Dividend Growth Investor

Bemis Co (BMS) Dividend Stock Analysis

2009-07-10T04:30:00.000-07:00

Bemis Company, Inc. manufactures and sells flexible packaging products and pressure sensitive materials primarily in the United States, Canada, Mexico, South America, Europe, and the Asia Pacific. The company operates in two segments, Flexible Packaging and Pressure Sensitive Materials. The company is member of the S&P 500 and was a recent addition to the S&P Dividend Aristocrats index.
Bemis Company has paid dividends annually since 1922 and quarterly since 1931 and consistently increased payments to common shareholders every year for 26 years.

From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 5.30% to its shareholders. The stock has lost over one third from its all-time high in 2007.

The company has managed to deliver a 4.70% average annual increase in its EPS between 1999 and 2008. Analysts are expecting flat EPS of $1.60 for 2009 and a slight increase to $1.75 by 2010. Bemis has not been able to increase profitability since 2004, as its earnings per share have remained flat. One bright statistic is that cash flow per share has increase from $2.88 in 2004 to $3.26 in 2008.

The Return on Equity has decreased over the past decade from 16% in 1999 to 11.50% in 2008. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 7.5 % annually since 1999, which is higher than the growth in EPS. If earnings per share remain flat, future dividend growth would be far from spectacular.
A 7 % growth in dividends translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1988, Bemis Co has actually managed to double its dividend payment every seven years on average.

The dividend payout ratio is currently above 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. If earnings remain flat and the company doesn’t start any cost cutting initiatives, future dividend growth could be jeopardized.

Currently Bemis Co is trading at 15.50 times earnings and yields 3.70%. It does seem that Bemis Co is attractively valued at the moment based on yield and price/earnings mutliple. The flat earnings, decreasing returns on equity and rising dividend payout ratio make this stock a hold, not a buy. I would only add to existing position there if I owned it or initiate a small position in Bemis if the stock drops below $18.

Full Disclosure: None

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- Eli Lilly (LLY) Dividend Stock Analysis
- Clorox (CLX) Dividend Stock Analysis
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Myths about Warren Buffett

2009-07-08T04:30:00.000-07:00

Warren Buffett is the richest investor in the world. The student of the father of value investing Ben Graham, learned how to invest money in the Graham-Newman Corp. partnership in the early 1950s. After it was closed, Buffett formed his own investment management partnership. In it, he utilized several value investment strategies, which allowed him to significantly outperform the S&P 500 for over a decade. In the early days of his partnership it was pretty easy to uncover value investment opportunities, since the partnership was small enough to deal where few investment advisers and mutual funds had the insight to operate.

In 1969, Warren Buffett closed his partnership, citing the fact that the market was overpriced and that bargains fitting the strict value investing principles that Graham taught him were tough to uncover.

At the same time he concentrated his actions on a small textile operation called Berkshire Hathaway, which is his flagship holding company. His success at Berkshire is astounding, but it is not merely due to value investing strategy, as is commonly known. Had Buffett not branched out of strict value investing principles that Graham taught him; Berkshire Hathaway would have remained a relatively small conglomerate. Buffett did branch out into other strategies however. His insurance operations are similar to selling naked puts or calls – he generates enough premium which in most cases doesn’t have to be paid out for many years to come, giving him a low cost source of financing. His recent deal to sell long term puts (LEAPs) on four major stock indices is another example of branching out.

Buffett also essentially shorted the US dollar. In 2002, Buffett entered in $11 billion worth of forward contracts to deliver U.S. dollars against other currencies. By April 2006, his total gain on these contracts was over $2 billion. In 2005 he reduced his exposure to the currency futures he was holding. His play on the weakening dollar is by purchasing solid businesses which derive a portion of their earnings from outside the US.

Most people I talk to also seem to believe that Buffett owns a concentrated portfolio of 10-15 positions, which allows him to allocate the most funds in his best ideas. A recent look at Berkshire Hathaway’s stock portfolio revealed 40 stock positions from a variety of industries such as consumer staples, utilities, financials, retailers, energy and many other sectors. In addition to that Berkshire Hathaway owns a variety of businesses ranging from insurance ( Geico and General RE) , Utilities ( Mid american), Apparel, Building Products, Flight Services, Retail, Financial, and Conglomerates such as the recently acquired Marmon Holdings.

Another example is his investments in Gillette, acquired by Procter and Gamble(PG) ; Coca Cola (KO) and Johnson & Johnson (JNJ). Buffett purchases businesses with wide moats, which he believes have strong growth potential, that would lift earnings and distributable cash flows. His yield on cost on his 1988-1994 $1.298 billion investment in Coca Cola (KO) is a staggering 25.20%. His average purchase price comes out to $6.49/share, whereas the annual dividend is $1.76/share after the most recent dividend increase.

Another interesting investment is in See’s Candies, which he purchased for $25 million in 1972, at a time when its pre-tax earnings were $5 million on $30 million of sales. The confectionary maker in a slow growth industry currently generates enough cash flow, which is then redirected to other business opportunities. In fact over the past 35 years, the capital needs for the company have risen from $8 million to $40 million annually, while it has returned $1.35 billion worth of pre-tax earnings to be allocated somewhere else.

Yet another myth about Buffett is that he doesn’t like dividends. The contrary is true – from his early days of buying farmland and operating a newspaper route to buying pinball machines Buffett has been particularly interested in the distributions from his business. His investments in See’s Candies and other businesses like Coca Cola (KO) and Johnson & Johnson (JNJ) throw off enough cash in the form of dividends to Berkshire Hathaway that he then allocates appropriately. The same is true for many dividend investors, which are primarily interested in purchasing stable wide moat businesses, that have the ability to grow earnings. That way these companies can afford to consistently raise distributions to shareholders. Dividend investors then allocate their dividends received in the best manner suitable – either by purchasing more stock or spending it on their own needs.

