High Yielding Stocks Boosting Distributions

Utilities, Pipeline Master Limited Partnerships and Real Estate Investment trusts typically distribute a large portion of their earnings and cash flows to their shareholders. As a result, most of them typically enjoy high dividend yields in comparison to the broader market. The main disadvantage is that dividend increases are not as high as those for other traditional dividend growth stocks such as PepsiCo (PEP) or Coca Cola (KO). Given the low interest rate environment over the past two years however, many investors have started chasing the high distributions from these sectors, which has lead to increases in stock prices and decrease in dividend yields to historic lows. This has led some market analysts to proclaim that we might be approaching a dividend bubble. In a previous article I noted that we are far from a dividend bubble at this point. Any further increase in popularity for high yielding stocks such as Utilities, Master Limited Partnerships and Real Estate Investment Trusts however could bring us closer to this point for these sectors, and would make other dividend growth sectors more appealing.

The dividend growth companies that announced distribution increases over the past week included:

Consolidated Edison, Inc. (ED), through its subsidiaries, provides energy services to residential, commercial, industrial, and government customers in the United States. The company raised its quarterly dividend by 0.83% to 60.50cents/share. This dividend aristocrat has raised distributions for 38 years in a row. The low dividend growth and the steep run up in price, which pushed the yield down to multi-decade lows make this stock a hold. Yield: 4.10% (analysis)

HCP, Inc. (HCP) is a real estate investment trust which primarily invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing. The company raised its quarterly dividend by 4.20% to 50 cents/share. This dividend champion has raised distributions for 27 years in a row. Yield: 4.80% (analysis)

Health Care REIT, Inc. (HCN) is a real estate investment trust which invests in senior living and health care properties. The company raised its quarterly dividend by 3.50% to 74 cents/share. This dividend stock has raised distributions for 6 years in a row. Yield: 5.20%

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 raised its quarterly distributions 81.50 cents/unit, which was a 7.60% increase over the Q1 2011 distribution. This dividend achiever has raised distributions for 11 years in a row. Yield: 4.90%

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 master limited partnership raised its quarterly distributions 88.50 cents/unit, which was a 4.70% increase over the Q1 2011 distribution. This Holly Energy Partners has raised distributions for 7 years in a row. Yield: 6.50%

SJW Corp. (SJW), through its subsidiaries, engages in the production, purchase, storage, purification, distribution, wholesale, and retail sale of water. The company raised its quarterly dividend by 2.90% to 17.75 cents/share. This dividend champion has raised distributions for 45 years in a row. Yield: 3%

California Water Service Group (CWT), through its subsidiaries, provides water utility and other related services in California, Washington, New Mexico, and Hawaii. The company raised its quarterly dividend by 2.40% to 15.75 cents/share. This dividend champion has raised distributions for 45 years in a row. Yield: 3.40%

Energen Corporation (EGN), an energy holding company, engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in the continental United States. The company raised its quarterly dividend by 3.70% to 14 cents/share. This dividend champion has raised distributions for 30 years in a row. Yield: 1%

CMS Energy Corporation (CMS), through its subsidiaries, operates as an energy company primarily in Michigan. The company operates in three segments: Electric Utility, Gas Utility, and Enterprises. The company raised its quarterly dividend by 14.30% to 24 cents/share. This dividend stock has raised distributions for 6 years in a row. Yield: 4.40%

Canadian National Railway Company (CNI), together with its subsidiaries, engages in the rail and related transportation business in North America. The company raised its quarterly dividend by 15% to 37.50 cents/share. This international dividend achiever has raised distributions every year since 1996. Yield: 2%

Norfolk Southern Corporation (NSC), through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. The company raised its quarterly dividend by 9.30% to 47 cents/share. This dividend achiever has raised distributions every year for 11 years. Yield: 2.50%

