strength of our cash flow and balance sheet. It demonstrates the Board's commitment to return cash to our shareholders while continuing to invest in the long-term growth of our business."

The company currently yields a very respectable 6.10%. Before you decide that Verizon (VZ) is a great company to own however, please consider the following information.

First, the company has been unable to increase earnings per share over the past decade. EPS has declined from $2.66 in 1999 to $2.26 in 2008. Smart dividend growth investors understand that without growth in earnings, the company’s ability to generate dividend growth is very slim.

Second, the company does not have a long history of consecutive dividend increases. The company started raising its distributions in 2005, after 6 years of unchanged dividend payments. The positive factor however is that the company has not cut its dividends over the past 25 years. It has either raised them or kept them unchanged.

Third, the dividend payout ratio is not covered well enough to support further dividend increases. Currently this indicator is at 77%. This, coupled with the fact that EPS growth has been stagnant over the past decade not only means that future dividend growth would be close to zero, but that the dividend payment could end up in jeopardy of a dividend cut. The positive factor here is that in 2008 cash flow was $7.57 per share. The capital expenditures required to maintain the business run at about $6/share. This leaves all remaining cash flow for dividends.

The company’s growth could come from focusing on its wireless operations, realizing synergies from acquisitions of Alltel and cost efficiencies. I view as a positive the fact that Verizon (VZ) is selling almost 5 million fixed lines and 1 million broadband customer accounts to Frontier for $8.6 billion. Wireline is in a decline, and thus focusing most of the attention to wireless operations is a smart move for the long run.

At this point of time I am not a big fan of telecom companies such as Verizon (VZ) and AT&T (T), which both spot above average dividend yields. Their dividend payouts are above 74%, which seems unsustainable to me. Earnings growth also appears to have stalled, which is not a good sign for long term dividend growth.

On the other hand I like the fact that both companies have been gaining share of the wireless markets either through acquisitions or organic growth. The telecom market is highly competitive; the costs to maintain and operate a network run in the tens of billions of dollars for companies the size of AT&T (T) and Verizon (VZ).

At this point of time I would maintain a hold on both AT&T (T) and Verizon (VZ). While the current yield is very tempting, without a boost to dividends in the future, inflation would erode their purchasing power over time.

Full Disclosure: None

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Sherwin-Williams (SHW) Dividend Stock Analysis

The Sherwin-Williams Company engages in the development, manufacture, distribution, and sale of paints, coatings, and related products. It operates in three segments: Paint Stores Group, Consumer Group, and Global Finishes Group. The company, which has raised dividends for 31 consecutive years, is a member of the S&P Dividend Aristocrats index. Back in February 2009 Sherwin-Williams announced a 1.40% dividend increase.

Over the past decade this dividend growth stock has delivered an average total return of 5.70% annually. Sherwin-Williams’ stock price is currently trading almost 20% lower from its all-time highs set in 2007.

The company has managed to deliver a 9.30% average annual increase in its EPS between 1999 and 2008. Sherwin-Williams is expected to earn $3.60 share in FY 2009, followed by $4.10/share in FY 2010. Despite the housing crisis, and expectations of 10% declines in sales for Sherwin-Williams, homeowners would still need to use paint in order to freshen the look of their houses. Home renovation and remodeling projects could be a driver for growth even in a slow economy. Residences are typically the largest investment for homeowners, who tend to spend regularly on maintenance and improvement projects in order to increase their values.
I believe that the company has a strong cash flow generation ability, which should serve it well in the longer term. Strategic acquisitions could add to growth, as could new store openings abroad.

The Return on Equity has generally trended upwards, and has stayed above 20% over the past 7 years. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 12.60% annually since 1999, which is higher than the growth in EPS. The company has also managed to decrease the number of dillluted shares outstanding from 168 million in 1999 to 117 million in 2008 through share repurchases. In 2008, the Sherwin-Williams purchased 7.25 million shares of its common stock in the open market, and continued its policy of paying out approximately 30% of the previous year’s diluted net income per share in the form of a cash dividend.
A 12 % growth in dividends translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1989, Sherwin-Williams has actually managed to double its dividend payment every seven years on average.


The dividend payout ratio has largely remained under 40% over the past decade, with the exception of 2000. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Sherwin-Williams is trading at 16.70 times earnings, yields 2.40% and has an adequately covered dividend payment. I would be looking forward to adding to my position in Sherwin-Williams (SHW) on dips below $48.

Full Disclosure: Long SHW

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Six things I learned from the financial crisis

I started blogging about dividend growth stocks in January 2008; right around the time the market started its slide. Fast forward 18 months and we have seen it all: from companies which were once deemed too big to fail and which were later acquired for pennies on the dollar to the blowups of several prominent pyramid schemes and hedge funds. Back in early 2008 most investors were not fully aware of the dangers that the real estate implosion would have on the overall economy. Some aggressive investors lost much more than S&P 500 in 2008 due to their heavy concentration in certain sectors built at the highs of the market, use of excessive leverage and chasing “broken companies” which offered suspiciously high yields, which proved unsustainable.
In order for investors to become better at allocating capital, it is important to learn from ones mistakes. I have identified several mistakes, which could have saved investors billions had they known about them in the first place:

1) Diversify your portfolio. We often hear that diversification is dead and the fact that in a crisis almost all assets go down in sync. While this is somewhat true, a simple diversification strategy where an investor held some allocation to government fixed income, would have resulted in smaller losses. There are several bond ETF’s which hold US Treasuries. Examples include iShares Barclays 20+ Year Treas Bond (TLT) and iShares Barclays 7-10 Year Treasury (IEF). It is also important to understand that simply adding different asset classes in a portfolio may not provide any diversification benefits. For example adding fixed income from High-Yield Bonds would not have provided any diversification benefits, as most junk bonds represent companies with low credit ratings, which have a higher chance of defaulting during a crisis. Several Junk Bond ETF’s such as iShares iBoxx $ High Yield Corporate Bd (HYG) were introduced right before the financial crisis.
In addition to that, investors who concentrated their portfolios in just a handful of companies (10 – 15) would have under performed their benchmarks even if they had just one AIG (AIG) or Bank of America (BAC) in it. Both companies were considered the best of the best, before the crisis affected them and they had to seek government funds, while reducing or eliminating distributions to shareholders.