Another myth about Warren Buffett is that he never sells. In 1998 he sold his position in McDonald’s (MCD) for a tidy profit. In his 1998 Letter to Shareholders, Buffett called this move “a very big mistake”. While McDonald’s stock closed 1998 at $38 it did fall to as lot as $12 at the bottom of the 2000-2003 bear market, before staging a massive rally during the 2003-2007-bull market. The stock is one of the few, which have not seen their shares fall of a cliff in the recent bear market.

The future of Berkshire Hathaway is really what gives nightmares to its investors. Due to its sheer size, it has to concentrate only on opportunities in the billions of dollars. In “THE SUPERINVESTORS OF GRAHAM-AND-DODDSVILLE” he explained that “if you ever get so you're managing two trillion dollars, and that happens to be the amount of the total equity valuation in the economy, don't think that you'll do better than average”

It would be impracticable to concentrate on hundreds of smaller deals, which could potentially generate higher returns. One idea that Berkshire could implement is to franchise Buffett Partnership’s business model to hundreds of small value investors with $1 million in seed capital, and watch them become the next Buffett. This could bring in new life to Berkshire.

Buffett seems to like companies, which generate enough in royalties due to their high moats for many years to come. Such competitive advantages that allow them to spend a considerable amount of funds upfront on research and development to create a unique product and then sell it for many years in the future is closely resembling the idea of passive income that many investors are constantly seeking out. Such companies which generate “royalty” type of revenues includes See’s Candies, Microsoft (MSFT), Coca Cola (KO), and pharmaceuticals companies such as Pfizer (PFE) or Eli Lilly (LLY).

Below I have summarized some interesting materials I found about Buffett:

Buffett Partnership Letters

http://www.ticonline.com/buffett.partner.letters.html

Berkshire Hathaway Shareholder Letters

http://www.berkshirehathaway.com/letters/letters.html

Buffett’s E-mail correspondence about Microsoft

http://thomashawk.com/2005/12/1997-email-from-microsofts-jeff-raikes.html

THE SUPERINVESTORS OF GRAHAM-AND-DODDSVILLE

http://www.tilsonfunds.com/superinvestors.pdf

Relevant Articles:

- Dividend Aristocrats Strike Back
- Warren Buffett – The Ultimate Dividend Investor
- Coca Cola (KO) Dividend Stock Analysis
- Warren Buffett’s Berkshire Hathaway Portfolio Changes for Q1 2009.

12 Dividend Stocks to own in this market

2009-07-07T00:41:00.000-07:00

With markets recovering from the lowest levels since 1996 and currently trading at the same levels as one decade ago, buy and hold investors’ portfolios are hurting. Dividend investors are also sharing the pain, as several prominent companies such as Pfizer, General Electric and JP Morgan have cut their dividends. Despite the fact that most major sectors have not been left without damage to dividends, the majority of the cuts have been centered in the financials segment of the market. Furthermore, despite all the gloom surrounding the stability of payments, investors who are sticking to a sound strategy of diversification, dollar cost averaging and dividend reinvestment are still enjoying increases in their dividend income.

I believe that whether the bottom has been hit or not astute dividend investors should seize the opportunity that the current bear market offers. I ran a screen on the S&P Dividend Aristocrats index to identify attractively valued stocks using the following criteria: (source Yahoo Finance)

1. Dividend Payout Ratio is less than 50%
2. Price/Earnings Ratio is less than 20
3. Current Dividend Yield is at least 3%

There were 12 companies that made the cut. Check the list below:

(Alternative link to view the watchlist)

I believe that diversification is important as well. Below you could find a breakdown of the list by sector plus a link to my most recent stock analysis of each company.

Consumer Discretionary

(VFC) VF Corp (analysis)

(MHP) McGraw-Hill Companies (analysis)

Consumer Staples

(PG) Procter & Gamble (analysis)

Financials

(AFL) AFLAC Inc (analysis)

(CB) Chubb Corp. (analysis)

Health Care

(ABT) Abott Laboratories (analysis)

(JNJ) Johnson & Johnson (analysis)

Industrials

(MMM) 3M Co (analysis)

(DOV) Dover Corp. (analysis)

(EMR) Emerson Electric (analysis)

(SWK) Stanley Works (analysis)

Materials

(NUE) Nucor Corp. (analysis)

The thing that separates these companies from other dividend stock lists is that they have a tendency to increase their dividends consistently every year. With an average yield of 3.60% this list has generated an average dividend growth of 11% over the past decade. If history were to repeat itself over the next 6 –7 years, the average yield on cost should be double what you can get today. In the worst case I expect that the income stream growth from this list of stocks would at least match the rate of inflation over time.

Full Disclosure: I have positions in all stocks above except for VFC and SWK, which I plan on buy on dips. Trade stocks for free through Zecco.com, the Free Trading Community.

- Dividend Portfolios – concentrate or diversify?

- Replacing dividend stocks sold

- Dividends versus Share Buybacks/Stock repurchases

- General Electric (GE) Cuts the Dividend

Dividend News: A Few Increases, More Expected in July

2009-07-06T04:02:00.000-07:00

Dividends are getting a bad reputation from everywhere. First it was the dividend guts at big banks like Citigroup, Bank of America, and Lehman Brothers, which once were reliable dividend growth stocks that triggered a wave of cuts and suspensions across the board. The Standard & Poors recently announced that a record low companies increased dividends in 2Q. According to their report, the number of dividend cuts has increased to the highest since 1957. While it is easy to feel pessimistic after those not so positive headlines, one has to remember that there still are many companies, which keep raising their distributions. Companies, that raise distributions when others are slashing or eliminating theirs, citing “unfavorable conditions”, are the true champions where investors should look into concentrating their efforts. Several companies raised their distributions over the past week:

General Mills (GIS), which manufactures and markets branded and packaged consumer foods worldwide, approved a 9% increase to its quarterly dividend to 47 cents per share. General Mills is a former dividend aristocrat, which has fought back to regain its status in the elite dividend index since 2004. The stock currently yields 3.20%.

Senior Housing Properties Trust (SNH), which owns independent and assisted living communities, nursing homes, rehabilitation hospitals, wellness centers and medical office buildings throughout the United States, increased its quarterly distributions by 1 cent to 36 cents per share. Senior Housing Properties has increased its annual dividend in each of the past eight years. The stock currently yields 8.80%.