Donaldson Company, Inc. (DCI) engages in the manufacture and sale of filtration systems and replacement parts worldwide. The company operates in two segments, Engine Products and Industrial Products. The company raised its quarterly dividend by 6.70% to 16 cents/share. This dividend champion has raised distributions for 26 years in a row. Yield: 0.90%

Parker Hannifin Corporation (PH) manufactures fluid power systems, electromechanical controls, and related components worldwide. The company raised its quarterly dividend by 5.40% to 39 cents/share. This dividend king has raised distributions for 55 years in a row. Yield: 1.90%

Rollins, Inc. (ROL), through its subsidiaries, provides pest and termite control services to residential and commercial customers in North America. The company raised its quarterly dividend by 14.30% to 8 cents/share. This dividend stock has raised distributions for 10 years in a row. Yield: 1.40%

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. The company raised its quarterly dividend to 28.50cents/share, which represents a 5.60% increase over the Q1 2011 dividend. This dividend stock has raised distributions for 9 years in a row. Yield: 3.80%

Full Disclosure: Long ED

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Diageo (DEO) Dividend Stock Analysis 2011

Diageo plc (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine products worldwide. This international dividend achiever has paid uninterrupted dividends on its common stock since 1988 and increased payments to common shareholders every year since 1998.

Diageo’s largest competitors include Brown-Forman (BF-B), Constellation Brands (STZ) and SAB Miller (SBMRY).

Over the past decade this dividend growth stock has delivered an annualized total return of 10.20% to its shareholders.

The company has managed to deliver a 5.50% annual increase in EPS since 2001. Analysts expect Diageo to earn $5.77 per share in 2012 and $6.44 per share in 2013. In comparison Diageo earned $4.84 /share in 2011.

Diageo owns some of the best known brands in spirits, including Smirnoff, Johnnie Walker, Baileys, Guinness, Captain Morgan and Jose Cuervo. I have previously written how strong brands are good for dividend growth. Diageo has focused exclusively on organic growth in its premium brands, shedding non-core assets over the past decade, and also focusing on achieving sales growth through acquisition of other premium spirits names. Diageo has benefited from strong demand for its premium products worldwide, as evidenced by strong volume growth over the past few years. A particular bright spot is the company’s performance in emerging markets, which accounts for one third of its revenues.

The company has maintained a high return on equity of over 30% for the majority of the decade. 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 in US Dollars has increased by 7.30% per year since 2001, which is higher than the growth in EPS. With international dividend achievers, it is important to look at the trend in distributions in their base currencies. Despite the fact that the annual dividend payment appears volatile in US dollars, the growth in distributions in UK pounds has shown a consistent upward trend in distributions.

An 7% growth in distributions translates into the dividend payment doubling almost every ten years.

The company pays dividends twice per year. The interim payment is typically almost 40% of the total annual amount and is paid in April. The Final payment is approximately 60% of the total dividend and is typically paid in October.

The dividend payout ratio has mostly remained above 50%. It is just a tad above 50% currently, which means that the distributions are sustainable. 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 Diageo is attractively valued at 18.20 times earnings, has a sustainable dividend payout and yields 3%.

Full Disclosure: Long BF-B and DEO

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Active Dividend Growth Investing

My strategy relates to buying quality dividend stocks which fit my criteria, then sit back and hold on until one of these three events happens. However, there are other ways for investors to actively generate income from dividend paying stocks. Although they are mostly for sophisticated investors, everyone should be aware of them.

One such strategy is active dividend investing. This relates to selling a stock when its current yield drops below a certain threshold. For example, back in 2009, investors could have purchased shares of Aflac (AFL) at $20 or less per share. As a result they would be earning a yield on cost of 6%. However, given the steep run up in the share price since then, the current yield is 2.80%.

The question that some investors ask themselves is whether it makes sense to sell a company yielding 2.80% today, and substituting it for a company which has a higher current yield. After all, this would only increase the current income that the portfolio generates. For investors who are in the distribution phase of their dividend investing lifecycle, any boost in the dividend income could be seen as a nice bonus.