2) Build positions over time. While dollar cost averaging provides inferior returns in strong markets relative to a lump sum investment, the chance of a black swan effect ala 2008 makes it preferable for investors to build their positions slowly. This would be another control that would prevent your portfolio from collapsing, in case your stock analysis didn’t work out as planned.

3) Don’t chase high yield stocks blindly. Back in 2008, many financial stocks had very attractive dividend yields in the low double digits. Some of those like Citigroup (C), Bank of America (BAC) and Fifth Third Bank (FITB) had long histories of consistent dividend increases each year. The problem was that these stocks could not sustain paying their distributions, since they were earning much less than what they were paying out. At the end of the day these companies had nowhere else to go but cut their distributions, which was a strong sell indicator for many dividend growth investors. Most of the dividend cuts in the financial sector were followed by massive implosions in shareholders value from companies such as Citigroup (C), Lehman Brothers, Fannie Mae (FNM) and Freddie Mac (FRE).

4) Don’t use excessive leverage. Using leverage means borrowing money to invest in something for the purpose of magnifying your profit potential. When you are right, leverage works in your favor. For example if you purchased a stock on margin, and it increased 10%, your leveraged return would be almost 20%. When you are wrong though, leverage could result in disastrous results and bankruptcy. Using the same example, a leveraged bet on the wrong side of the table where the underlying fell by 10% results in a 20% loss.
The whose housing mess was created by allowing people who cannot afford expensive houses speculating on housing prices enjoying double digit increases for eternity, while being heavily leveraged. Once housing prices started dropping like a rock, panicked sellers helped exacerbate the problem by adding more fuel to the already severe drop in values. This caused interest payments on mortgage backed securities to not be paid, which triggered collapses in financial companies such as Ambac (ABK) and Fannie Mae (FNM) which then sent shockwaves throughout the world.

5) Don’t overpay for stocks. Investors often overpay for stocks because of the recency phenomenon, where they discount double-digit growth indefinitely. This leads to purchasing stocks with unacceptably low dividend yields, high P/E ratios and rosy predictions for strong dividend growth for eternity. Such conditions are simply unsustainable. The so called “Tech Four Horsemen” that CNBC’s “Fast Money” touted in the last quarter of 2007, Apple (AAPL), Research in Motion (RIMM), Google (GOOG) and Garmin (GRMN) all spotted unusually high valuations until growth expectations declined substantially. Investors suffered huge losses in the process.

6) Understand what you are investing into. It is important to understand what one is getting into by reading a prospectus for example. Many mortgage-backed securities were marketed to individuals and institutions as no risk investments. Investors who took the trouble to check the 500-page prospectus of such investments would have avoided severe losses. It is important to keep simple and within your circle of competence. Another example includes some dividend ETFs which were supposed to offer stable income, but which ended up heavily concentrated in financials and REITs. Retirees who depended on those ETFs rather than individual stock selection for income, were caught by surprise. Even the S&P Dividend Aristocrats Index ETF (SDY) and Dow Jones Select Dividend Index (DVY) at some point in time included dividend stocks which shouldn’t have been there. Even now the Dividend Aristocrats Index includes stocks like General Electric (GE), Pfizer (PFE) and Gannett (GCI) which should be avoided by dividend investors.

While this list is not meant to be a comprehensive all-inclusive one, it is a great starting point for both novice and experienced investors. I believe that investing has never been a perfect science, but one could achieve perfection by learning from their mistakes and not repeating them over and over.

Full Disclosure: None

This article was included in the Carnival of Personal Finance: Live From Monticello

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Altria Group's 6% Dividend Hike

When companies decide to share a portion of their earnings with their shareholders, it is a sign of prudent fiscal discipline. Shareholders who are rewarded on a timely basis in the form of dividend payments are less likely to sell their holdings, even during a steep market correction. However, when companies decide to raise their distributions they exert strong confidence in their near-term performance. This dividend increase is a strong bullish signal especially if it comes after a long string of consecutive dividend increases.

Several companies announced that their boards of directors have approved dividend increases. The companies include:

Altria Group, Inc. (MO), which engages in the manufacture and sale of cigarettes and other tobacco products in the United States, increased its quarterly dividend by 6.3% to 34 cents per share. The stock currently yields 7.50%. Check my analysis of the stock.

MGE Energy, Inc. (MGEE), which engages in generating, purchasing, transmitting, and distributing electricity, increased its quarterly dividend by 8% to 14 cents per share. MGE Energy, Inc. is a dividend achiever, which has increased its quarterly dividend for 34 consecutive years. The stock currently yields 3.90%.

HCC Insurance Holdings, Inc. (HCC), which provides property and casualty, surety, group life, accident, and health insurance coverage, as well as related agency and reinsurance brokerage services to commercial customers and individuals., increased its quarterly dividend by 8% to 13.50 cents per share. HCC Insurance Holdings, Inc. is a dividend achiever, which has increased its quarterly dividend in each of the past thirteen years. The stock currently yields 1.90%.

Delta Natural Gas Company, Inc. (DGAS), which sells and distributes or transports natural gas to customers in central and southeastern Kentucky., increased its quarterly dividend by 1.6% to 32.50 cents per share. The company has raised dividends consistently since 2005. The stock currently yields 5.20%.

G&K Services, Inc. (GKSR), which provides branded identity apparel and facility services programs in North America., increased its quarterly dividend by 7% to 7.5 cents per share The stock currently yields only 1.30%.

Alliance Financial Corporation (ALNC), which which provides various banking products and services to commercial, retail, government, and investment management customers, increased its quarterly dividend by 7.7% to 28 cents per share. The stock currently yields 4.00%.

