Dividend Growth Stocks – The best kept secret on Wall Street

When considering dividend stocks, many investors consider the companies with the highest yields to be the best picks. In a zero interest rate environment however no one can blame investors who want to maximize their yield in order to generate enough income.
One thing that yield hungry investors tend to forget is total returns. Another thing that yield hungry investors forget is inflation. Talk to them about companies raising dividend payments for 50 years in row and you get blank stares. Many investors ask how a company could raise dividends each year for many decades, yet the yield is 3%. In order to understand the dividend growth strategy however, investors have to get back to basics.

Dividend yield is calculated by annualizing the latest dividend payment and dividing it by the stock price. If we look at Johnson & Johnson (JNJ) whose latest quarterly dividend payment is 54 cents/share and which trades at $64, its current annual dividend is $2.16/share. Its current yield is thus 3.30%.

The yield on cost is calculated by dividing the most recent annual dividend payment to the price that you paid for the shares that you own. If you purchased Johnson & Johnson (JNJ) at the very end of 1990, when the stock was trading at $8.97/share, and the annual dividend was 17 cents/share, your current yield would have been 1.90%. Your yield on the $8.97 cost would have also been 1.90%. This was a particularly low yield, given the fact that 30 year treasuries delivered 8.25% and the yield on the S&P 500 was 3.74%.

The company was able to grow earnings over the next 20 years, and as a result was able to increase dividends every year since the hypothetical purchase. While the company didn’t have any control over its stock price, which was one of the determinants of its dividend yield, it had control over the actual amount of the quarterly dividend payment. The dividend yield fluctuated wildly over the past 20 years, while the dividend payment increased steadily for 20 years. Actually the dividend payment had increased steadily for 28 years before that!



The yield on cost on an investment in Johnson & Johnson (JNJ) steadily increased with the increase in dividends each year and reached 23.50% in 2010. This income stream was three times higher than what investors who purchased treasuries in 1990 generated. The growth in this income stream has also exceeded inflation for the period studied.

Last but not least a $100 investment in Johnson & Johnson (JNJ) at the end of 1990, with dividends reinvested would be worth $9646 by August 2010. Investors who spent all the dividend income would only have accumulated $6592 by August 2010.

This was not really an isolated incident. Many of the original dividend aristocrats of 1989 managed to deliver very good total returns over the next twenty years, coupled with solid yields on cost. Investors who were able to understand the power of dividend growth stocks were able to generate a dividend income stream that exceeded inflation as well as total returns, which at least matched market returns in aggregate.

Other quality stocks which could result in double digit future yields on cost include:

Medtronic, Inc. (MDT) develops, manufactures, and sells device-based medical therapies worldwide. This dividend champion has increased distributions for 33 years in a row. Over the past decade, the company has managed to increase dividends by 18.40% annually. Yield: 2.50% (analysis)

Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. This dividend aristocrat has increased distributions for 37 years in a row. Over the past decade, the company has managed to increase dividends by 14.50% annually. Yield: 1.90% (analysis)

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. This dividend aristocrat has increased distributions for 28 years in a row. Over the past decade, the company has managed to increase dividends by 22.70% annually. Yield: 2.10% (analysis)

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores for low to lower-middle income consumers in the United States. This dividend aristocrat has increased distributions for 34 years in a row. Over the past decade, the company has managed to increase dividends by 10.50% annually. Yield: 1.30% (analysis)

In conclusion, a company yielding 2-3% today that has raised dividends for many years has rewarded early shareholders with yields on cost, which are higher than what most high yield stocks could have generated at the time of purchase. Investors who buy stock in companies which regularly raise dividends would enjoy higher dividend income over time and solid capital gains as well.

Full Disclosure: Long all stocks listed

This article was included in the Carnival of Personal Finance #283

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Three Dividend Growth Stocks raising the bar

Investors, who want to be treated as owners of a business, should focus on buying and holding onto solid businesses that throw excess cash every year, while still growing at a decent pace. Investing in stocks should not be any different than investing in a business. Purchasing quality stocks with stability in earnings that can pay rising distributions, while also growing the business, will result in a positive return on investment during any market condition or economic cycle. Companies which consistently are able to generate rising incomes in order to support a consistent dividend growth are rare gems, yet they sell products or services that most consumers and businesses use fairly often.

Three companies which have raised distributions for over five years in a row and which raised distributions last week include:

Universal Corporation (UVV), together with its subsidiaries, operates as the leaf tobacco merchants and processors worldwide. The company raised its quarterly dividend by 2.10% to 48 cents/share. This dividend champion has consistently raised dividends for 40 years in a row. Yield: 4.40% (analysis)

Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology, as well as delivering engineering services and solutions to various industrial, commercial, and consumer markets worldwide. The company raised its dividends by 3% to 34.50 cents/share. Emerson is a member of the dividend aristocrats index, and has consistently raised dividends for 54 years in a row. Yield: 2.40% (analysis)

Aaron’s, Inc. (AAN) operates as a specialty retailer of consumer electronics, computers, residential and office furniture, household appliances, and accessories in the United States and Canada. The company raised its quarterly dividend by 8.30% to 1.30 cents/share. Aaron’s has regularly raised dividends since 2003. Yield: 0.30%

Of the three companies listed above, I view only Universal (UVV) as a buy candidate at current prices. The company not only has an above average dividend yield, but also has a sustainable dividend payout ratio. Emerson Electric (EMR) on the other hand has slowed down on distributions increases in the past few years, as it was hit by the recession. In addition to that it is yielding less than my minimum yield requirement of 2.50%. The problem with Aaron’s (AAN) is also its very low yield, caused by its low payout ratio.