MFA Financial, Inc. (MFA) announced that its board has approved a 13.6% increase in its quarterly dividend from $0.22 to $0.25 per share. The company primarily invests in mortgage-backed securities (MBS) that include hybrid and adjustable-rate MBS (ARM-MBS). The dividend is pretty volatile, ranging from a low of 5 cents a share in 2005 and 2006 to a high of 32 cents in 2002. The current yield is 14.70%.

Despite the slow week for dividend increases, I am looking forward to a relatively busy July, since historically some well-known dividend aristocrats like Walgreen (WAG) and Stanley Works (SWK) tend to raise their dividends during the current month.

Walgreen (WAG) has raised its dividend every July over the past five years. This dividend growth stock has been raising dividends for 34 consecutive years and has a 5-year dividend growth rate of 21.30%.

Stanley Works (SWK) has raised its dividend every July over the past five years. This dividend growth stock has been raising dividends for 41 consecutive years and has a 5-year dividend growth rate of 4.20%.

Disclosure: None

Relevant Articles:

- High Yielding Companies boosting distributions
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- Target (TGT) and Clorox (CLX) confident in raising dividends
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Emerson Electric (EMR) Dividend Stock Analysis

2009-07-02T03:30:00.000-07:00

Emerson Electric Co., a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. The company operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. The company is member of the S&P 500 and the S&P Dividend Aristocrats indexes.
Emerson Electric Co.has paid uninterrupted dividends on its common stock since 1947 and increased payments to common shareholders every year for 52 years.

From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 4.90% to its shareholders. The stock is down over 50% from its 2007 and 2008 all-time highs.

The company has managed to deliver an 8.40% average annual increase in its EPS between 1999 and 2008. Analysts are expecting an increase in EPS to $2.35 for 2009 and $2.20 by 2010. This would be a decrease from the 2008 earnings per share of $3.11. The economic crisis is currently affecting the St. Louis based company, which recently announced a 25% decline in orders for the past three months. Emerson Electric does expect to restructure its operations in order to make them more cost effective. In addition to that the relative diversification of its revenue sources by continents and five major business segments should soften the fall in earnings. Another positive for the company is the fact that it focuses on new product introductions, which could add greatly to profitability. Strategic acquisitions could also add to the bottom line as well.

The Return on Equity has increased over the past decade from 22% in 1999 to 27% in 2008. The reason for the increase is managements implementing capital efficiency initiatives after a string of acquisitions. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 7% annually since 1999, which is slightly lower than the growth in EPS.
A 7 % growth in dividends translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1982, Emerson Electric Co. has actually managed to double its dividend payment every nine years on average.
Despite the expectations for lower earnings and revenues for 2009 and 2010, I believe that the dividend payment would not be affected. The worst that could happen is that dividend growth slows down for the next two years, before resuming its 7% annual rate of increase. Despite being regarded as a cyclical company Emerson has raised distributions for over half a century, so a recession should not create a steep shift in the company’s dividend policy.

The dividend payout ratio remained below 50% for the majority of the past decade. The only exception was the 2001-2003 period, when profitability suffered from the economic downturn at the time 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 Emerson Electric Co. is trading at 13 times earnings and yields 4.00%. I believe that Emerson Electric Co.is attractively valued at the moment. I would be looking forward to adding to my position there.

Full Disclosure: Long EMR

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Best Yielding Stocks for 2009 2Q Update

2009-07-01T04:30:00.000-07:00

At the end of 2008 I was invited to participate in a passive stock-picking contest between several US and Canadian bloggers. The goal of the competition was to select the four best stock ideas from each blogger. The rules did not allow active buying and selling, which means that once you select your picks; one can’t go back and change them. Check out my original post for the rationale behind my picks.

Contests are a tricky thing. Most participants might choose riskier stocks, which could go higher much faster if the market was bullish, versus higher quality issues, which have lower volatility. Thus observing investors making bets without having any funds at risk, is not the same as putting your money where you mouth is.

The companies I selected were representative of four high yielding sectors- real estate, energy transportation, utilities and tobacco. Despite the high yields, the dividend payments seemed sustainable enough even during the financial meltdown. The average yield on the four stocks mentioned below is 6.88%. The riskiest stock of the four seems to be Realty Income (O), since real estate is one of the hardest hit sectors in the US. Kinder Morgan (KMP) and Con Edison (ED) are pretty much utility like investments, while Phillip Morris International (PM) should do fine in a crisis, as smokers find it tougher to quit.

Realty Income (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The monthly dividend company ended 2008 at $23.15 and has distributed $0.85 in dividends so far this year. At the current price of $21.92 the investment is underwater by 1.64%. This dividend achiever, which has consistently increased its distributions several times/year since 1994, currently spots a very attractive 7.90% yield. Check out my analysis of Realty Income.

Consolidated Edison, Inc. (ED), ended 2008 at $38.93. At the current price of $37.42 plus the $1.18 in dividends collected during the first two quarters the investment in this provider electric, gas, and steam utility services has lost 0.85%. Currently this dividend aristocrat yields 6.30%. Check my analysis of Consolidated Edison.

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. One of the largest master limited partnerships in the US has generated a total return of 16.33% in 2009, one third of which came from this dividend achievers generous distributions. The units of this partnership currently yield 8.30%. Check my analysis of Kinder Morgan.

Philip Morris International Inc (PM) manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. The largest publicly traded manufacturer and marketer of tobacco products closed 2008 at $43.51/share and has paid $1.08 in dividends in 2009. At the current price of $43.62 the investment is up by 2.74%. This dividend growth stock currently spots an attractive 5.00% yield and recently announced its expectations to return some $9 billion in cash to its shareholders during 2009 in the form of dividends and share buybacks.

