Twelve Dividend Machines Boosting Dividends

When evaluating dividend stocks, the culture of maintaining dividend increases throughout various economic cycles is important. Companies that generate excess chas flows are more likely to maintain and increase their dividends. Much more important however are the fundamentals that will pave the way for future dividend increases. Investors should also focus on income stocks which have sustainable dividends.

The companies which announced dividend increases in the past week include:

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company increased its quarterly dividend by 10% to 33 cents/share. This dividend aristocrat has raised distributions for 29 years in a row. Yield: 2.80% (analysis)

V.F. Corporation (VFC) designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. The company increased its quarterly dividend by 14.30% to 72 cents/share. This dividend aristocrat has raised distributions for 39 years in a row. Yield: 2.20% (analysis)

Reynolds American Inc. (RAI), through its subsidiaries, manufactures and sells cigarette and other tobacco products in the United States. The company increased its quarterly dividend by 5.70% to 56 cents/share. This dividend stock has raised distributions for 8 years in a row. Yield: 5.80%

Sunoco Logistics Partners L.P. (SXL) engages in the transport, terminalling, and storage of refined products and crude oil, as well as the purchase and sale of crude oil in the United States. The company increased its quarterly distributions to $1.24/share. This master limited partnership has raised distributions for 10 years in a row. Yield: 5.20%

Holly Energy Partners, L.P. (HEP) operates a system of petroleum product and crude oil pipelines, storage tanks, distribution terminals, and loading rack facilities. The company increased its quarterly distributions to 87.50 cents/share. This master limited partnership has raised distributions for 7 years in a row. Yield: 6.30%

Williams Partners L.P.(WPZ) focuses on natural gas transportation, gathering, treating and processing, storage, natural gas liquid fractionation, and oil transportation activities in the United States. The company increased its quarterly distributions to 74.75 cents/share. This master limited partnership has raised distributions for 7 years in a row. Yield: 5.30%

Meredith Corporation (MDP), a media and marketing company, engages in magazine publishing and related brand licensing, television broadcasting, integrated marketing, interactive media, and video production businesses in the United States. The company increased its quarterly dividend by 50% to 38.25 cents/share. This dividend achiever has raised distributions for 19 years in a row. Yield: 5.60%

UMB Financial Corporation (UMBF), a multi-bank holding company, provides banking and other financial services in the United States. The company increased its quarterly dividend by 5.10% to 20.50 cents/share. This dividend achiever has raised distributions for 21 years in a row. Yield: 2.30%

Nu Skin Enterprises, Inc. (NUS) develops and distributes anti-aging personal care products and nutritional supplements worldwide. The company increased its quarterly dividend by 18.50% to 55 cents/share. This dividend achiever has raised distributions for 12 years in a row. Yield: 1.30%

Perrigo Company (PRGO), through its subsidiaries, develops, manufactures, and distributes over-the-counter (OTC) and generic prescription (Rx) pharmaceuticals, infant formulas, nutritional products, and active pharmaceutical ingredients (API) worldwide. The company increased its quarterly dividend by 14.30% to 8 cents/share. This dividend stock has raised distributions for 9 years in a row. Yield: 0.30%

MSC Industrial Direct Co., Inc. (MSM), together with its subsidiaries, operates as a direct marketer and distributor of metalworking and maintenance, repair, and operations products to industrial customers in the United States. The company increased its quarterly dividend by 13.60% to 25 cents/share. This dividend stock has raised distributions for 9 years in a row. Yield: 1.50%

NewMarket Corporation (NEU), through its subsidiaries, engages in the petroleum additives and real estate development businesses. The company increased its quarterly dividend by 10% to 55 cents/share. NewMarket Corporation has raised distributions for 7 years in a row. Yield: 1.50%

Full Disclosure: Long AFL

Relevant Articles:

- Why Sustainable Dividends Matter

- Five Metrics of Successful Dividend Companies

- Seven wide-moat dividends stocks to consider

- Dividend Investing Risks

Why Sustainable Dividends Matter

My strategy entails purchasing dividend growth stocks which meet qualitative and quantitative entry criteria. The goal of my dividend growth portfolio is to purchase stocks that will raise dividends for years, without me having to reinvest anything back. The stream of dividend income will be used to fund my retirement, while the dividend growth will provide protection against inflation. I do not plan on selling, unless one of these three situations occur.