Full Disclosure: Long UVV and EMR

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Enterprise Products Partners L.P. (EPD) Dividend Stock Analysis

Enterprise Products Partners L.P. provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the continental United States, Canada, and Gulf of Mexico. This dividend achiever has raised distributions for thirteen consecutive years. As a master limited partnership, the company doesn’t pay taxes at the corporate level. The tax bill is paid by the unitholders, which receive K-1 forms that give detailed explanations on how to report each significant item of income that Enterprise Product Partners has generated.

Over the past decade, this dividend stock has delivered a total return of 18.30% annually.
Over the past decade, Enterprise Products Partners L.P. has managed to increase cash flow per share by 10.20% annually. The beauty of pipeline MLPs is that they generate stable revenues, as they have virtual monopoly on oil and gas transportation for a particular pipeline in a particular region. In addition to that, volumes transported of natural gas or oil are much less volatile than the price of the underlying commodity.


The company has managed to raise annual distributions at a rate of 8.60% annually over the past decade. At 9%, dividends double every eight years. The current rate of distribution is double the amount paid every quarter nine years ago.

The company’s cashflow payout ratio has steadily decreased over the past decade from its highs reached in the early 2000s. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
As a master limited partnership, Enterprise Product Partners tends to distribute more than what it earns in a given year. Because it distributes almost all of its cashflow to unitholders, the company grows by issuing additional units or taking on debt.
There are several risks to EPD in particular. The first risk is that interest rates could increase, which will make master limited partnerships unattractive relative to risk-free fixed income instruments. This could also increase the cost of capital for the company and hinder future growth. Another risk with master limited partnerships is that the government could decide to abolish the MLP structure, in order to generate more revenues to fill in the huge deficits that the US is running. A similar move by the Canadian government in 2006 to phase-out the Canadian royalty trust structure led to losses in principal and income for investors who were relying exclusively on Canroys. The most important thing is to be diversified and not have over 10-15% of one’s portfolio in master limited partnerships such as Enterprise Product Partners (EPD) or Kinder Morgan Partners (KMP).

Another risk that will be mitigated for this MLP is incentive distribution rights, which allow the general partner a cut of distributions above certain thresholds. This would not be an issue for EPD, since on September 7 it announced plans to purchase the general partner that held those rights, and merge it with one of its wholly-owned subsidiaries. This move would lower the cost of capital for EPD.

The return on assets dropped off sharply between 2000 and 2003, before starting to recover since 2003. Master limited partnerships typically grow by purchasing new assets, which is one reason that this indicator would fluctuate over time. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Overall I find Enterprise Product Partners (EPD) to be an attractive dividend stock for current income and distribution growth. It yields 5.50% and trades at a P/E of 21.40. I would consider initiating a position in the stock on dips below $39.

Full Disclosure: None


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Is Buy and Hold Dividend Investing dead?

Back in late 2008 and 2009 many investors were asking themselves whether it was worth it to be invested in the market. Business journalists and hedge fund managers were using this to question whether buy and hold was still relevant today. Now that the market has increased significantly since hitting its March 2009 lows, many investors are realizing that buy and hold still works. The difficult part of buy and hold investing is sitting through declines in the stock market, while being fully invested. Another problem with buy hold is that investors could start believing the hype that it would have been possible to “time the market" and exit at the right time, right after the market hit its highs, and thus become market timers. Many such investors are still in cash, thus missing most of the recovery in stock prices. It is very difficult not to succumb to the temptation of actively managing your portfolio, especially given the ease of access to markets over the internet.

The main problem with trading however is that if you trade you incur significant transaction fees and trigger tax liabilities that you otherwise would not have incurred with a buy and hold strategy. In addition to that, once you sell you can miss any big moves in the market. Another risk is that the company you purchase with the proceeds from the first investment could turn out to be a poor performer. Most investors will never be successful in timing the market, especially since they get scared at the bottom and greedy near market tops. As a result academic studies have found that most “active” individual investors tend to underperform the market averages particularly due to overtrading.

One positive thing behind buy and hold is when you purchase a stock and then give some time to your position to work in your favor. If you had done your research and purchased a strong brand with solid competitive advantages, such as Johnson & Johnson (JNJ) or McDonald’s (MCD) where the fundamentals are expected to improve over the long term, the exact entry price should not matter too much. As long as you do not overpay dearly for a stock by paying more than 20 times earnings, it shouldn’t matter whether you paid $55/share or $70/share. The most important thing is to be able to identify the solid company in the first place and then simply reinvest dividends, which would further compound your gains and magnify total returns.