Guess?, Inc. (GES), which designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children., increased its quarterly dividend by 25% to 12.5 cents per share. The stock currently yields 1.40%.

ESSA Bancorp, Inc. (ESSA), which provides financial services to individuals, families, and businesses in Pennsylvania, increased its quarterly dividend by 25% to 5 cents per share. The stock currently yields only 1.20%.

Harris Corporation (HRS), which operates as a communications and information technology company that serves government and commercial markets worldwide, increased its quarterly dividend by 10% to 22 cents per share. The stock currently yields 1.90%.

In summary I view Altria's dividend increase as a bullish sign for the company stock. The company seems to be following its policy of consistent dividend increases that it used to follow before the spin-offs of Philip Morris International (PM) and Kraft Foods (KFT) I do however also own some Philip Morris International in order to benefit from international exposure to the tobacco sector.

Full Disclosure: Long PM and MO

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V.F. Corporation (VFC) Dividend Stock Analysis

V.F. Corporation, together with its subsidiaries, engages in the design, manufacture, and sourcing of branded apparel and related products for men, women, and children in the United States. It owns a portfolio of brands in the jeanswear, outerwear, packs, footwear, sportswear, and occupational apparel categories. The company is also a member of the S&P Dividend Aristocrats index.
V.F. Corporation has consistently increased dividends for 36 consecutive years. The company last announced a dividend raise in October 2008.

Over the past decade this dividend growth stock has delivered an average total return of 5.70% annually. The stock price decreased from its all time highs of $96.20 in 2007 to a multi-year low of $38.22 in 2008, before strongly recovering from its lows.

The company has managed to deliver a 6.80% average annual increase in its EPS between 1999 and 2008. V.F. Corporation is expected to earn $4.90 share in FY 2009, followed by $5.50/share in FY 2010. The company is currently experiencing some short term in demand, which has led to a drop in revenues. If this recession proves to be a short one, the company would certainly manage to hit its annual goals of 8% annual revenue growth. The company’s foreign operations do have the ability to generate strong revenue growth over time. Another part of V.F. Corp’s growth strategy entails buying brands that could utilize the company’s extensive distribution network and result in economies of scale to produce the new apparel brands at a lower cost.

The Return on Equity has generally remained stable around 17% with the exception of 2000 and 2001. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 11.90% annually since 1999, which is higher than the growth in EPS. Much of the increase came from V.F. Corporation’s 90% dividend increase in 2006. If we take this big increase out of the dividend growth calculation, we would see that the company typically raises distributions by an average of 3% to 5% annually.
A 12 % growth in dividends translates into the dividend payment doubling every six years, whereas at a 4% growth rate it could take 18 years for the dividend payment to double. If we look at historical data, going as far back as 1986, V.F. Corporation has actually managed to double its dividend payment every eight years on average.


The trends in the dividend payout ratio have closely tracked short term EPS weakness in 2000 and 2001 by rising to disproportionate levels. It also fell to 24% before the company decided to drastically raise distributions by 90% in 2006. The ratio has largely remained under 50% over the past decade, which is a good sign. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently V.F. Corporation is attractively valued, trading at 14 times earnings, yields 3.50% and has an adequately covered dividend payment. I would be looking forward to initiating a small position in V.F. Corporation (VFC) on dips.

Full Disclosure: No position at the time of writing

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Financial Stocks for Dividend Investors

Financial stocks, which used to be great dividend investments, have had their share of troubles over the past two years. The sector has rebounded sharply since hitting its lows in March. Since the major dividend growth stories of the past such as Bank of America (BAC) and US Bancorp (USB) have cut dividends, most dividend growth investors seem to have a very low allocation to the sector. As a result dividend investors could suffer inferior risk adjusted returns in the future since they won't own any financial stocks.

There are several alternatives for investors who are underweight the financial sector right now. One of them involves purchasing shares in some of US insurance companies such as Aflac (AFL) or Chubb (CB), which offer decent yields and have a long history of dependable dividend growth.

Another alternative is buying shares in the five major Canadian banks, which seem to have escaped the financial meltdown. While none of them have increased their dividends in over one year, they have not cut them either. In addition to that major Canadian banks spot very decent yields as well. It is important to check individual payout ratios in order to gauge the sustainability of the dividend payments. The major Canadian banks include
Toronto-Dominion Bank (TD) , Bank of Montreal (BMO), Royal Bank of Canada (RY), Canadian Imperial Bank of Commerce (CIBC) and Bank of Nova Scotia (BNS).

Buying Preferred stocks could also be a decent bet on the long recovery of US financial institutions. Preferred shares have a higher ranking than ordinary shares in the event of a bankruptcy, but a lower priority relative to bonds. Preferred stocks do not have voting rights but have a fixed dividend payment, just like a bond. Preferred stockholders are also first in line to receive dividend payments, which are typically fixed. They don’t typically get to share in the prosperity of the enterprise however as preferred stock dividends do not increase. In tough economic conditions however, preferred stock dividends are much less likely to be cut or suspended; as long as the company continues operating as a going concern preferred stock dividends continue getting paid. In addition to that if you buy a cumulative preferred stock, the company is obligated to pay distributions to you even if it skips a few payments. That is of course as long as the company is not bankrupt. These two ETFs PFF and PGF are good vehicles to gain exposure to preferred stocks. Most of the issues they hold are in the financial sector.

Some investors also believe that the major US financial institutions would one day return to their former glory. This could mean that companies like Bank of America (BAC), Citigroup (C) and US Bancorp (USB) could yield very decent returns if they were to increase distributions to their 2007 levels. This option of getting exposure to financials is the riskiest of all, since most of the TARPed financial institutions are already paying billions in dividends to the Treasury every year. In addition to that the Treasury and other strategic investors might elect to convert their preferred stock into common, which would dilute existing shareholders. Last but not least it is very difficult to forecast how the US banking industry would look like a few years from now. Just because a bank survives the meltdown, does not mean it would be a solid long-term investment.
The strong gains off the March lows have definitely pushed financial stocks in overbought territory. Thus, if you believe that owning US banks provides you with the best exposure to the US financial sector, you might consider waiting to buy them on pullbacks.