My strategy relies on companies which grow dividends over time. However, I do expect that I will experience dividend cuts and eliminations. Despite the fact that I own more than 40 individual stocks, a few rotten apples could lead to flat or lower dividend income for me. One of the three reasons that cause me to sell a stock is when it cuts distributions. However, I do end up replacing the cutter with a company from a similar sector, which meets my entry criteria. For example, when I sold the financial State Street (STT) in 2009, I replaced it with Aflac (AFL).

As a result, in order to reduce the risk of dividend cuts, I analyze the sustainability of the dividend payments before I commit any capital to new or existing positions. For most stocks, this means evaluating whether the dividend payout ratio is less than 60%. The dividend payout ratio is the percentage of earnings that the company distributes to shareholders in the form of dividends. Besides the absolute percentages, I also look for the trends in this ratio. In addition, I focus on the earnings and the dividend growth over the past decade, in order to assess any changes that could potentially affect the sustainability of dividend payments. Some companies increase dividends much faster than earnings, which lead to increase in the dividend payout ratio. This typically puts a limit on future dividend growth, because increasing dividends faster than earnings would lead to unsustainable payout. Thus, a clear rising trend in the payout ratio is a potential warning sign, particularly if the ratio is rising above 50%.

While I can calculate the ratio right now, once I initiate a position, I realize that things can change afterwards. A company that raises dividends faster than earnings, will eventually be in a position where it might not be able to reinvest sufficient amounts into the business. This could lead to dividend cuts, which are to be avoided. Another item to note includes structural changes. Banks such as US Bancorp (USB) and Bank of America (BAC) used to be darlings for dividend growth investors. However, the events of 2008 led to steep dividend cuts. An investor, who purchased these stocks in the 1990’s, could not have foreseen the events that led to the financial crisis of 2007 – 2009. Only those who monitored their portfolios closely and weren’t “married” to their stock holdings would have been nimble enough to dispose of the stock after the first dividend cut in 2008.

For REITs, I use Dividends to Fund From Operations (FFO) ratio, whereas for Master Limited Partnerships I use the Distributions to DCF ratio. Read more about REITs here. Read more about MLPs here.

Some recent dividend growth stocks I have purchased, that have sustainable distributions include:

Medtronic, Inc. (MDT) manufactures and sells device-based medical therapies worldwide. The company spots a dividend payout of 33.80%. This dividend champion has raised distributions for 34 years in a row and currently yields 2.90%. Check my analysis of the stock.

Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States. The company spots a dividend payout of 30.60%. This dividend aristocrat has raised distributions for 36 years in a row and currently yields 2.70%. Check my analysis of the stock.

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company spots a dividend payout of 36%. This dividend achiever has raised distributions for 17 years in a row and currently yields 2.60%. Check my analysis of the stock.

Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, NGLs, crude oil, refined products, and petrochemicals in North America. This master limited partnership has one of the highest distribution coverage in the MLP arena of 1.50 as of Q2 2011. Enterprise Product Partners has raised distributions for 14 years and yields 5.60%. Check my analysis of this MLP.

Full Disclosure: Long AFL, MDT, WAG, UTX, EPD

Relevant Articles:

- Four High Yield REITs for current income

- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors

- Five Metrics of Successful Dividend Companies

- Six Dividend Stocks to Hold Forever

This article was featured in the Carnival of Wealth

Ten Income Stocks Confident in their Growth Prospects

Dividends are paid out of real cash, generated by businesses. In order for these companies to be able to afford it, they should be expecting to generate sufficient amounts of cashflow. Thus, companies which announce an increase in their distributions, show their optimism about near-term business prospects. It is particularly refreshing to hear about companies which are optimistic about their future, particularly in light of all bearish news around Greece and US Budget deficits to name a few.

The following companies were confident enough in their business prospects, to increase distributions over the past week. Some were even bold enough to provide guidance extending over several years into the future:

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. This master limited partnership raised distributions to $1.16/unit. This was an increase of 4.50% compared to the last distribution paid out in 2010. This master limited partnership has increased distributions for 15 years in a row and currently yields 6.10%. According to this press release, the partnership will distributed almost $5/unit in 2012, followed by a 5%-7% distribution growth for the foreseeable future. Check my analysis of Kinder Morgan.