Overall my picks gained 0.70% year to date. If you add in dividends, the total return was 4.10%. Check out the performance of the other bloggers year to date returns in the table below:

Rank

1 Four Pillars 48.83%

2 Intelligent Speculator 43.32%

3 The Wild Investor 41.45%

4 Where does all my money go 28.72%

5 The Financial Blogger 13.29%

6 Million Dollar Journey 4.76%

7 Dividend Growth Investor 0.70%

8 Zach Stocks -3.09%

9 My Traders Journal -11.36%

S & P 500 +3.16%

I would like to emphasize the fact that successful dividend investing is a long-term process. I strongly doubt that a time frame of less than 15 years is indicative of whether the performance of the stock picks above is sustainable or not. Having a diversified portfolio of at least 30 individual companies from several sectors, sizes and locations is essential in order to be diversified and avoid taking unnecessary risks. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today's post.

Relevant Articles:

- Best High Yield Dividend Stocks for 2009-1Q Update...

- Best High Yield Dividend Stocks for 2009

- Best Dividends Stocks for the Long Run

- Best International Dividend Stocks

High-Yield Dividends at Risk

2009-06-30T04:30:00.000-07:00

I am a firm believer in dividend growth investing strategies, where one could purchase a stock in a company that consistently increases its dividends and watch their dividend income rise over time. Dividend investing is a long-term strategy however, as the full impact of the fruits from your investments won’t be felt for several decades.

Successful dividend investing is much more than picking the highest yielding stocks however. Recent history has shown that in most cases, the stocks with the highest yields are the first to cut distributions when trouble arises. In order to be successful at long-term dividend investing, one needs to find the right balance between dividend growth and dividend yield.
There are several stocks, which offer tempting current high yields, which are less likely to be sustained. Most of the companies mentioned below are members of the elite S&P Dividend Aristocrats index for now.

Avery Dennison Corporation is engaged in the production of pressure-sensitive materials, office products and a variety of tickets, tags, labels and other converted products. The Company's segments are Pressure-sensitive Materials, Retail Information Services and Office and Consumer Products. The company last raised its dividend in 2007. Avery Dennison has been unable to cover its dividend payment over the past two quarters. Based off the past 4 quarterly earnings reports however Avery earned $2.16/share and paid out $1.64 in dividends per each unit of common stock. Avery ended its 32-year streak of consistent dividend increases in 2008.

M&T Bank Corporation (M&T) is a bank holding company. The Bank offers a range of commercial banking, trust and investment services to its customers. M&T Bank last raised its dividend in 2007 as well. M&T Bank paid out most of its earnings as dividends over the past 3 quarters and couldn’t cover its distribution in the latest quarter. The bank is also one of the financial institutions, which had taken funds from the US Treasury. M&T Bank took $600 million in TARP money back in December 2008. M&T Bank ended its 27-year streak of consistent dividend increases in 2008.

Leggett & Platt, Incorporated is a diversified manufacturer that conceives designs and produces a range of engineered components and products used in homes, offices, retail stores and automobiles. Leggett & Platt’s dividend was last raised in 2007, which ended the company’s 37-year streak of dividend increases. The company hasn’t been able to even cover its dividend payments by earnings for both 2007 and 2008 fiscal years.

Johnson Controls provides automotive interiors, products and services that optimize energy usage in buildings and batteries for automobiles and hybrid electric vehicles, along with related systems engineering, marketing and service expertise. The Company operates in three businesses: building efficiency, automotive experience and power solutions. The company last raised its dividend in 2007, ending its 33-year streak of consistent dividend raises. Even though Johnson Controls only yields 2.50%, which could hardly be justified as “high yield stock” per se, it has not been able to adequately cover its distributions from its earnings since Q4 2008.
This being said, due to the company’s diversification in location, products and clientele it should be able to withstand the current crisis in the automotive industry. The price of future growth could come at the expense of a dividend cut.

Just because companies have not been able to cover their dividends over the past few quarters doesn’t mean they would necessarily be cut; a rebound in corporate profits could push down payout ratios to more reasonable levels. The lack of dividend increases for more than one year however typically indicates that management does not see an improvement in the company financials over the next two years. Unless dividends are raised by the end of 2009 for the four companies mentioned above, they would certainly be dropped out of the Dividend Aristocrats indexes.

Full Disclosure: None

Relevant Articles:

- Don’t chase High Yielding Stocks Blindly
- High yield stocks for current income
- Why do I like Dividend Aristocrats?
- Dividend Analysis of M&T Bank Corporation (MTB)
- Dividend Stocks to Avoid

High Yielding Companies boosting distributions

2009-06-29T04:30:00.000-07:00

While some investors viewed Petsmart’s 233% dividend raise as extremely important, I found the increases from several high yield stocks to be very intriguing as well. First of all, as a dividend growth investor my goal is to generate a double digit yield on cost after years of consistent dividend increases by the companies I have included in my portfolio. But what if I could purchase dividend stocks that already spot double-digit dividend distributions? Regular readers of my blog know that I do not like chasing high yielding stocks blindly. My experience with American Capital (ACAS), which suspended its dividend is a lesson that will never be forgotten. Despite the fact that the company recently announced a dividend of $1.07/share in order to maintain its status of a business development company, 90% of which would be paid in additional shares and the rest in cash, the company faces troubles with its creditors.
Two of the companies that raised distributions, American Capital Agency Corp. and Hatteras Financial Corp. have fluctuating dividend payments. The other one, Prospect Capital has raised distributions for 19 consecutive quarters. Most of these distributions consist of earnings and returns of capital. Companies could only afford paying such distributions by selling additional stock and raising more money by selling additional debt in order to grow and sustain operations.
The double digit current yields, also show investors pricing in a high probability of a dividend cut.

Well let’s look at last weeks dividend increases first:

Hatteras Financial Corp. (HTS), which invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by the United States Government agency, or by the United States Government-sponsored entity, boosted its quarterly distributions to $1.10 per share. This represents a 4.8% increase for this real estate investment trust compared to its previous distribution. Hatteras Financial Corp. has a fluctuating dividend payment, which has ranged between $0.75 and $1.05 per share. The stock currently yields 15.90%.