I typically worry about replacing dividend stocks after I sell dividend stocks when one of these three events occur. The reason why I don’t sell stocks that have gone up so much, that their current yield is low, is because I would not want to miss out on any dividend growth potential.
For example, investors holding onto Yum! Brands (YUM), might be disappointed with the low current yield of the stock. I purchased the stock last year at $41/share. My yield on cost is almost 2.80%. The current yield on the stock is 1.80%. Theoretically, if I sold my Yum! Brands stock, and purchased shares of McDonald’s (MCD) with the proceeds, I would increase my dividend income by 50%. The current yield on McDonald’s (MCD) is 2.80%. However, I am careful not to focus too much on one aspect, which is yield. You can read more about choosing between dividend stocks in a previous article on the topic. In a potential decision of whether to sell or hold on-to Yum! Stock includes:

- Total returns

The main reason why I invest in stocks with growing dividends is the rising stream of passive income over time. The beauty of dividend growth stocks is that the increased dividends tend to lead to share price appreciation. While this process is not as linear as that of consistent dividend increases, total returns will increase your portfolio value, while also maintaining purchasing power of your principal. I believe that both McDonald’s (MCD) and Yum! Brands (YUM) have the potential to deliver strong total returns. However, given Yum! Brands strong position in China, I would expect them to slightly outperform the golden arches.

- Valuation

Valuation is important as well. Right now McDonald’s (MCD) is trading at 20 times earnings, while Yum! Brands (YUM) is trading at 24.50 times earnings. Valuation also drives total returns over time. Overpaying for stocks could result in subpar performance. Since Yum! was spun off from PepsiCo (PEP) in 1997, it has handily outperformed Mcdonald’s (MCD). Over the past five years however, McDonald’s (MCD) was able to deliver stronger price gains in comparison to Yum!.

- Dividend Growth

Over the past five year, MCD has managed to increase dividends per share at 27.50% per year and has raised distributions for 35 years in a row. YUM has been able to deliver 32.60% dividend growth over the same time frame, but has only raised distributions for eight consecutive years. The latest dividend increases of Yum! Brands however have been much higher than those for McDonald’s. In addition to that, the dividend payout ratio for Yum! Brands is much lower than the payout ratio for McDonald’s (MCD). Investors should also evaluate the risk of dividend cut, particularly if the dividend payout ratio is overextended above 60% for one of the companies.

- Earnings Growth

Over the past decade, MCD has managed to increase earnings per share at 20.70% per year. YUM has been able to deliver 13% EPS growth over the same time frame. McDonald’s generates 2.5 times the amount of sales that Yum! generates. In addition to that, the golden arches have a market capitalization that is three times the size of its rival. The future earnings growth, the expectations behind earnings growth are the fundamental factors that are going to drive dividend increases, share price growth over time. No two analysts have the same opinions on who will perform better over the next decade. This is exactly why picking one company over the other is more complicated.

- Diversification

I always stress diversification in as many sectors as possible. I also try to be exposed to several issues within a sector, in order to avoid any losses in income or principal stemming from a few bad apples. Investing is all about making assumptions and having a set of estimates of what might happen. Whether your theory materializes or not, is yet to be seen. However, by owning shares in two fast-food companies with global operations, you are better positioned than owning just one fast food company.

For example, investors who owned Wal-Mart (WMT) over the past decade have seen very little in terms of total returns. On the other hand, investors who owned Target (TGT) shares, did very during the same period. Back in the year 2000, it would have been impossible to determine which of these two companies would have outperformed the other. That’s why having an allocation to both could be a winning strategy after all.

In addition, investors who favored British Petroleum (BP) in 2009 over Chevron (CVX) for example, would have been in for a nasty surprise when BP was involved in the Gulf of Mexico oil spill. This resulted in steep declines in the company’s share price, as well as a suspension of its quarterly dividend.