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This high yielding real estate investment trust increased its monthly distribution by a fraction of a penny to 0.1451875 cents/share. Overall, the four increases in distributions since the start of 2011 have resulted in annual dividend increases of 1.50 cents/share to $1.736625/share. While this distribution growths looks low, investors should not forget that Realty Income is one of the few REITs that did not cut distributions during the financial meltdown. The company has raised dividends for 17 years in a row and yields 5.40%. Check my analysis of the stock.

Eaton Vance Corp. (EV), through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. It also provides investment management and counseling services to institutions and individuals. The company raised its quarterly dividend by 5.60% to 19 cents/share. This marked the 31st consecutive annual dividend increase for this dividend champion. Yield: 3.10%. Check my analysis of the stock.

Stepan Company (SCL), together with its subsidiaries, engages in the production and sale of specialty and intermediate chemicals to manufacturers in various industries worldwide. The company raised its quarterly dividend by 7.70% to 28 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion. Yield: 1.50%.

Met-Pro Corporation (MPR) manufactures and sells product recovery and pollution control equipment for purification of air and liquids, fluid handling equipment for corrosive, abrasive and high temperature liquids, and filtration and purification products in the United States and internationally. The company raised its quarterly dividend by 7.60% to 7.1 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Yield: 3.20%.

Magellan Midstream Partners, L.P. (MMP), together with its subsidiaries, engages in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. The master limited partnership increased distributions by 1.90% to 80 cents/unit. This represents a 7.40% increase over the distribution paid out in the last quarter of 2010. Magellan Midstream Partners has increased distributions for 11 consecutive years. Yield: 5.10%

Visa Inc. (V) operates retail electronic payments network worldwide. It facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. The company raised its quarterly dividend by 46.70% to 22 cents/share. This was the third consecutive annual dividend increase since the company went public in 2008. The stock yields only 1%, but could be the next big dividend growth story.

Cass Information Systems, Inc. (CASS) provides payment and information processing services to large manufacturing, distribution, and retail enterprises in the United States. The company raised its quarterly dividend by 6.25% to 17 cents/share. This marked the tenth consecutive annual dividend increase for this future dividend achiever. Yield: 1.90%

Bar Harbor Bankshares (BHB) operates as the holding company for Bar Harbor Bank & Trust that provides various banking products and services to individuals, businesses, not-for-profit organizations, and municipalities primarily in Hancock, Washington, and Knox counties. The company increased dividends by 1.80% to 28 cents/share. Bar Harbor Bankshares has increased dividends for 9 consecutive years. The quarterly dividend has been raised 3 times over the past year, after being flat for 2 years. The flat period included half of 2008 and 2010 and the whole year 2009. Yield: 3.90%

Prosperity Bancshares, Inc. (PRSP) operates as the holding company for Prosperity Bank that provides retail and commercial banking services to small and medium-sized businesses and consumers. The company raised its quarterly dividend by 11.40% to 19.50 cents/share. This marked the 14th consecutive annual dividend increase for this future dividend achiever. Yield: 2.10%

As a side note, I own the i-shares of Kinder Morgan (KMR). Investors in KMR do not receive cash distributions, but receive shares proportional to the ownership interest they have in the stock. The cash distributions for KMP and KMR are equal, the only difference is that KMR distributions are paid in the form of additional shares.

Full Disclosure: Long KMR, O, EV

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Archer-Daniels-Midland (ADM) Dividend Stock Analysis

Archer-Daniels-Midland Company (ADM) procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. Archer-Daniels-Midland is a dividend aristocrat, which has paid uninterrupted dividends on its common stock since 1927 and increased payments to common shareholders every year for 36 years.

The most recent dividend increase was in February 2011, when the Board of Directors approved a 6.70% increase in the quarterly dividend to 16 cents/share. Archer Daniels Midland ’s largest competitors include Bunge (BG), Corn Products Intl (CPO) and Griffin Land and Nurseries (GRIF).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.80% to its shareholders.