Duke Energy (DUK), which operates as an energy company in the Americas, raised its quarterly dividend to 24 cents per share, which represented an increase of $0.01 over the previous level. It appears that Duke Energy has regularly increased its quarterly dividend since 2005, accounting for spinning off its natural gas transmission and storage business into Spectra Energy in 2007. The stock currently yields 6.60%.

American Capital Agency Corp. (AGNC), which invests in agency securities for which the principal and interest payments are guaranteed by a U.S. Government agency, increased its quarterly dividend to $1.50 per share, up from the previous distribution of $0.85/share. The stock currently yields 25.40%.

Prospect Capital Corporation (PSEC), which is a closed-end investment company that lends to and invests in private and microcap public businesses, increased its quarterly dividend to 40.625 cents per share. This dividend marks Prospect Capital's 19th consecutive quarterly increase. The company’s investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. The stock currently yields 16.90%.

PetSmart, Inc. (PETM), which provides products, services, and solutions for pets in North America., increased its quarterly dividend by a staggering 233% to 10 cents per share. The company’s Board of Directors also authorized a $350 million stock purchase plan that expires in January 2012. PetSmart, Inc. initiated a dividend payment policy in 2003 at 2 cents/share. The company has increased its dividend only once , in 2004 to 3 cents/share and kept it unchanged since, until the most recent increase. The stock currently yields 1.90%.

Darden Restaurants Inc. (DRI), which engages in the ownership and operation of full-service restaurants in the United States and Canada, increased its quarterly dividend by 25% to 25 cents per share. Darden Restaurants Inc has consistently increased its quarterly since 2005. The stock currently yields 3.10%.

As usual there’s not free lunch on Wall Street. Thus, before getting too excited about the high yielding dividend raisers from last week, research them carefully and make sure you understand how their business model works. In a market where cash is king, relying on the capital markets to fund growth could turn very expensive if done at the wrong moment.

Full Disclosure: None

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Coca Cola (KO) Dividend Stock Analysis

2009-06-26T04:29:00.000-07:00

The Coca-Cola Company manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. The company is member of the S&P 500, Dow Jones Industrials and the S&P Dividend Aristocrats indexes. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for 47 years.
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 2.10% to its shareholders. The stock has largely traded between $65 and $40 over the past decade.

The company has managed to deliver a 10.90% average annual increase in its EPS between 1999 and 2008. Analysts are expecting an increase in EPS to $3.05-$3.10 for 2009 and $3.25-$3.30 by 2010. This would be a nice increase from the 2008 earnings per share of $2.49. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time.
Some analysts believe that Coca Cola could follow arch rival Pepsi Co’s moves to acquire its own bottlers in an effort to gain more control over the production and distribution of its beverages in key markets. Coke holds a 35% interest in its largest manufacturer and distributor of Coca Cola products, Coca-Cola Enterprises In. (CCE). Coca-Cola Enterprises Inc. accounts for about 40% of Coke’s concentrate sales and 16% of the company’s worldwide volume, which makes it a likely target of acquisition, should Coca Cola decide to follow Pepsi Co’s strategy of buying back its bottling operations.

The Return on Equity has been in a decline after hitting a high in 2001. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 10.10% annually since 1999, which is slightly lower than the growth in EPS. The company last raised its dividend by 8% in February 2009, for the 47th year in a row.
A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1969, The Coca Cola Company has indeed managed to double its dividend payment every seven years on average.

The dividend payout ratio remained above 50% for the majority of 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 Coca Cola is trading at 20 times earnings and yields 3.30%. In comparison arch rival in the cola wars Pepsi Co (PEP) trades at a P/E multiple of 16.5 and yields 3.40%. Check my analysis of Pepsi Co (PEP)

I believe that The Coca Cola Company is not as attractively valued at the moment as Pepsi Co. I would consider adding to my position there if it can cover its dividends at least two times by its earnings by the end of the year, and if the P/E ratio doesn’t increase above 20.

Full Disclosure: Long KO and PEP

Relevant Articles:

- Cola Wars - Coke versus Pepsi

- PepsiCo (PEP) Dividend Stock Analysis

- Taking Stock in Coca-Cola (KO):

- Why do I like Dividend Aristocrats?

- Dividend Aristocrats Strike Back

Largest Stock Buybacks for first quarter of 2009

2009-06-24T04:30:00.000-07:00

In a previous article I outlined the reasons why I consider stock buybacks to be inferior to dividends. Nevertheless it pays to know which the largest repurchasers of their common stocks are. I am also a supporter of companies doing both stock buybacks while regularly raising dividends.

The 20 largest stock buybacks from the 1Q 2009 are listed below: (source S&P)

The decrease in buybacks was about 73% in comparison to the first quarter of 2008. S&P 500 companies spent $30.8 billion buying back their own stock in 1Q 2009 versus $113.9 billion in 1Q 2008.

It’s interesting to note that several prominent dividend stocks appear on the list.

Exxon Mobil (XOM) accounted for the majority of buybacks in the first quarter, after purchasing $7.85 billion worth of its own stock. This was slightly down from the $8.845 billion spent on buybacks in 4Q 2008. In comparison the largest oil and gas company in the US paid only $1.98 billion in dividend payments for the quarter. Exxon Mobil has been consistently increasing its dividends for 27 consecutive years, with its most recent dividend payment being 42 cents/share. Check my analysis of Exxon Mobil (XOM).

International Business Machines (IBM) was the third largest company repurchasing its shares, after spending $1.765 billion in the first quarter 2009 and $47.945 billion since 2004. This was higher from the $0.74 billion spent on buybacks in 4Q 2008.In comparison “Big Blue”, as traders on the NYSE call this global tech behemoth, spent only $675 million on dividends in the same quarter. IBM has been consistently increasing its dividends for 14 consecutive years, with its most recent dividend payment being $0.55/share . Check my analysis of IBM.