These options could either be used on a standalone basis or in a combination. As a dividend growth investor I currently own mostly insurers and have a position in one of the Canadian banks. I might add to my Canadian exposure, which also provides international diversification for my portfolio.

Full Disclosure: Long AFL, CB and TD

This article was included in the Carnival of Personal Finance 221- Labour Day Edition

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Aflac (AFL) Dividend Stock Analysis

Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance in the USA and Japan. The company is member the S&P Dividend Aristocrats index.
Aflac has consistently increased dividends for 27 consecutive years. The company announced a 16.70% dividend raise in October 2008.

Between June of 1999 up until June 2009 this dividend growth stock has delivered an average total return of 3.90% annually. The stock fell from its all time high of $68.81 in 2008 to a multi-year low of $10.83 in March 2009, before recovering by 300% off its lows.

The company has managed to deliver a 10.80% average annual increase in its EPS between 1999 and 2008. Aflac is expected to earn $4.70 share in FY 2009, followed by $5.15/share in FY 2010. The company generates over 70% of its revenues in Japan. New distribution channels in the country for Aflac’s supplemental health and life insurance plans, which are not covered by Japanese healthcare, would drive sales in the future. The brand recognition that the company is building in the US should also be a strong driver of growth over time, in addition to focusing on retirement services targeting the baby boomers.

The Return on Equity has ranged over the past decade between a low of 12% and a high of 19%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 22.90 % annually since 1999, which is higher than the growth in EPS. The disparity is mostly due to a gradual increase in the dividend payout ratio and the amounts this insurer has spent on stock buybacks.
A 23 % growth in dividends translates into the dividend payment doubling almost every three years. If we look at historical data, going as far back as 1986, Aflac has actually managed to double its dividend payment every four and a half years on average.

The dividend payout ratio has increased rather sharply over the past two years, but is still much lower than my 50% threshold. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Aflac is trading at 16 times 2008 earnings, yields 2.70% and has an adequately covered dividend payment. I would be looking forward to adding to my position in Aflac (AFL) on dips below $37.30.

Full Disclosure: Long AFL

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Cincinnati Financial’s Dividend Surprise

Cincinnati Financial (CINF) surprised investors in a positive way, after the provider of property, casualty, personal, and life insurance products to businesses and individuals in the United States upped its quarterly dividend from 39 to 39.5 cents/share.

Kenneth W. Stecher, president and chief executive officer, commented, "The company has consistently increased dividends for 48 years, and the board of directors chose to continue that record for the benefit of our shareholders. This action demonstrates their confidence in our strong capital, liquidity and financial flexibility and in our initiatives to improve earnings performance."

The company last increased its dividend in 2008. If it hadn’t raised it in 2009, the Cincinnati, Ohio based insurer would have been booted out of both the dividend aristocrats and dividend achievers indexes.

The company is a hold for me right now, as it has pretty disappointing short-term EPS prospects. Its insurance premiums are under pressure on increased competition. It might not be able to cover its dividend payment by a factor of 2 until 2010 or 2011.
Half of the company’s investment portfolio was allocated to equities in 2007. The losses in the stock markets and an initiative to reduce equity exposure lead to a decrease in the equity exposure to 33% in 2008.

Three other companies announced dividend hikes over the past week as well.

Getty Realty Corp. (GTY), which engages in the ownership and leasing of retail motor fuel and convenience store properties, and petroleum distribution terminals, increased its quarterly dividend from 47 to 47.50 cents per share. This dividend achiever currently yields 8.50%.

ITC Holdings Corp. (ITC), which invests in the electricity transmission grid to improve electric reliability, improve access to markets, and lower the overall cost of delivered energy, increased its quarterly dividend by 4.90% to 32 cents per share. This is the fourth consecutive dividend increase for ITC Holdings Corp. since the company went public in 2005. The stock currently yields 2.60%.

Nordson Corporation (NDSN), which manufactures equipment used for precision dispensing, testing and inspection, and surface preparation and curing., increased its quarterly dividend by 4.10% to 19 cents per share. This represents the 46th consecutive year of annual dividend increases for this dividend achiever. The stock currently yields 1.50%.

Full disclosure: Long CINF

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29 stocks with sustainable dividends

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

Due to the horrifying statistics of the overall bleak dividend picture, some reporters are claiming that dividend investing is dead. Just because you read it in the paper however, doesn’t mean it is true for everybody. While the overall statistics have been rather scary, the negative dividend news has been concentrated in the financial sector. Thus a well-diversified portfolio of income stocks should have performed well even during crisis.

Broad statistics on dividends could be misleading however as they focus on all companies, not just on the ones which have a proven track record of raising dividends. Even if the sky truly is falling down, there still are companies, which are generating enough cash flows and are confident enough in their business to increase distributions. In fact the dividend aristocrats index with its 52 components has seen 8 dividend cuts, one buyout and 32 dividend increases so far in 2009.

In addition to that, most dividend growth strategies tend to evaluate sustainability of dividends on a per issue basis, thus weeding out companies whose dividends are in peril. It really is a no brainer that a company, which generates enough earnings to cover dividend payments by a factor of 2 or 3, is much less likely to cut or eliminate distributions compared to a company, which pays out almost all of its cash flows out as dividends. This simple formula does exclude certain vehicles such as REITs for example, which are required to distribute almost all of their earnings as distributions to shareholders in order to maintain their tax status. Thus, these vehicles (such as REITs) should be evaluated using other criteria, which I would describe in a future post.

