Dividend Investors are Getting Paid for Holding Dividend Stocks

Dividends provide a return on investment, which is much more stable than relying on capital gains. Investors who select quality dividend paying companies with long histories of dividend increases can ignore the day to day fluctuations in the markets. As long as the company is paying the dividend every month/quarter like clockwork, and can afford to do so, any declines in stock prices will be more of an opportunity to buy stocks at a discount than a reason to be worried about putting food on the table. Dividend investors are thus essentially getting paid for holding on to their stocks. They could choose to spend those dividends on everyday expenses, or they could choose to buy more shares when the time is right.

Investors should choose companies which have strong competitive advantages to keep increasing earnings over the next decades. This would create a trickledown effect as it would allow these corporations to raise dividends. By reinvesting a portion of earnings back into the business, these dividend paying companies would be able to expand operations and remain competitive. Due to inflation, the purchasing power of the dollar is decreasing each year. That’s why it is important to select companies with growing distributions, in order to maintain the purchasing power of your income. When this is achieved, the dividend investor can safely live off dividends in retirement, while letting their principal compound quietly in the meantime. In essence, dividend investors are having their cake and eating it too- they generate an income stream that maintains purchasing power while also enjoying capital gains that maintain the purchasing power of their principal as well.

Contrast this to traditional retirement strategies focusing on asset depletion, where a flat market can lead to running out of money prematurely. A retiree who had the misfortune to retire in 2000, invested their nest egg in index funds and followed the four percent rule, would have less than seven years worth of expenses today. A retiree which purchased dividend growth stocks and spent only the dividends received, would be in a much better situation.

Receiving dividends in your brokerage account is reassuring, even during times of increased volatility in the stock market. The following attractively valued dividend stocks essentially pay their stockholders to hold their stock:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend aristocrat has regularly boosted distributions for 50 years in a row. Yield: 3.60% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. It franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, desserts, snacks, and other beverages, as well as full or limited breakfast menu. This dividend aristocrat has regularly boosted distributions for 35 years in a row. Yield: 3.10% (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. Its portfolio of international and local brands includes Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company has consistently raised distributions since its spin-off from Altria Group in 2008. Yield: 3.40% (analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. This dividend achiever has regularly boosted distributions for 18 years in a row. Yield: 4.20%  (analysis)

While focusing on the best dividend stocks will provide investors with an edge in the markets, investors should not forget about diversification either. Having adequate exposure to the market leaders in several sectors should lessen the risk for income portfolios. In addition, investors should also avoid paying top dollar for dividend stocks. Overpaying for your investments can lead to sub-par returns for long periods of time.

Full Disclosure: Long JNJ, WMT, O, PM

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High Dividend Growth Stocks in 2012

This year has been characterized as a record year for dividend distributions paid to shareholders by cash rich companies. The sentiment is even more bullish amongst the elite dividend aristocrats list, which includes large-cap corporations each of which have managed to boost distributions for at least 25 consecutive years in a row. Out of 51 members of the index at 12/31/2011, 35 have increased distributions in 2012, while the remaining companies have not had the chance to announce changes in dividends so far this year. I went through the list of dividend increases, and decided to focus on the companies with the fastest dividend growth rates.

In general, companies that raise distributions at a fast rate will be able to generate a high yield on cost for their investors. This of course will happen only if the high dividend growth rates can be sustained out of rapid growth in earnings or if the companies start out with a low dividend payout ratio. I analyzed each of the high dividend growth aristocrats for 2012 below, in order to determine whether the high dividend growth is a one-time deal or not. If companies have the characteristic to boost distributions rapidly for a sustained period of time, and if investors are able to get on board at attractive valuations, high yields on cost could be achieved in a relatively short periods of time. The companies on the list include:

Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. In June, the company raised annual distributions by 22.20% to $1.10/share. The ten year dividend growth rate has been 18.90%/year. This dividend aristocrat has raised distributions for 37 years in a row. The stock is attractively valued at 12 times earnings, yields 3.10% and has an adequately covered distribution. I like the high dividend growth rate at the firm and the attractive valuation and as a result I recently added to my position in the stock. (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. In April, the company raised annual distributions by 21.30% to $2.28/share. The ten year dividend growth rate has been 7.40%/year. This dividend aristocrat has raised distributions for 30 years in a row. The stock is attractively valued at 9.50 times earnings, yields 2.60% and has an adequately covered distribution. While I like the recent strong increase in distributions, I think the yield is lower in comparison to Chevron (CVX). (analysis)

W.W. Grainger, Inc. (GWW) engages in the distribution of maintenance, repair, and operating supplies, as well as other related products and services for businesses and institutions primarily in the United States and Canada. In April, the company raised annual distributions by 21.20% to $3.20/share. The ten year dividend growth rate has been 13.70%/year. This dividend aristocrat has raised distributions for 41 years in a row. The stock is slightly overvalued at 20.90 times earnings, yields 1.60% and has an adequately covered distribution. While I own the stock, I consider it a hold at current valuations, which means I would not add money to this position and would reinvest dividends elsewhere.