The company has managed to deliver a 16.70% annual increase in EPS since 2002. Analysts expect Archer-Daniels-Midland to earn $3.07 per share in 2012 and $3.40 per share in 2013. In comparison Archer-Daniels-Midland earned $3.13 /share in 2011.

The company plans to spend almost $2 billion on capex and acquisitions. The company has been able to expand commodity processing capacities through acquisitions, new plant construction and plant expansions. A recovering global economy might increase export demand, which would provide sufficient growth for the company’s corn processing operations. Increased demand for soft drinks and snack foods will be beneficial for ADM’s high-fructose corn syrup business.


The company’s Returns on Equty has been quite volatile, and closely followed the volatility in EPS. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 13.30% per year over the past decade, which is lower than the growth in EPS.

A 13% growth in distributions translates into the dividend payment doubling every five and a half years. If we look at historical data, going as far back as 1990 we see that Archer-Daniels-Midland has managed to double its dividend almost every 5 years on average.

The dividend payout ratio has been on the decline since 2002. Lately it has stabilized around 20%, which is very conservative. 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 Archer-Daniels-Midland is attractively valued and is trading at 8.90 times earnings, yields 2.30% and has a sustainable forward dividend payout. I would add to my position subject to availability of funds on dips below $25.60/share.

Full Disclosure: Long ADM

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Seven wide-moat dividends stocks to consider

Wide-moats, or strong competitive advantages exist in almost every industry. It is very difficult to take away market share from such companies, because they have strong consumer loyalty and strong brand names synonymous with being the best at what they do. These features protect the companies from competitors, and help them generate high returns on equity and charge higher prices to consumers.

Lowest Prices

Wal-Mart (WMT) is the most successful retailer in the world. The company has marketed itself as the lowest price retailer for almost everything consumers spend money on. The sheer scale of Wal-Mart (WMT) (analysis) has enabled it to squeeze lower prices from suppliers and increase operating effectiveness. In addition, its massive investment in technology has enabled to retailer to deliver the right goods when they are needed most. As a result it would be very difficult and costly to emulate the company’s business model. Check my analysis of Wal-Mart (WMT).

Strong Brand Names

Coca-Cola (KO) (analysis) has a portfolio of drinks, most prominent of which is Coke. It is a strong global brand, and consumers are willing to pay the premium to buy the product. It is true that there are alternatives to Coke from Pepsi (PEP) (analysis), but any Coke drinker would surely tell the difference between the two. I personally enjoy Coke and would never drink a Pepsi, although I own shares in both stocks. Furthermore the quality of Coca-Cola drinks is another reason why generations of consumers worldwide are buying the company’s drinks.
Another company with a strong portfolio of brand names includes Philip Morris International (PM) (analysis), which sells cigarettes and other branded tobacco products outside of US. The addictive product

Patents

Medical Device and Pharmaceutical companies spend billions in R&D in each year in order to address health issues for patients worldwide. Once a new drug is introduced, it undergoes years of trials and testing before hitting the market. After a patent is granted to the pharmaceuticals company, typically for a period of 20 years in the US, the company can pretty much charge as much as it wants to consumers. The reason is that there are few substitutes for most drugs, until generic competition starts eroding market shares. It is very rare that big pharma companies introduce competing drugs treating the same conditions. Companies with strong patents include Abbott Laboratories (ABT) (analysis) and Johnson & Johnson (JNJ) (analysis).

Geographic Location

Another type of competitive advantage exists when a company has a virtual monopoly at a particular geographical area. A prime example of that includes utilities companies such as Con Edison (ED) (analysis) or pipeline companies such as Kinder Morgan (KMP) (analysis). When consumers in New York need electricity, there is only Con Edison to supply this service to them. When oil and gas producers need to move their product between terminals, they don’t have a choice but to use the strategically positioned pipelines from companies like Kinder Morgan. It is so prohibitively expensive to set up the infrastructure for utilities and pipelines that making the investment in a parallel infrastructure would not be profitable.

Full Disclosure: Long all stocks mentioned above

Relevant Articles:

- Five Metrics of Successful Dividend Companies
- How dividend stocks protect investors from inflation

- How to choose between dividend stocks?

- Dividend Investing Risks