In order to be able to sleep well at night however, the portfolio has to be properly diversified. In addition to that your stocks have to have strong competitive advantages, which would translate into higher earnings, dividends and stock prices over time. It is also important not to overpay for stocks. One of the primary reasons why the stock market has been flat over the past decade, despite solid earnings growth, is simply because it was much overvalued in the late 1990s and early 2000s. Many analysts are again trying to time what will happen in the next few months in the stocks market. Chances are they have no idea what they are talking about. The best solution is to pick at least 30 solid companies and hold on to them for the next few decades.

Some of the best companies which have solid business models that throw off enough cash to reinvest and grow the business as well as grow distributions include:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 48 consecutive years. Over the past decade, the company has managed to increase dividends by 13.50% annually. Yield: 3.40% (analysis)

McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 34 consecutive years. Over the past decade, the company has managed to increase dividends by 26.50% annually. Yield: 3.10% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 48 consecutive years. Over the past decade, the company has managed to increase dividends by 9.90% annually. Yield: 2.90% (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 28 consecutive years. Over the past decade, the company has managed to increase dividends by 7.10% annually. Yield: 2.60% (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 38 consecutive years. Over the past decade, the company has managed to increase dividends by 8.70% annually. Yield: 4.20% (analysis)

Full Disclosure: Long JNJ, MCD, KO, XOM, KMB

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Nine Consistent Dividend Raisers in the News

It doesn’t take much for a company to raise distributions once in a while. In fact, even companies without a shareholder friendly dividend policy could occasionally afford to raise dividends. It is only companies with strong balance sheets and ability to generate excess scash flows that could not only maintain a solid dividend payment, but also afford to increase it consistently every year. As a result enterprising dividend investors should avoid companies that only sporadically raise distributions, and instead follow companies that consistently raise them. I define a company as a consistent dividend payer, if it has raised distributions for over five years in a row. I typically however require a history of at least ten years in a row of annual dividend increases, before initiating a position in a stock. I do this in order to avoid companies which have been able to raise distributions simply because they were in the right place at the right time, and not because they had any solid competitive advantages.

Over the past week, the following consistent dividend payers raised distributions:

Boardwalk Pipeline Partners, LP(BWP), through its subsidiaries, engages in the interstate transportation and storage of natural gas in the United States. This master limited partnership raised its quarterly distribution from 51 to 51.5 cents/unit. The company has raised distributions since going public in 2006. Yield: 6.10%

Ecology and Environment, Inc. (EEI), an environmental consulting firm, provides professional services to the government and private sectors worldwide. The company raised its smi-annual dividend by 4.80% to 22 cents/share. The company has consistently raised dividends since 2006. Yield: 3.30%

NuStar Energy L.P. (NS) engages in the terminalling, storage, and transportation of petroleum products in the United States, the Netherland Antilles, Canada, Mexico, the Netherlands, and the United Kingdom. The company raised its quarterly distributions by 1% to $1.075/share. This master limited partnership has consistently raised distributions since 2001. Yield: 6.80%

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 raised its quarterly distribution by 1.20% over the previous quarters distribution, to 83.50 cents/unit. This master limited partnership has consistently raised distributions since 2005. Yield: 6.60%

Cintas Corporation (CTAS) provides corporate identity uniforms and related business services in the United States and Canada. This dividend aristocrat raised its annual dividend by 2% to 49 cents/share. The company has raised distributions for 28 years in a row. Yield: 1.80%

Molex Incorporated (MOLX) manufactures and sells electronic components worldwide. The company raised its quarterly dividend by 14.8% to 17.50 cents/share. Despite the fact that this was the first dividend increase since 2008, the company has actually managed to raise annual dividends since 2003.

UMB Financial Corporation (UMBF), a multi-bank holding company, provides banking and other financial services in the United States. The company raised its quarterly dividends by 5.40% to 19.50 cents/share. This dividend achiever has raised distributions for 20 years in a row. Yield: 2.10%

Perrigo Company (PRGO), through its subsidiaries, develops, manufactures, and distributes over-the-counter (OTC) and prescription (Rx) pharmaceuticals, nutritional products, active pharmaceutical ingredients (API), and medical diagnostic products worldwide. The company raised its quarterly dividend by 12% to 7 cents/share. Perrigo has consistently raised distributions since 2003, but only yields 0.40%.

Arrow Financial Corporation (AROW) operates as the holding company for Glens Falls National Bank and Trust Company, and Saratoga National Bank and Trust Company that offer various commercial and consumer banking, and financial products in the United States. The company raised dividends by 3.10% to 25 cents/share. This was the 18th consecutive annual dividend increase for this dividend achiever. Yield: 3.90%

Identifying companies which consistently raise dividends is just the beginning of the screening process. Next steps include analysis of competitive advantages and business models in order to avoid chasing companies which are not likely to keep raising distributions. Even after the right great company has been identified, one shouldn’t overpay for it, nor should they put all their money on that stock.

Full Disclosure: None

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