Target Corporation (TGT) operates general merchandise stores in the United States. In June, the company raised annual distributions by 20% to $1.44/share. The ten year dividend growth rate has been 17.50%/year. This dividend aristocrat has raised distributions for 45 years in a row. The stock is attractively valued at 14.70 times earnings and has an adequately covered distribution but yields only 2.30%. In my analysis of the stock, I outlined that I would much rather play retail sector by owning Wal-Mart Stores (WMT), which is the heavyweight champion in the sector.

Stanley Black & Decker, Inc. (SWK) provides power and hand tools, mechanical access solutions, and electronic security and monitoring systems primarily in the United States, Europe, Latin America, and Canada. In July, the company raised annual distributions by 19.50% to $1.96/share. The ten year dividend growth rate has been 5.70%/year. This dividend aristocrat has raised distributions for 45 years in a row. The stock is slightly overvalued at 20.40 times earnings, although it yields 2.70% and has an adequately covered distribution. I would consider analyzing the stock further in order to determine if it has what it takes to sustain future dividend increases.

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. In January, the company raised annual distributions by 16.70% to $0.84/share. The ten year dividend growth rate has been 11.80%/year. This dividend aristocrat has raised distributions for 36 years in a row. The stock is valued at 17.80 times earnings, yields 1.30% and has an adequately covered distribution. Because of the low current yield, it is outside of my buy range. As a result I do not plan on adding to my position in the stock, and I would consider re-investing dividends received in other attractively priced dividend paying companies. (analysis)

Lowe’s Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer. In June, the company raised annual distributions by 14.30% to $0.64/share. The ten year dividend growth rate has been 29.60%/year. This dividend aristocrat has raised distributions for 50 years in a row. The stock is valued at 19 times earnings, yields 2.30% and has an adequately covered distribution. I would consider addin to my position in the stock on dips below $25.60. (analysis)

Sigma-Aldrich Corporation (SIAL), a life science and high technology company, develops, manufactures, purchases, and distributes various chemicals, biochemicals, and equipment worldwide. In February, the company raised annual distributions by 11.10% to $0.80/share. The ten year dividend growth rate has been 15.90%/year. This dividend aristocrat has raised distributions for 36 years in a row. The stock is valued at 19.60 times earnings, yields 1.10% and has an adequately covered distribution. While the company has maintained a double digit dividend growth rate, I find the current yield to be low. As a result I would pass on the stock for now, but would continue monitoring if stock trades at lower valuations.

Dover Corporation (DOV) manufactures and sells a range of specialized products and components, and provides related services and consumables. In August, the company raised annual distributions by 11.10% to $1.40/share. The ten year dividend growth rate has been 8.50%/year. This dividend aristocrat has raised distributions for 57 years in a row. The stock is attractively valued at 12.80 times earnings, yields 2.40% and has an adequately covered distribution. I would add the company to my list for further analysis.

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. In March, the company raised annual distributions by 10.30% to $2.56/share. The ten year dividend growth rate has been 11.10%/year. This dividend aristocrat has raised distributions for 30 years in a row. The stock is attractively valued at 13.30 times earnings, yields 3.10% and has an adequately covered distribution. I like the fact that APD had managed to consistently boost dividends at a double-digit rate, and I also find the stock to be a bargain at this time. I recently added to my position in the stock. (analysis)

Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. In February, the company raised annual distributions by 10% to $1.98/share. The ten year dividend growth rate has been 4.80%/year. This dividend aristocrat has raised distributions for 56 years in a row. The stock is attractively valued at 16.30 times earnings, yields 3.20% and has an adequately covered distribution. However, the dividend growth rate over the past decade makes me want to wait for higher yields before I consider initiating a position in the stock. (analysis)

Full Disclosure: Long WAG, XOM, GWW,FDO, LOW, APD

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Target Corporation (TGT) Dividend Stock Analysis

Target Corporation (TGT) operates general merchandise stores in the United States. The company is a member of the dividend aristocrats index, has paid dividends since 1965 and increased them for 45 years in a row.

The company’s last dividend increase was in June 2012 when the Board of Directors approved a 20% increase to 36 cents/share. The company’s largest competitors include Wal-Mart Stores (WMT), Dollar Tree (DLTR) and Costco (COST).