I have selected several prominent dividend growth stocks, whose earnings and cash flows provide adequate coverage for their dividends:



Investors should be cautioned that entry price does matter. Thus this list should only be considered as a starting point in the process of analyzing potential dividend stock candidates. Chances are that a dividend growth stock that manages to grow earnings is a likely candidate to continue growing distributions, which will increase yield on cost over time.

Full Disclosure: Long ABT, ADM, ADP, AFL, APD, CLX, EMR, FDO, GW, JNJ, MCD, MHP, MMM, NUE, PG, SHW, WMT

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

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Buffett's Newest Stock Pick

Jae Jun is the author of Old School Value, a value investing blog focused on fundamental analysis, stock valuation and stock ideas that offer high returns with low risk.

With the release of Berkshire Hathaway's 13-F filing, you can see that a new addition has been made to the holdings of Berkshire Hathaway.

1.2million shares of Becton Dickinson & Co (BDX) were added which totals $86.6 mil but compared to his total portfolio and other holdings, it is a very small position. This initial position is half the size of when Berkshire first added Eaton Corp (ETN) which again leads me to think that it was a subsidiary making the purchase as Buffett is known to go big first time around.

I previously went over BDX briefly while going through the 40 Best Stocks to Retire on and noted that the company...

...has consistently produced plenty of FCF but FCF growth has been minimal, very good CROIC of 15%, steady growth in shareholders equity/book value, stable rising margins, debt to equity is consistently dropping, sales has been increasing. - Best Stocks for Retirement

Whoever made the purchase, BDX looks to be a typical Buffett type company. Long history or consistent performance with results to match.

Quick Look

[caption id="attachment_2136" align="alignnone" width="433" caption="BDX Spider Graph"][/caption]

Business Summary

Becton, Dickinson and Company (BDX) is a medical technology company that operates through three business segments: BD Medical, BD Diagnostics, and BD Biosciences.

• BD Medical: offers syringes, needles, monitoring systems, drug delivery systems, blades, scalpels and thermometers

• BD Diagnostics: microbiology products, specimen collection products, specimen management systems, diagnostic instruments and consulting services

• BD Biosciences: flow cytometry systems for cell analysis, monoclonal antibodies for biomedical research, molecular biology products for the study of genes and their functions, cell growth and screening products and labware products

The company generates more than half of its revenues from international operations which will help to diversify income but swings in foreign currency can impact top line results. But remember, it's the bottom line that is most important.

Financial Statement Analysis

Running through the numbers I see the following:

• Gross, operating and net margins have been steadily increasing even in a recessionary environment


• A dividend aristocrat which has increased dividends for 36 years


• FCF positive for more than 10 years


• Inventory turnover consistent but since margins have increased, leads to higher efficiency and profit


• ROA and ROE increasing steadily


• Reduced debt


• Very low capitalization ratio which shows how leveraged the company is with debt


• Has plenty of FCF to pay down debt rather than issue stock or seek loans


• CROIC is very steady at 17% which means that the company makes 17c off every $1 of cash invested


• Converts 12c of every dollar in sales to FCF. BDX is a FCF machine.


• Excellent management

DCF Intrinsic Value Estimate

The assumptions are as following for the DCF model:

• With the level of consistency and outstanding numbers a 9% discount rate is used


• 10% growth rate which is just a little under the FCF growth but looks to be the rate of growth the company has displayed according to the graph below. After all price follows value which means I can reverse engineer the DCF to find the growth rate.


• 50% margin of safety but don't feel it has to be so big for BDX

With a couple of assumptions you can see from the graph below that BDX has been trading close to its intrinsic value until September 2008 when the markets crashed. It's probably the biggest drop and difference its had so far.

Intrinsic value comes out to $87.

[caption id="attachment_2139" align="alignnone" width="500" caption="BDX Price vs Value Graph"][/caption]

(Click on the image to view the PDF version of the stock analysis and graphs.)

Benjamin Graham Formula Valuation

BDX top line growth is just as good as its bottom line. By looking at multiple years and comparing them in a staggered fashion and then looking at the mean to smooth out cycles and one time bad years still shows a historical EPS growth rate of 17%. My calculated 17% is actually fairly close with Yahoo or Reuters past 5 yr growth rate of 16%.

This is a little too high by my standards for future growth in a mature company which is why I lowered it down to 10%.

This gives a fair value of $111.

Competitor and Peer Analysis

Probably the simplest way to value a company.

If you look at the 7th page of the stock analysis report that I posted, you will see that BDX side by side with 5 competitors and the numbers show that BDX is slightly cheaper than its competitors.

BDX current PE of 13.86 is lower than peers with less revenue and lower metrics. Seems like 15 or 16 is what BDX would be trading at if priced correctly.

• PE 15 = $72


• PE 16 = $76

Summary

From the valuations we looked at, BDX looks to be worth somewhere between $72 - $111 but I believe the range would be more towards $76-$90.

Becton Dickinson looks to be a very typical Buffett type company selling at a discount to its intrinsic value.

This article was featured on Carnival of Personal Finance - History of College Football Edition

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7 Dividend Raisers during a financial crisis

Companies that pay dividends show prudent fiscal management in place, which is an important piece of information about a business. Some investors believe that a dividends shows that earnings are real and not manufactured by smart accountants manipulating GAAP rules.

Companies that raise dividends however show not only smart cash management skills, but also confidence in the company’s near term prospects. This assurance of balance sheet strength, despite the challenging economic environment, show their focus on delivering sustainable long-term results to shareholders. The boards of several firms announced dividend hikes over the past week:

Connecticut Water Service, Inc. (CTWS), which operates as a regulated water company in Connecticut. , increased its quarterly dividend by 2.20% to 22.75 cents per share. Connecticut Water Service, Inc. is a dividend achiever, which has increased dividend payments for each of the last 40 years. The stock currently yields 4.20%.

Consolidated Water Co. Ltd. (CWCO), which uses reverse osmosis technology to produce fresh water from seawater, announced an increase to its quarterly dividend by 15% to 7.50 cents per share. Consolidated Water Co. Ltd. is an international dividend achiever, which has increased its quarterly dividend in each of the past ten years. The stock currently yields 1.40%.

