Dividend Stocks in the news over the past week

The past several months have been characterized by tremendous volatility and a lot of negative news regarding the state of the economy as a whole. Given the uncertainties in the global economy, investors are wondering whether they should cash out their portfolios and simply wait for the storm to end.

I think that this would not be a good move, especially for the dividend investor who already has a diversified portfolio of income producing stocks. Such an investor will be more focused on the dividend raises that his or her stocks deliver.

Investors focusing on every tick of the market might miss some rare investment opportunities when there is a disconnect between fundamentals and price. Don’t forget that even during a crisis people will continue to eat, shave, take showers, purchase beverages, smoke and eat out. Thus it always pays to not lose track of the big picture, even during the most challenging times for your portfolio.

Several stocks had some major dividend increases over the past week. Others didn’t deliver such exciting news but reaffirmed their payments to shareholders.

McDonalds increased its annual dividend by 33% to $2.00 share. The company has increased its dividends for over 32 consecutive years. Annual dividend payments have increased over the past 10 years by an average of 25%. The current yield stands at 2.40%. The new dividend increases the yield to 3.16%

Microsoft increased its annual dividend by 18% to $0.52 share. The company has increased its dividends since 2003. MSFT has recorded double digit annual dividend payment increases over the past 5 years. The current yield stands at 2.00%.

Accenture increased its annual dividend by 19% to $0.5 share. The company has increased its dividends since 2005. ACN has recorded double digit annual dividend payment increases over the past three years. The current yield stands at 1.26%.

Campbell Soup increased its annual dividend by 14% to $1.00 share. The company has increased its dividends every year since 2004. CPB has recorded double digit annual dividend payment increases over the past 4 years. The current yield stands at 2.30%. The new dividend increases the yield to 2.66%

Lockheed Martin increased its annual dividend by 36% to $2.28 share. The company has consistently increased its dividends every year since 2003. LMT has recorded double digit annual dividend payment increases over the past 5 years. The current yield stands at 1.50%. The new dividend increases the yield to 2.03%

Of these stocks MCD only fits my criteria for purchase. The rest of the stocks have been added to my watchlist for further investigation.

Full Disclosure: Long MCD

“The Top 40 Dividend Stocks for 2008 – How and Why to Build a Cash Machine of Dividend Stocks”, Book Review

This article originally appeared on The DIV-Net September 19, 2008.

Recently I received an interesting book on dividend investing, titled “The top 40 Dividend Stocks for 2008 – how and why to build a cash machine of Dividend Stocks”, written by David P. Van Knapp. The author, who also maintains the site sensiblestocks.com, decided to skip the publishers altogether and has his book available to readers online in a PDF format. That made it easier for him to provide an up to date edition in order for his readers to stay competitive in the markets.

The book is very well written and is organized in 8 chapters, starting with an overview of dividend stocks in general, characteristics of the best dividend stocks, creating and managing a dividend portfolio and ending with the system that the author has created which has helped him identify the top 40 dividend stocks that he recommends. This book should be appealing not only to novice dividend investors but also to more seasoned stock pickers with its wealth of information on dividends. Almost everything you ever wanted to know about dividends could be found in it.

The author starts the book by giving an introduction of what dividends are and why investors should buy stocks which produce increasing streams of dividend income. He also discusses the pros and cons of dividends versus share buybacks, and proves that it pays to own the “boring” dividend stocks which provide the most efficient stream of income from a tax perspective right now. I especially enjoyed reading about his discussion on managing portfolios consisting of the best dividend stocks. I also liked his ideas on portfolio management where he set clear goals and objectives as well as strategies for achieving them. I also found the idea of avoiding to catch falling knives, and instead wait for the stock price to turn before accumulating shares particularly intriguing.

Another section focused on certain types of companies which are organized specifically to pay high dividends such as business development companies, real estate investment trusts as well as master limited partnerships.

Many investment services will sell you a cheap book which describes a system which is pre-sold throughout the book. Not this one – this author sells a buy one get one free type of deal as he not only shares his stock picking system but also provides specific picks as well as the reasoning behind selecting those picks. The last half of the book was specifically dedicated to analyzing the top 40 dividend stocks for 2008 in more detail, thirteen of which were non-US companies.