Procter & Gamble (PG) spent $1.122 billion on buybacks versus $1.215 billion on dividends. In comparison the company spent $1.332 billion on share buybacks and $1.239 billion on dividend payments. The money spent on buybacks translates into 38 to 44 cents/share for each of the past two quarters. This provider of branded consumer goods products worldwide has spent over $43 billion on share buybacks between 4Q 2004 and 1Q 2009, which was much larger than the amount of total dividends paid for the same period. Procter & Gamble is a dividend aristocrat, which has been increasing its dividends for the past 53 consecutive years, with its most recent dividend payment being 44 cents/share . Check my analysis of Procter & Gamble (PG).

Another notable company on the share repurchasing front is Johnson & Johnson (JNJ). The company repurchased $834 million worth of stock in 1Q 2009 versus $878 million bought in 4Q 2008. The money spent on buybacks translates into 30 cents/share for each of the past two quarters. In comparison this healthcare company spent $1.273 billion on dividends for each of the last two quarters. JNJ has been consistently increasing its dividends for 47 consecutive years, with its most recent dividend payment being 49 cents/share. Check my analysis of Johnson and Johnson (JNJ).

McDonald’s (MCD) returned $813 million and $553.4 million respectively on stock buybacks and dividend distributions in the latest quarter. The stock buyback translates into $0.70/share for the quarter, which could have been paid as a cash dividend. McDonald’s has been consistently increasing its dividends for 32 consecutive years, with its most recent dividend payment being 50 cents/share. Check my analysis of McDonald’s (MCD).

Wal-Mart Stores (WMT) returned $886 million and $1.067 billion on share repurchases and dividends for the latest quarter. The money spent on buybacks translates into 22.50 cents/share for the latest quarter. In comparison, the world’s largest retailer returned $932 million in the form of dividends and zero in the form of stock buybacks in the previous quarter. Most recently it announced a new share repurchase program that gives the company authorization to repurchase $15 billion of its shares. Wal-Mart (WMT) has increased its quarterly dividend in each of the past thirty-five years, with its most recent dividend payment being 27.3 cents/share. Check my analysis of WMT.

Overall, the money spent on stock buybacks, does increase earnings per share in the long run, which also leaves room for faster dividend growth. This could also lower total dividend costs paid by corporations down the road.

In the end I enjoy a balanced approach, where companies do both dividends and share buybacks. My preference is on dividends, as I view share buybacks as a way to share the wealth with shareholders only during good times. The recent Standard and Poors report shows the steep declines in share repurchases in the first quarter of 2009. This confirms my theory that stock buybacks are similar to special dividends, and should not be taken into consideration when evaluating the income attractiveness of dividend stocks. However while both methods have their pros and cons, when used carefully, they could strongly add to the total returns of long-term shareholders.

This post was included in Carnival of Personal Finance #212: Independence Day Around the World Edition

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- Dividends versus Share Buybacks/Stock repurchases

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- Exxon Mobil (XOM) Dividend Stock Analysis

- IBM Dividend Stock Analysis

Dividends versus Share Buybacks/Stock repurchases

2009-06-23T04:30:00.000-07:00

Companies have several means through which they share their prosperity with shareholders. Dividends are the portion of corporate profits paid out to stockholders in the form of cash. Share buybacks on the other hand represent cash distributed to existing shareholders in exchange for a fraction of the company’s outstanding equity. While both methods have their pros and cons, when used carefully, they could strongly add to the total returns of long-term shareholders.

Share Repurchases have gained popularity among companies because there's a total flexibility with them, whereas dividend payments require a commitment. With repurchases a company could spend billions buying back its stock in one year, and then spend nothing for the next few years. With dividends however a company that cuts, eliminates or suspends its payment would likely enrage shareholders.

Some investors believe that stock buybacks are the most tax efficient way for companies to return cash to shareholders. Currently, the highest tax on qualified dividend income is 15% for the top income tax bracket. When companies earn money, they pay taxes on it. When companies pay dividends, dividends are taxed again at the individual level.

When companies repurchase their own shares, they decrease the number of outstanding stock available, which theoretically increases the stock value. Some investors consider this to be the most tax efficient method of returning cash to shareholders, since there is no tax on repurchasing shares. These investors seem to forget however that the holders of stock who sold to the company end up paying a capital gains tax on their profit. While not all shareholders sell stocks to companies, which are repurchasing their own stock, the ones that do could end up with a higher tax bill at the end of the day, especially if they were long-term buy and hold investors.

One reason for the increased popularity of buybacks is that companies do not wish to commit to a certain dividend level, since their earnings are volatile. Stocks like Exxon Mobil (XOM) didn’t pay a large dividend during the huge run up in oil prices over the past decade, partly because their executives might have believed that once oil prices stabilized, dividends would have had to been cut in order to account for the new reality. It looks like Exxon Mobil (XOM) managers were correct about using caution in expecting the good times to continue indefinitely. Projections for near term earnings per share are to contract by 50% in 2009 before recovering to only two-thirds of the record earnings numbers from 2008. Check my analysis of Exxon Mobil (XOM)

Some analysts believe that companies use share buybacks as a clever way to offset shareholder dilution from exercised stock options from management. With stock repurchases companies fail to reduce share count due to new issuance of stock to redeem employee stock options. Stock buybacks are typically initiated in good times, when stock prices are high and discontinued in bad times, when stock prices are low, Thus, corporations end up purchasing their own stock at inflated prices, which greatly limits the supposed benefits of increasing the ownership percentage of each share owned by stockholders.

General Electric (GE) is a prime example for this. In 2007 the company spend $12.319 billion buying back stock, which reduced the share count from 10394 million to 10218 million, or a decrease of 176 million shares. This comes out to $70/share, whereas the high and low prices of GE stock in 2007 were $42.15 and $34.50 respectively. This sure tells us that the company gave out at least one hundred million shares through option exercises. Facing a liquidity crunch in 2008 the company was forced to sell $12 billion worth of stock at $22.25/share, much lower than the price is had paid for buybacks over the past 4 years. Back in February 2009, the company cut its dividend as well in order to conserve cash.