Badger Meter, Inc. (BMI), which engages in manufacturing and marketing flow measurement and control products for water utilities, municipalities, and industrial customers worldwide, increased its quarterly dividend by 9% to 12 cents per share. CEO Richard A. Meeusen noted, "This is our seventeenth consecutive year of increased dividend payments. The increase reflects our ongoing commitment to our shareholders and our continued confidence in the future of Badger Meter. This dividend achiever currently yields only 1.30%.

Kinross Gold (KGC), which engages in the gold mining and exploration, increased its quarterly dividend by 25% to 5 cents per share. This is the first dividend increase for Kinross Gold is since the company started paying dividends in 2008. The stock currently yields only 0.40%. If you believe that gold is going to increase over the next few years, gold miners could be a good bet, since they pay some dividends, no matter how small they really are.

Equity LifeStyle Properties, Inc. (ELS) announced that its board of directors has approved a 20% increase in its quarterly dividends to 30 cents/share. This real estate investment trust (REIT) engages in the ownership and operation of lifestyle oriented properties. This is the sixth dividend increase for Equity LifeStyle Properties, Inc. since the company suspended distributions in 2003. The stock currently yields 2.80%.

Broadridge Financial Solutions, Inc. (BR) announced that its board of directors has approved a 100% increase in its quarterly dividends to 14 cents/share and authorized the repurchase of up to 10 million shares of its outstanding common stock. The company provides technology-based outsourcing solutions to the financial services industry. This is the second dividend increase for Broadridge Financial Solutions, Inc. since the company started a dividend policy in 2007. The stock currently yields 2.80%.

Lorillard, Inc. (LO), which engages in the manufacture and sale of cigarettes in the United States, increased its quarterly dividend by 8.7% to 1 dollar per share. Lorillard, Inc.was spun off from Loews in 2008, which explains the lack of long history of dividend increases. The stock currently yields 5.10%.

Full Disclosure: None

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Berkshire Hathaway’s portfolio changes for 2Q 2009

Berkshire Hathaway (BRK-B) just posted its 13-F filing with the SEC, which lists changes in its stock positions.

Buffett initiated a new position in medical technology company Becton Dickinson (BDX) in the second quarter. The sec filing shows Berkshire Hathaway purchased.1.20 million shares in Becton Dickinson (BDX). Becton Dickinson is a dividend aristocrat, which has raised distributions for 36 years in a row.

Berkshire added 4.4 million shares to its position in health care giant Johnson & Johnson (JNJ). This is the second consecutive addition to its holdings there. Johnson and Johnson (JNJ) is another dividend aristocrat, which has rewarded shareholders with 47 years of consecutive dividend increases. Check my analysis of the stock.

Those recent moves by Buffett reiterate my convictions that he is a closet dividend investor. Most companies that have managed to increase their dividends for long periods of time are ones that have wide moats as well as excellent competitive advantages in the marketplace. Having these qualities leads to rising earnings which tend to support a steady pace of increase in dividends.

Berkshire eliminated its position in utility company Constellation Energy (CEG). This wasn’t a surprising move since Buffett’s company had already disclosed this sale in a June 1 filing.

Berkshire Hathaway disclosed lowered stakes in Carmax (KMX), ConocoPhillips (COP), Eaton Corporation (ETN), Home Depot (HD), United Health Group (UNH) when comparing June 30 to March 31 filings.

In a July 22 filing Berkshire Disclosed it had also cut its stake in the credit rating company Moody’s (MCO) by 16%.

Over the past several months Berkshire Hathaway has been allocating funds to preferred stocks with at very good prices. The company has invested billions in preferred shares of companies like Goldman Sachs (GS), General Electric (GE), Tiffany’s (TIF), Harley Davidson (HOG) and Dow Chemical (DOW). Some of these deals deliver not only solid yields in the low double digits, but also give warrants which could provide solid capital gains if these stocks recover over the next few years.

What this filing does not show however is the fact that Buffett’s conglomerate “goofed on derivatives”. While there may be more buzz than actual news and the SEC issues have been resolved, it is interesting how Buffett talks one thing but then does exactly the opposite of what he preaches. He’s always held a view against derivatives, yet his company has always engaged in options selling, futures and insurance derivatives.

One of his riskiest trades is the selling of puts on four major world stock indices, which expire somewhere between 2018 and 2028. Berkshire assumed over $37.50 billion in potential liabilities in the process, and has already lost $8 billion on them at the end June 2009. If world stock markets resemble the Japanese stock market of the second “lost decade” for the country with the rising sun, then Berkshire would be on the hook for almost half the $37 billion in assumed liabilities.

Does is pay to follow Buffett’s moves? The answer is yes it does. According to this paper a portfolio that mimicked Buffet’s stock investments would have outperformed S&P 500 by 14.6% annually between 1976 and 2006. Here’s a list of Berkshire Hathaway’s portfolio holdings as of June 30, 2009:



Full Disclosure: Long JNJ

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Chubb (CB) Dividend Stock Analysis

The Chubb Corporation, through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company operates through three segments: Personal Insurance, Commercial Insurance, and Specialty Insurance. The company is member of the S&P 500 and the S&P Dividend Aristocrats indexes.
Chubb has consistently increased dividends every year for 44 years. The company announced a 6.10% dividend raise in February 2009, plus a 20 million share repurchase initiative in December 2008.

Between June of 1999 up until June 2009 this dividend growth stock has delivered an average total return of 3.90% annually. The stock is trading almost 50% above the levels it was changing hands a decade ago.

The company has managed to deliver an 11.60% average annual increase in its EPS between 1999 and 2008. Next year Chubb is expected to earn $5.15 share, followed by $5.20/share in FY 2010.

The Return on Equity has ranged over the past decade between a low of 2% and a high of 20%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time. With the exception of 2001 and 2002, this indicator has been stable.