There were several items that the author might have to provide some clarity to readers in future editions of the book. A mention that unless the current tax code is extended beyond 2010, the tax rate on dividend income for the highest income brackets would be much more than 15%, would have been informative.

I also think that future editions of the book should mention something about holding dividend stocks in a tax-deferred account such as an IRA, ROTH IRA or a 401k. Most investors who are in the accumulations stage would be better off in the long run without having to pay taxes on their annual dividend income.

I enjoyed his writings on the BDC, REITS and MLP’s. I believe however that most investors overlook these vehicles because the distributions from the three types of firms are taxed somewhat differently compared to distributions from common stocks. I would have also enjoyed reading more about taxation on MLP’s from his own experience. Most other yield hungry investors would probably enjoy a small section on Canadian Income Trusts as well as tanker stocks such as NAT, FRO, DSX.

I personally disagree with him that dividend payout ratios are not important in individual stocks selection. In fact avoiding stocks with unreasonable payouts has prevented me from purchasing any stocks that were caught in the most recent financial turmoil, which had to cut their dividends in order to conserve cash.

Last but not least, despite the fact that Mr. Van Knapp shared the top 40 picks from his system, it seemed to me that his initial list of around 700 dividend paying stocks needed more clarification about the methodology in compiling it. Don’t get me wrong – the top 40 dividend paying stocks in his book are representative of what every dividend growth investors looks for. I wonder however if he compiled his initial list of stocks from other sources whether he would have arrived with different stock picks in the end.

Overall I enjoyed reading the book, and would recommend it to any serious dividend investor who wants to succeed in his or her endeavors. It is easy to read, well organized and provides a wealth of information not only for the novice investor but also for the seasoned pro!

This article originally appeared on TheDiv-Net.

Unlimited Free Trades at Zecco in October!

My Money Blog originally reported this, and a recent e-mail from Zecco confirmed it. Here's more information, directly from the announcement:

October will be a 100% unlimited free trading month for current Zecco Trading customers
Thanks for hanging in there. To show our appreciation for your loyalty, we have decided to make October a 100% unlimited free trading month. This means that between October 1st and October 31st you can make unlimited equity and options trades commission-free. As far as I know, this has never been done in the history of the brokerage industry, until now. But then again, we are seeing things in the market we never would have believed, until now.

If you are not a customer at Zecco, consider opening an account with them.

Eligibility for the October Promotion

- The no-commission stock and options trade offer applies to all Zecco Trading accounts in good standing.

- The offer applies to equity and options trades, including multi-legged options orders and all options contracts.

- Mutual fund trades are not eligible for the offer.

- There is no minimum equity balance requirement or minimum trade volume restriction.
All account types are eligible, including IRA.

- The offer is effective for equity and option trades placed and executed 10/1/08 through 10/31/08. The standard free trading program and options pricing will resume 11/1/08.

Even without this promotion, any Zecco account that has a total value exceeding $2,500 receives 10 free stock trades per month. After that you get charged for your stock trades a small $4.50 commission per trade.

I think that if you open an account now, you would be able to use the no-commissions trading October promotion to build your dividend portfolio.

Nordic American Tanker (NAT) Dividend Stock Analysis

Nordic American Tanker Shipping, Ltd. owns and operates crude oil tankers. The company operates its vessels in the spot market, on time charters, or on bareboat charters. As of December 31, 2007, it owned 12 double hull Suezmax tankers averaging approximately 155,000 deadweight tons each. The company was founded in 1995 and is headquartered in Hamilton, Bermuda.
Nordic American Tanker is not a dividend achiever but a component of the NYSE Composite and Zacks Yield Hog index. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 29.10 % to its shareholders. The stock gained 19 % value so far in 2008.

At the same time company has managed to deliver a 6.40% average annual increase in its EPS since 1998.

The average cash breakeven for the trading fleet of 12 vessels is about $9,000 per day per vessel. The company has stated in their 2Q earnings and dividends announcement that when the freight market is above that level, the company will pay a dividend. The good news is that the average daily spot rate for the type of ships NAT holds has not fallen below $20,000 since 2000.