Full Disclosure: Long AFL, YUM, MCD, PEP, WMT

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Avoid Cyclical Dividend Growth Stocks

For my retirement strategy, I purchase dividend paying stocks with shareholder friendly managements, that can afford to raise dividends every year. I typically tend to focus on companies which have raised annual distributions every year for over one decade. I do however try to analyze the long-term dividend histories of companies I am researching, in order to determine if there are any past events which could forecast trouble for my income stream in the future. Utilities are notorious for raising distributions for one or two decades, before cutting or freezing them for several years. After that, it is pretty easy to start raising distributions again, and the company might even reach dividend achiever status once again, while early investors might be receiving less in distributions than a decade earlier. In my dividend strategy, I try to avoid these cyclical dividend achievers.

The following companies increased distributions over the past week:

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 raised quarterly distributions to 62 cents/unit. This represents a 5.10% increase over the Q1 2011 distribution paid to unitholders. Enterprise Products Partners has raised distributions for 14 years in row. Yield: 5.20% (analysis)

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. The company raised its quarterly distribution by 16.70% to 21 cents/share. This dividend aristocrat has boosted distributions for 36 years in a row. The current yield is1.50%, but my yield on cost is more than twice that much (analysis)

ONEOK, Inc. (OKE), a diversified energy company, operates as a natural gas distributor primarily in the United States. It operates through three segments: ONEOK Partners; Distribution; and Energy Services. The company raised its quarterly distribution by 9% to 61 cents/share. ONEOK has boosted distributions for 10 years in a row. The current yield is 2.80% (analysis)

ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. This master limited partnership raised its quarterly distributions to 61 cents/unit, which represents a 7% increase over the distribution paid in Q1 2011. ONEOK Partners has boosted distributions for 7 years in a row. The current yield is 4.40%

The McGraw-Hill Companies, Inc. (MHP) provides various information services for financial, educational, and business information markets worldwide. It operates in four segments: Standard & Poor’s (S&P), McGraw-Hill Financial, McGraw-Hill Education (MHE), and McGraw-Hill Information & Media (I&M). The company raised its quarterly distribution by 2% to 25.50 cents/share. This dividend aristocrat has boosted distributions for 39 years in a row. The current yield is 2.20% (analysis)

CenterPoint Energy, Inc. (CNP) operates as a public utility holding company in the United States. The company raised its quarterly distribution by 2.50% to 20.25 cents/share. CenterPoint Energy has boosted distributions for 7 years in a row. The current payment is still below the 37.50 cents/share quarterly dividend paid between 1992 and 2002. Yield: 4.30%

Dominion Resources, Inc. (D), together with its subsidiaries, engages in producing and transporting energy in the United States. It operates in three segments: DVP, Dominion Generation, and Dominion Energy. The company raised its quarterly distribution by 7.10% to 52.75 cents/share. Dominion Resources has boosted distributions for 9 years in a row. The company had boosted distributions for 19 consecutive years as of 1995, before it froze the distributions until 2004. Yield: 4.20%

Pall Corporation (PLL), together with its subsidiaries, manufactures and markets filtration, purification, and separation products and integrated systems solutions worldwide. The company raised its quarterly distribution by 20% to 21 cents/share. Pall Corporation has boosted distributions for 8 years in a row. The company ended its 20 year streak of dividend increases in 2002, when it cut distributions by 47% to 9 cents/share. Yield: 1.40%

AmeriGas Partners, L.P. (APU), through its subsidiary, AmeriGas Propane, L.P., operates as a retail and wholesale distributor of propane gas in the United States. The company raised its quarterly distribution by 76.25 cents/unit, which is an 8.10% increase over the Q1 2011 distribution. AmeriGas Partners has boosted distributions for 8 years in a row. Yield: 7.20%