Annual dividends have increased by an average of 8.40 % annually since 1999, which is slower than the growth in EPS. The disparity is mostly due to a gradual decrease in the dividend payout ratio and the billions of dollars the insurer has spent on stock buybacks.
An 8 % growth in dividends translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1984, Chubb has indeed managed to double its dividend payment every eight years on average.


The dividend payout ratio has been on the decline, and is still much lower than my 50% threshold. 2001 and 2002 stick as outliers, since earnings per share were lower on high underwriting combined ratios. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Chubb is trading at 9.20 times earnings, yields 3.10% and has an adequately covered dividend payment. In comparison rival Travelers Cos (TRV) trades at a P/E multiple of 10 and yields 2.80% , while Cincinnati Financial (CINF) trades at a P/E multiple of 8 and yields 6.40%. Berkshire Hathaway (BRK.B) is also a competitor to Chubb(CB), although it trades at a P/E of 29, and does not pay a dividend. The company does spend a lot of its cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort. I like the company and its business model. Insurance companies like Chubb (CB) are a way for investors to fill in the need for exposure to the financial sector, after several high profile payers like Citigroup (C) and Bank of America (BAC) cut their distributions.
I believe that the company is attractively valued at the moment; thus I would be looking forward to adding to my position in Chubb (CB).

Full Disclosure: Long CB

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OptionsXpress $100 Referal Bonus

Besides Tradeking’s $50 promotion, Optionsxpress is also offering new customers $100 account opening bonus through their refer a friend program. The referred account must maintain an average account balance of $500 for 6 months, and the account must trade at least once.

I just opened an account with Optionsxpress so I do have referral codes. If you want in shoot me an e-mail at dividendgrowthinvestor@gmail.com.
OptionsXpress stock trades are a little pricey at 14.95/trade, but they do have an outstanding options service if that’s what you are into. This definitely is a good deal since just for trying out a new service you get paid $100. If you just want to get the bonus, open an account with $520, make one stock trade for one share of a low priced stock such as Freddie Mac (FRE) or Fannie Mae (FNM) and you would make at least a 15% return on your investment in 6 months.

Here’s the overview of the promotion bonus from OptionsXpress site:

Offer limited to one $100 bonus per referrer and referred friend, for each unique referral resulting in a newly activated, funded optionsXpress account meeting the terms and conditions of the refer a friend program. To qualify for the $100 bonus, the referred account must maintain a per account average balance of $500 for 6 months, and the account must trade at least once. The $100 bonus will be deposited into the referrer and referred accounts within 45 days after the referred friend meets the terms and conditions of the offer. To qualify, the referrer must enter the referred friend's email address through this page, and the referred friend must enter the promo code "FRIEND" through the new account application form when opening the new account. A referred customer can only qualify for the $100 bonus a total of one time. A customer can only qualify for a total of $500 from any combination of optionsXpress cash promotions per calendar year. Deposits of new funds or securities from existing optionsXpress accounts are not eligible for this offer. Qualified (IRA), linked and shared accounts are not eligible for this offer. This offer is not valid for optionsXpressassociates, non-U.S. residents, certain referring parties, and where otherwise prohibited. Customers can not exchange the $100 for other offers, cash or credit. We reserve the right at our sole discretion, to cancel, modify or suspend this offer program at any time without notice.

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13 dividend stocks to enter on dips

Ever since the markets hit a milti year low in March, investors have been wondering how sustainable the advance is. Some claim that the bear market is over, while others believe that the worst is yet to come in the grand scheme of events.

Intelligent dividend investors are not worried about short-term fluctuations in the markets however. They understand that if they follow a rigorous screening process and acquire a diversified mix of the best dividend paying companies in the world, their distributions would provide a positive return in any market. In a previous post I identified 12 attractively valued dividend stocks to acquire now. It is important however not to overpay for stocks, even those with exceptional moats, as this could lead to underperformance relative to their benchmark over time.

If the markets were truly overstretched, then a slight retracement from markets recent highs would be a welcoming sign for income investors, who are looking to exploit these conditions by acquiring great franchises on dips. Pockets of opportunity allow dividend investors to buy solid businesses at reasonable prices, decent yields and acceptable dividend growth rates.

In order to capitalize on such opportunities, I have screened for companies, which have raised their dividends for more than 25 consecutive years. My criteria were are follows:

1) Stock has increased dividends for more than a quarter of a century
2) Price/Earnings Ratio of less than 20
3) Dividend payout ratio of less than 50%
4) Dividend yield is more than 2%, but no more than 3%

The companies, which I identified in the screen, are listed below:

(Open as a spreadsheet)

I require a 3% initial dividend yield before initiating a position in a stock. Thus the above-mentioned stock list should be acquired only on dips below the target price. Another strategy for enterprising dividend growth investors is selling cash secured puts on the stocks below, with strike prices close to the target price mentioned above. I have provided some explanation why I require at least some yield below.

Investors often overpay for stocks because of the recency phenomenon, where they discount double-digit growth indefinitely. This leads to purchasing stocks with unacceptably low dividend yields, high P/E ratios and rosy predictions for strong dividend growth for eternity. Such conditions are simply unsustainable.

Thus by buying a stock with a dividend yield of at least 3% an investor’s income is relatively well covered in a scenario where the company stops growing its distributions. With this margin of safety the investor still generates some dividend income until they manage to sell the stock and re-invest the proceeds in a more promising dividend growth stocks. With a 1%-2% yielder, it would take forever for our enterprising dividend investor to earn a reasonable dividend income if distribution growth slows down or grinds to a halt.

Full Disclosure: Long MHP, MMM, SHW and WMT

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9 Dividend Stocks in the news

Two more dividend aristocrats raised their distributions last week, bringing the total number of raisers in the elite index to 30. This is quite impressive, given the fact that there are almost 5 more months to go before the year is out and that there are only 51 components in it.