Over the past decade this dividend growth stock has delivered an annualized total return of 6% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 10% per year. Analysts expect Target to earn $4.35 per share in 2013 and $4.86 per share in 2014. In comparison Target earned $4.28/share in 2012.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 10% per year. Analysts expect Target to earn $4.35 per share in 2013 and $4.86 per share in 2014. In comparison Target earned $4.28/share in 2012.

Future growth would likely be focused on expanding same-store sales and renovating existing stores, rather than simply by opening a large number of locations. Future growth could be realized by the increased penetration of the RED Card, which the company’s cashiers keep promoting to customers. Another venue for growth that could increase the number of customer visits is the remodeling of its stores, which would add fresh foods to the stores. The company is targeting middle-class and upper income consumers, which are more interested in quality and diversity of product offerings, rather than simply looking at the lowest prices. It has in essence managed to differentiate itself from Wal-Mart (WMT), while also retaining its status as a discounter.

The company also is on track to bring the number of stores in Canada do 130 by 2013, which could lead to long-term profits. Currently, the costs associated with jumpstarting its Canada operations have been dilutive for earnings, and would be for the next few years.

Target Stores has a goal of earning $8/share by 2018, which would be driven by 5% sales growth in US, share repurchases, store openings in Canada, as well as square footage growth. Risks to growth include worsening of the economy, failure to execute its strategy of effectively differentiating itself from arch rival Wal-Mart as well as credit card risks.

The return on equity has remained consistently in a tight range between 15% and 19%. 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 17.50% per year over the past decade, which is higher than to the growth in EPS.

A 17.50% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1988 we see that Target has actually managed to double its dividend every six years on average.

The dividend payout ratio has increased from 13.30% in 2003 to 25.70% in 2012. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. 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, Target Stores is attractively valued at 14.90 times earnings and has an adequately covered dividend but only yields 2.30%. In comparison, rival Wal-Mart (WMT) trades at 15.80 times earnings and only yields 2.10%. Target could be a decent addition to a portfolio on dips below $57; however Wal-Mart (WMT) continues to be my preferred way to play big box retailers.

Full Disclosure: Long WMT

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How to retire with dividend stocks

Dividend investing is a long term process. Investors should buy stocks with the intention of holding them forever, as long as the business fundamentals are still intact. The companies that are best suited for long term buy and hold investors have strong brands, strong competitive advantages, rising earnings and pay their shareholders to hold them. These stocks pay shareholders by sharing a portion of their earnings every year in the form of dividend, which is increased every year. Stocks that regularly raise dividends produce an income stream which keeps up with inflation, and could easily be spent, without having to dip into principal or reinvest a portion of it back in order to maintain purchasing power of income. Investors in fixed income on the other hand have to reinvest a portion of their interest income every year, in order to maintain the purchasing power of their income, unless they want to dip into principal.

Once investors have set their sights on dividend stocks, they should patiently accumulate positions in their best ideas. A company that pays 2%-3% today is generally ignored by most dividend investors. However, if this stock manages to double distributions at least every decade, they would generate a very respectable income stream when their investor decides to retire. The truth is that these yield-chasing dividend investors “need” a stock yielding 6%-8% only because they have not saved enough money for retirement. Most often these investors buy securities without analyzing whether the dividend is secure. Not all high yielding stocks are bad of course. Buying a stock just because it has a high current yield however, without analyzing it in detail, is a sure recipe for disaster.

We have all heard about the power of compounding. A $1000 investment, which generates 12% in annual total returns, will be worth $16,000 in 24 years. An investor who buys dividend stocks and reinvests distributions for decades, will be able to accumulate a sizeable portfolio by the time they are ready to retire. However, if those dividend stocks also regularly increased these distributions, the investor would enjoy a turbocharged power of compounding in their wealth.

The process of dividend investing will not get you rich quick overnight. However, the slow and steady approach provides attractive long term returns on capital, while minimizing the frequency of mistakes that more active traders make. Investing $1000/month in a portfolio of dividend stocks yielding 3% today, which has a dividend growth of 12% per year, would generate over $26,300 in annual dividend income in 24 years. If dividends are reinvested, chances are that this investment would generate much more than $39,600 per year in 24 years. As a result, for every dollar that you save in your 20s and put in dividend stocks, you would generate one dollar in dividend income in your 50s or 60s.

Market downturns are particularly helpful to investors who plan on living off dividends in retirement, because they provide an ideal opportunity to purchase world class dividend stocks at a discount.