IBM is another interesting buyback stock to research further. Over the past decade, the worldwide supplier of advanced information processing technology and communication systems and services and program products has managed to decrease the number of shares outstanding from 1.852 billion at the end of 1998 to 1.339 billion by 2008. At the same time revenues have increased by 18.4% from $87.548 billion to $103.63 billion over the past decade. Earnings per share increased by 116.75% from $4.12 to $8.93, mainly due to share buybacks, since net income only rose by 60.4% from $7.692 billion to $12.334 billion in the process. $100 invested in IBM stock at the end of 1998 would now be worth $130.30 with dividends reinvested, and only $117.4 without reinvestment. Dividend payments increased from 0.11/share in 1998, when the yield was a little less than 0.5% to $0.55/share, for a yield of less than 2.1%.
The company has spent $73 billion on share buybacks, which should have been paid out as special dividends instead. This would have increased the total returns for shareholders by rewarding them with a higher dividend payment, the compounding effects of which could have greatly magnified long-term stockholder returns. I am a supporter of the extra cash being paid out as a dividend, since its contribution to the total returns would have been more visible than share buybacks. Check my analysis of International Business Machines (IBM).

Dividends on the other hand are mostly cash in hand that gives the investors options about their further allocation. They could be spent, re-invested in the same or other stocks or could be placed in a savings account. Dividends are somewhat more predictable and reliable sources of income, especially if you are looking for an alternative income stream in retirement. Furthermore, dividends
Dividends have contributed a large portion of total returns to shareholders. They typically account for 40% of average annual total returns each year and are the only form of returns on investment that shareholders achieve during bear markets. The reinvestment of dividends has accounted for majority of S&P 500 total returns as well over the past century.

Companies that regularly pay dividends impose a discipline on managers to treat cash very carefully and thus make better decisions by adopting projects, which would generally improve the bottom line, without sacrificing return on equity.

It would be much easier for an individual who plans on living off their investments to rely solely on dividends that on hoping that share buybacks would lift the value of his or her stocks. Selling your stocks at the midst of a bear market in order to sustain your lifestyle doesn’t make much sense, yet investors keep cheering the supposed “tax efficiency” of stock buybacks.

I typically treat share repurchases the same way as special dividends. Share buybacks are inferior to dividend payments, as they could be canceled or temporary suspended at any moment, without many investors noticing this. Dividend payments on the other hand are visible to shareholders and cutting or eliminating a payment would certainly create negative publicity for the company. I would much rather see special dividends, rather than stock buybacks, which are a clever way to mask the diluting effect of employee option being exercised.

Full Disclosure: None

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Realty Income (O) and Medtronic (MDT) Boosting Distributions

2009-06-22T04:30:00.000-07:00

Several companies expressed their confidence in their future business prospects, by raising their dividends. One of them was Realty Income (O), which engages in the acquisition and ownership of commercial retail real estate properties in the United States. The monthly cash dividend was increased to $0.142375 per share from $0.1420625 per share. This represents the 6th increase for the past year. Tom A. Lewis, Chief Executive Officer of Realty Income, commented, "We are pleased that, despite challenging economic conditions, our operations allow us to once again increase the amount of the dividend we pay to our shareholders. With the payment of the July dividend we will have made 468 consecutive monthly dividend payments."
Realty Income calls itself The Monthly Dividend Company(R), since it has declared 468 consecutive common stock monthly dividends throughout its 40-year operating history and increased the dividend 54 times since Realty Income's listing on the New York Stock Exchange in 1994. The monthly dividend is supported by the cash flow from over 2,300 retail properties owned under long-term lease agreements with leading regional and national retail chains. Check my analysis of Realty Income (O). This dividend achiever currently yields 7.70%.

Medtronic, Inc. (MDT), which develops, manufactures, and markets medical devices worldwide, approved a 9% increase in its quarterly dividend to 20.50 cents per share. In addition to that the company also approved an increase in its Share Repurchase Plan, authorizing Medtronic to purchase an additional 60 million shares of its common stock, which represents 5.4% of the company’s outstanding stock issued. Medtronic, Inc. is a dividend champion, which has increased its quarterly dividend for thirty one consecutive years. The stock currently yields 2.20%.

John Wiley & Sons, Inc. (JW.A) and (JW.B), which publishes print and electronic products that provide content and solutions, raised its quarterly dividend for A and B shares to 14 cents per share. This action represented an almost 8% increase in comparison to the previous dividend payment. This was the 16th annual dividend increase for this dividend achiever. The stock currently yields 1.50%.

Del Monte Foods Company (DLM), which engages in the production, distribution, and marketing of branded food and pet products for the retail market in the United States, announced that its board of directors has approved a 25% increase in its quarterly dividend to 5 cents per share. This is the first dividend increase for Del Monte Foods Company since it initiated its dividend policy in 2006. The stock currently yields 1.80%.

Annaly Capital Management, Inc. (NLY), which engages in the ownership, management, and financing of a portfolio of investment securities, increased its quarterly dividend by 20% to 60 cents a share. The dividends that Annaly Capital Management, Inc. pays are volatile and have ranged between 10 cents/share in 2005 to 68 cents/share in 2002. The stock currently yields 13.80% based off the past three payments and the new quarterly distribution.

Screening the news for potential additions to my dividend growth portfolio didn’t unveil any new hidden gems except for Realty Income (O), which was on my Best High Yield Dividend Stocks for 2009 list.

Full Disclosure: Long O

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Eli Lilly (LLY) Dividend Stock Analysis

2009-06-19T04:30:00.000-07:00

Eli Lilly and Company engages in the discovery, development, manufacture, and sale of pharmaceutical products in the United States, Puerto Rico, and internationally. The company offers neuroscience products, endocrine products, oncology products, and cardiovascular agents for the treatment of various diseases. The company is member of the S&P Dividend Aristocrats index. Eli Lilly has paid uninterrupted dividends on its common stock since 1885 and increased payments to common shareholders every year for 42 years.
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 5.40% to its shareholders. The stock has lost over two thirds of its value from its peak in 2000. The stock performance resembles the continued slide in Pfizer (PFE) stock right before the dividend cut in January 2009.