The Williams Companies, Inc. (WMB), through its subsidiaries, engages in finding, producing, gathering, processing, and transporting natural gas primarily in the United States. The company increased its quarterly distribution by 3.50% to 25.875 cents/share.The company has raised distributions for 9 years in a row. Yield: 3.60%

TransMontaigne Partners L.P. (TLP) operates as a terminaling and transportation company. It provides integrated terminaling, storage, transportation, and related services for customers engaged in the distribution and marketing of light refined petroleum products, heavy refined petroleum products, crude oil, chemicals, fertilizers, and other liquid products. This master limited partnership raised quarterly distributions to 63 cents/unit, which represented a 3.30% increase over the distribution paid in Q1 2011. TransMontaigne Partners has boosted distributions for 7 years in a row. Yield: 7.30%

In order to generate sustainable dividend income, I try to avoid cyclical dividend achiever. For example ONEOK (OKE) cut its dividend payment in 1989 to from 16 cents/share to 7.50 cents/share. The distribution was not restored until 1998. It is normal for a company with a long streak of dividend increases to pause them, and that would make the stock a hold, but would not necessarily mean it is a sell.

Full disclosure: Long EPD, OKS, FDO, D, MHP

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Unilever (UL) for International Dividend Diversification

Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and the Americas. This international dividend achiever has paid uninterrupted dividends on its common stock since 1937 and increased payments to common shareholders every year since 1999.

The most recent dividend increase was in June 2011, when the Board of Directors approved an 8.20 % increase in the quarterly dividend to 22.50 euro cents/share. Unilever’s largest competitors include Procter & Gamble (PG), Kraft (KFT) and Nestle (NSRGY).

Over the past decade this dividend growth stock has delivered an annualized total return of 10.30% to its shareholders.

The company has managed to deliver a 15.50% annual increase in EPS since 2001. Analysts expect Unilever to earn $2.20 per share in 2011 and $2.40 per share in 2012. In comparison Unilever earned $1.94 /share in 2010.

A large portion of the company’s revenues come from Emerging markets, where sales growth is expected to continue at a high single digit to a low double digit rate of increase. The company has also been able to pass on increases in prices of raw materials onto consumers, who purchase its branded products globally. The risk behind this strategy is if Unilever increases prices to rapidly, sales volumes might suffer as a result. Typically however, while the market for food and personal consumer products is highly competitive, demand is stable and relatively immune from economic stress. The company’s strategic plans have revealed that it expects long-term sales growth of 3%- 5% per year.

The company’s Return on Equty has followed an upward trend from 20.30% in 2001 to 33.20% in 2010. Overall, despite volatility, this indicator has remained at high levels over the past decade. 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 11.20% per year since 2001, which is in line with the growth in EPS. With international dividend achievers, it is important to look at the trend in distributions in their base currencies. Despite the fact that the annual dividend payment appears volatile in US dollars, the growth in distributions in UK pounds has shown a consistent upward trend in distributions.

An 11% growth in distributions translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1988 we see that Unilever has actually managed to double its dividend almost every seven and a half years on average.

The dividend payout ratio has been on the decline over the past decade. It fell from a high of 80% in 2001 to 57.60% in 2010. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Unilever is a company that is headquartered in the UK and the Netherlands. In this analysis I am concentrating on the British based, American Depositary Receipts. Unilever operates as a single business entity. However, there are two owners: Unilever (NV) and Unilever (PLC) which are the two parent companies of the Unilever Group, having separate legal identities and separate stock exchange listings for their shares. You can find Unilever shares trading on NYSE as (UN) or (UL) representing NV and PLC respectively. By investing in the UK shares, I am avoiding foreign withholding of my dividends.

Currently Unilever is attractively valued at 15.90 times earnings, has a sustainable dividend payout and yields 3.60%. I would consider adding to my position in the stock on dips.

Full Disclosure: Long UL, KFT, NSRGY and PG

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