Chevron Corporation (CVX), engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. This dividend champion has raised distributions for 25 years in a row. The company has also managed to boost distributions by 8.80% per year over the past decade. Yield: 3.20% (analysis)

Kimberly-Clark Corporation (KMB), engages in the manufacture and marketing of health care products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care. This dividend champion has raised distributions for 40 years in a row. The company has also managed to boost distributions by 9.70% per year over the past decade. Yield: 3.50% (analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. This dividend achiever has raised distributions for 19 years in a row. The company has also managed to boost distributions by 15.30% per year over the past decade. Yield: 2.70% (analysis)

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. This dividend aristocrat has raised distributions for 40 years in a row. The company has also managed to boost distributions by 13.30% per year over the past decade. Yield: 2.90% (analysis)

The Clorox Company (CLX) manufactures and markets consumer and institutional products worldwide. The company operates in four segments: Cleaning, Lifestyle, Household, and International. This dividend aristocrat has raised distributions for years in a row. The company has also managed to boost distributions by % per year over the past decade. Yield: 3.50% (analysis)

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend aristocrat has raised distributions for 30 years in a row. The company has also managed to boost distributions by 11.10% per year over the past decade. Yield: 3.10% (analysis)

Walgreen Co. (WAG), together with its subsidiaries, operates a chain of drugstores in the United States. This dividend aristocrat has raised distributions for 37 years in a row. The company has also managed to boost distributions by 18.90% per year over the past decade. Yield: 3.10% (analysis)

The truth is that investors do not need a nest egg of $1 million to retire. They do need however to have saved and invested regularly in quality dividend stocks, purchased at attractive valuations over their investing career.

Full Disclosure: Long All Stocks listed above

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Three High Dividend Stocks Raising Distributions

The decrease in interest rates over the past four years has placed a strain on retirees who traditionally relied on bonds for income in retirement. With 30 year bonds yielding 2.80% and fears of rampant inflation many of these individuals are increasingly investing their assets in dividend paying stocks. Dividend paying stocks provide a tax efficient stream of income as well as the possibility for dividend increases over time, which will provide a hedge against inflation.

Over the past week, several dividend growers announced their plans to boost distributions to shareholders. I have listed companies which have boosted distributions for over five years in a row, along with my brief comment behind each. The companies include:

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. The company raised its quarterly distributions by 7.30% to 44 cents/share. Altria is a dividend champion, which has raised distributions for 44 years in a row. Yield: 5.10% (analysis)

Altria’s new annual dividend comes out to $1.88/share. Looking at projected earnings per share of $2.20 for 2012 and $2.37 in 2013, this represents a forward dividend payout ratio of 85% and 79% respectively. While I tend to avoid stocks with high dividend payout ratios, I typically make exceptions on a case by case basis after analyzing the specific situation. In Altria’s case, the company does not need to invest a lot in in order to grow the business, because of the regulatory environment. Tobacco companies cannot advertise, and cigarette usage has been flat or declining slightly in the US. As a result, the company does not need to invest in new factories. However, it does invest in efforts to contain costs and continuously improve and streamline operations in order to lower expenses. In addition, a large part of the sale price for cigarettes is actually excise taxes, whereas the portion that tobacco companies get to collect is relatively small. Given the high margins that cigarette manufacturers enjoy, and the fact that they can keep raising prices to more than offset against declines in consumption, companies like Altria are almost guaranteed increased profits for years to come. So essentially, Altria generates a lot of cash every year, with not a lot of options to spend it. It typically spends cash on share buybacks and dividends.

As a result, I would consider adding to my position in Altria subject to availability of funds.

Harris Corporation (HRS), together with its subsidiaries, operates as a communications and information technology company that serves government and commercial markets worldwide. The company raised its quarterly distributions by 12.10% to 37 cents/share. This is the second dividend increase in a year. Harris Corporation is a dividend achiever, which has raised distributions for 11 years in a row. Yield: 3.10%

Over the past decade, Harris has been able to boost dividends at 26.60%/year. It is currently attractively priced at 9.80 times earnings and has adequately covered dividends. I have included the $3.62 non-cash charge recorded in Q2 2012 into EPS, since it represents a one-time event that does not affect EPS from continuing operations. Analysts are also expecting EPS to rise to $5.17 in 2013 and $5.29 by 2014. I would add the company to my list for further research.

BancFirst Corporation (BANF) operates as the holding company for BancFirst that provides commercial banking services to retail customers and small to medium-sized businesses in Oklahoma. The company raised its quarterly distributions by 7.40% to 29 cents/share. BancFirst Corporation is a dividend achiever, which has raised distributions for 19 years in a row. Yield: 2.80%

The company is attractively valued at 12.80 times earnings and has an adequately covered dividend. In addition, BancFirst has managed to boost distributions by 11%/year over the past decade. The company has also managed to increase profitability over the past decade. Analysts are also expecting EPS to rise to $3.18 in 2012 and $3.20 by 2013. I would add it to my list for further research.

Full Disclosure: Long MO

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