Dover Corporation (DOV), manufactures industrial products and components, as well as provides related services and consumables in the United States and internationally, increased its quarterly dividend by 4% to 26 cents per share. Dover Corporation is a dividend aristocrat, which has increased its quarterly dividend in each of the past fifty-four consecutive years. The stock currently yields 2.90%.

Leggett & Platt (LEG), which designs and produces a range of engineered components and products worldwide, increased its quarterly dividend by 4% to 26 cents per share. Leggett & Platt is a dividend aristocrat, which has increased its quarterly dividend in each of the past 38 years. The stock currently yields 5.80%. The company has been unable to cover its dividend payment in 2007 and 2008, so this move is definitely a surprising one from this High-Yield dividend stock at risk. On the positive side, over the past two years the company had a $1.42 and $1.16 in cash flow per share, which still barely leaves any funds for other activities. Another positive fact is that the company has announced that as long as cash flows from operations exceed $300 million, which is enough for capex and distributions, dividends are safe.

Aqua America (WTR), which operates regulated utilities that provide water or wastewater services in the United States, increased its quarterly dividend by 7.4% to 14.50 cents per share. Aqua America is a dividend achiever, which has increased its quarterly dividend in each of the past eighteen years. The stock currently yields 3.00%.

Carlisle (CSL), is a diversified global manufacturing company, increased its quarterly dividend by 3.20% to 16 cents per share. This marks the 33rd consecutive year of dividend increases for Carlisle, which is a member of the dividend champion’s list. The stock currently yields 1.90%.

On July 29, 2009, the Board of Directors of Church & Dwight Co (CHD), which evelops, manufactures, and markets a range of household, personal care, and specialty products under various brand names in the United States and internationally, increased its quarterly dividend by 55.60% to 14 cents per share. Church & Dwight Co is a dividend achiever, which has increased its quarterly dividend in each of the past thirteen years. The stock currently yields only 1.00%.

BCE Inc. (BCE), which provides a suite of communication services to residential and business customers in Canada, increased its quarterly dividend by 5% to 40.50 Canadian cents per share. This increase is funded from free cash flow and is consistent with the company's target dividend payout ratio of 65% to 75% of Adjusted EPS. The stock currently yields 6.10%.

Apollo Investment Corporation (AINV) announces that its Board of Directors has declared its second fiscal quarter 2010 dividend of $0.28 per share. Apollo Investment Corporation is business Development Company specializing in investments in middle market companies. Apollo Investment Corporation cut its quarterly per share distributions by half in 2009, from $0.52 to $0.26. The current distribution raise is a positive, as long as the company can sustain the momentum of distribution raises over time. The stock currently yields 14.00%.

Chemed Corporation (CHE), provides hospice care services, increased its quarterly dividend by an astounding 100% to 12 cents per share. Before you get too excited about this dividend increase, please be alert that this is the first raise since 2002; furthermore the new distribution of 12 cents/share is still way below Chemed’s 26.50 cents/share quarterly distribution before it cut its dividends in 1999. The stock currently yields 1.10%.

Atrion Corporation (ATRI), which designs, develops, manufactures, sells, and distributes products and components for the medical and healthcare industry, increased its quarterly dividend by 20% to 36 cents per share. Atrion has consistently paid and increased its quarterly dividend since 2003. The stock currently yields 0.90%.

Despite the recent outperformance of speculative stocks since March 2009, long term investors are beginning to put their money in stable companies which share portions of their profits with shareholders. While markets can go up and down, creating and destroying capital gains in seconds, investors who focus on getting "a bird in hand" should do well overtime as they receive an ever increasing stream of income from their investments.

Full Disclosure: None

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Wal-Mart (WMT) Dividend Stock Analysis

Wal-Mart Stores, Inc. 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 35 years. The company announced a 15% dividend raise in March 2009, plus a $15 billion stock buyback initiative last month.

Between June of 1999 up until June 2009 this dividend growth stock has delivered an average total return of 1.10% annually. The stock is trading below the levels it was changing hands a decade ago.

The company has managed to deliver an 11.60% average annual increase in its EPS between 1999 and 2008. Next year Wal-Mart is expected to earn $3.55 share, followed by $3.90/share in FY 2011. With growth slowing down, the price/earnings multiple could contract even lower. This being said I believe Wal-Mart is an excellent business, as it always investing in innovation that helps control inventory and focus on certain types of merchandise that offsets weaker demand in recessions. Despite the expected slow down in consumer spending, Wal Mart is well positioned with its diverse product mix of consumer staples and foods that it is offering on its shelves. It has lower prices in comparison to its competitors, which could drive more traffic for the retailer.
Just like Walgreen (WAG), Wal-Mart Stores expects to slow down on the rate of opening new stores and instead would try to focus on developing the profitability of existing locations, without cannibalizing sales in its existing outlets.
A potential growth area for the company are its international joint ventures in China, Brazil, India and Chile.

The Return on Equity has ranged over the past decade between a low of 20% and a high of 22%, with the exception of 1999. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 18.90 % annually since 1999, which is higher than the growth in EPS. The disparity is mostly due to a gradual increase in the dividend payout ratio and the billions of dollars the Bentonville, AR based retailer has spend on stock buybacks.
A 19 % growth in dividends translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1976, Wal-Mart has actually managed to double its dividend payment every three years on average.
The slowdown in capital spending could free up more cash for dividend increases and share buybacks. Thus, despite expectations for EPS growth of 7% over the next few years, Wal-Mart could still manage to deliver low double-digit dividend growth.

The dividend payout ratio has been on the rise, although it is still much lower than my 50% threshold. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Wal-Mart Stores is trading at 14.20 times earnings, yields 2.20% and has an adequately covered dividend payment. The company does spend a lot of its cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort. Most analysts are bullish on the stock, but this could be a recency bias due to the strong performance of the stock in 2008. Although I really like the company, I don’t want to pay top dollar for it. Thus I would consider adding to my position there on dips below $40.

Full Disclosure: Long WMT

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