Only one of the twelve vessels is under contract to ship goods at fixed prices; the rest are on the spot market, which explains the great variability in the quarterly and annual financials.

The ROE has fluctuated greatly; rising from 4% in late 1990’s to over 38% in 2004 before falling to 7% at the end of our study period.

Annual dividend payments have increased by an average of 11.90% annually over the past 10 years, which is higher than the growth in EPS. A 12% growth in dividends translates into the dividend payment doubling almost every six years. The problem is that even though the company is committed to paying a large amount of its cash flows to shareholders, it hasn’t committed to paying stable dividend payments. Because of this fact do not be surprised if the annual dividend payments in six years are not double what they were in 2008.
41.2% of the 2007 dividends were distributed from current earnings while 58.8% were a return of capital.

If we invested $100,000 in NAT on December 31, 1998 we would have been able to purchase 8696 shares. In early 1999 your quarterly dividend check would have been for $2939. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $58,000 by August 2008. For a period of 10 years, your quarterly dividend income would have increased by 373%. If you reinvested it though, your quarterly dividend income would have increased by 1873%.

The dividend payout ratio has remained between 90% and 250% since 1998. Once again the reason why the payout is above the EPS is because NAT’s management pays out distributions out of the operating cash flows, which includes certain non cash items such as depreciation expense (which is excluded from the EPS calculation).

Overall the wild fluctuations in dividends and earnings per share are something my method is not accustomed to. The tanker business is very competitive and capacity has been increased faster than demand over the past couple of years. Having the majority of the fleet on the spot market could definitely boost profitability in good years, but could also lead to poor operating performance in bad years.

One positive is that the company has low amounts of long term debt relative to its assets. I also liked the fact that the tangible book value of the stock was at $22.42 at the end of 2007.
One positive is that Nordic American Tanker has never paid a quarterly dividend per share which was lower than 30 cents/share. If I were a holder of NAT I would treat any quarterly payment as if it were only 30 cents and putting the rest in a savings account in order to smooth my dividend income.

I plan on initiating a small position in NAT on dips below 30 or close to the tangible book values.

Disclosure: I do not own shares of NAT

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Toronto-Dominion Bank (TD) Dividend Stock Analysis

The Toronto-Dominion Bank and its subsidiaries provides financial services in North America. It operates through four segments: Canadian Personal and Commercial Banking, Wealth Management, U.S. Personal and Commercial Banking, and Wholesale Banking.

The Toronto-Dominion Bank is an international dividend achiever as well as a component of the TSX 300 index. It has been increasing its dividends for the past 14 consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 17.90 % to its shareholders. The stock has lost 10 % of its value so far in 2008.
At the same time company has managed to deliver a 16.80% average annual increase in its EPS since 1998.

The ROE has fluctuated greatly; falling from 30% in late 1990’s to zero in 2002 before recovering to 30% again at the end of our study period.

Annual dividend payments have increased by an average of 13.70% annually over the past 10 years, which is higher than the growth in EPS. A 14% growth in dividends translates into the dividend payment doubling almost every five years. If we look at historical data, going as far back as 1996, TD has actually managed to double its dividend payment every five years on average.

If we invested $100,000 in TD on December 31, 1998 we would have been able to purchase 5919 shares (Adjusted for a 2:1 split in August 1999). In early 1999 your quarterly dividend check would have been for $1006. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $4871 by July 2008. For a period of 10 years, your quarterly dividend income would have increased by 242%. If you reinvested it though, your quarterly dividend income would have increased by 384%.

The dividend payout ratio has remained over 50% for the majority of the time over our study period. Over the past two years this ratio has remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

TD does look attractively valued with its low price/earnings multiple of 13, low DPR as well as attractive yield at 4 %. The current yield is pretty attractive based off historical standards as well.

Canadian banks have not been affected by the sub-prime mortgage crisis like their related banks in the US. It would be interesting to follow developments on the strength of the Canadian financial sector for any signs of trouble.

In the meantime I will put this stock on my watch list.

Disclosure: I do not own shares of TD

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