The company has managed to deliver an unimpressive 2.10% average annual increase in its EPS between 1999 and 2007. Earnings per share were a negative $1.89 due to several factors. One of the factors was a $4.46/share net impact associated with the acquisition of Imclone in 2008 for acquired IPR&D related to this acquisition. Another major item that affected earnings per share was a $1.20/share charge related to federal and state investigations regarding the drug Zyprexa. If it weren’t for these adjustments in earnings, adjusted EPS would have been $4.02, versus $3.54 in 2007. Analysts are expecting an increase in 2009 earnings per share to $4.20 and $4.50 by 2010. This is a rather steep increase from the range in which the stock’s earnings remained between 1999 and 2007. The most important factor for Elli Lilly and Co is their pipeline. The company’s future success depends upon its ability to discover and develop innovative new medicines that help people live longer, healthier, and more active lives.

The Return on Equity has been in a steep decline, falling from 54% in 1999 to 24% in 2007. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 8.20% annually since 1999, which is much higher than the growth in EPS.
An 8 % growth in dividends translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1974, Eli Lilly Company has actually managed to double its dividend payment every seven years on average.

The dividend payout ratio remained above 50% since 2002. 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 Eli Lilly and Co is trading at 8.20 times 2009 earnings and yields 5.70%. In comparison Pfizer (PFE) trades at a P/E multiple of 12.5 and yields 4.30%, Merck (MRK) trades at a P/E multiple of 10 and yields 5.50%, while Novartis (NVS) trades at a P/E multiple 11.60 while yielding 4.30%.

I believe that the company will be attractively valued if it can cover its dividends at least two times by its earnings by the end of the year. While the high yield is tempting, I don’t like the declining returns on equity, high dividend payout ratio and the very slow growth in earnings over the past decade. I also don’t like the continued weakness in the stock over the past decade. It seems as if the market is pricing in something that few investors are considering. I would consider initiating a position at Eli Lilly & Co. when its 2009 earnings per share are posted and cover dividends at least by a factor of two.

Full Disclosure: None

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- Is Pfizer (PFE) a value trap for investors?

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Dividend Portfolios – concentrate or diversify?

2009-06-17T04:30:00.000-07:00

My post on replacing dividend stocks sold triggered some heated debates by some readers. Some investors believe that by concentrating on their best ideas they could generate the best returns. After all, it is much easier to be up to date on any developments on ten to fifteen companies, rather than focusing on at least 30 individual stocks.
In retrospect, it is easy to identify the best performing stocks over the past two or three decades and develop screening criteria that would have triggered a buy signal. The question is whether this success could be replicated over the next two to three decades. I am highly skeptical of methods that show great promise on paper, because the market is an ever-evolving creature, which tends to fool even the best investors. Even the almighty Warren Buffett has evolved his strategies over the years, from a pure Graham follower, to an avid business owner and stakeholder in some of America’s most successful corporations such as Johnson & Johnson (JNJ), Coca Cola (KO) and Procter and Gamble (PG). Without adapting his methodology to the external environment and his portfolio size, Berkshire Hathaway (BRK.A) would have never made it to what it is today.

Back to sticking to the best investments, I disagree that ten to fifteen companies would provide an adequate diversification for ones portfolio. There are about ten sectors that comprise the S&P 500 alone, which sure leaves you holding just a single stock from each sector if you wanted to concentrate only on your best ideas. Chances are that a concentrated portfolio would not be diversified internationally or diversified into small and mid cap dividend stocks. Over time even the best ideas could take a longer time to live up to their full potential especially if the market ignores a group of stocks such as large caps, while favoring international and mid cap domestic stocks. It is difficult to forecast which would be the best performing sectors or stocks over the next few years

A portfolio consisting of 10 to 15 shares would likely experience a higher volatility and thus a higher amount of risk in comparison to a portfolio consisting of at least 30 dividend stocks from a diversified list of sectors. Thus, on a risk adjusted basis the more concentrated portfolio would likely underperform a more diversified portfolio consisting of more than 30 individual stocks.

Even if you owned a quality dividend stock from each sector in the S&P 500, your dividend income could suffer greatly if your stock cuts or eliminates its dividends. If you owned Bank of America (BAC) stock and had a 10% allocation to this once high yielding and high dividend growth stock, chances are that your dividend income would have dropped off much faster in comparison to having a 3% allocation to the stock. You also might have not properly diversified your sector risk as well, as you might have picked the worst performer in the sector, even though the other leaders do better.
For example, Coca Cola (KO) has had a horrible ten-year total return in comparison to Pepsi Co (PEP). While the so-called cola wars have swept the globe over the past several decades, predicting which company would be the winner in each decade would have been highly unlikely. Thus, sticking with both competitors in the cola wars could be the best idea for investors.

Now there is another side to this equation and it is that identifying more than 40 quality dividend stocks could be a rather difficult task to handle. My goal has been to diversify as much as possible by holding up to 100 individual securities. This would make my dividend income stream properly diversified and not dependent on a dividend cut by any individual stock. In reality however, requiring a minimum number of companies to own could lead to lowering your entry criteria, which could prove as disastrous for long term performance as concentrating in the best ten stock ideas that you might have.

One thing to add here is that per the paretto principle, I would expect about 80% of my long-term performance to come from 20% of the issues I select. In a 40 stock portfolio that means that about 8-10 companies that I own today would be responsible for most of my gains over time. Since I own mostly dividend growth stocks such as the dividend aristocrats and the dividend achievers I think that this is a fairly accurate statement. In a previous study I found that the percentage of companies that remain in the S&P Dividend Aristocrats index after 10 years is about 30%. In addition to that the average company stayed 6.5 years in the S&P Dividend Aristocrats index from the time of its addition. In addition to that out of 26 initial components of the elite dividend index in 1989, only 7 are still parts of it 20 years later. The companies are: Dover Corp (DOV), Emerson Electric (EMR), Johnson & Johnson (JNJ), Coca Cola (KO), Lowe’s (LOW), 3M (MMM) and Procter & Gamble (PG).

Of course it would have been next to impossible to predict which ones were to remain the index back in 1989. It would be almost impossible to predict which ones would remain in the index 20 years from now as well, due to the limitations of using only past data to reach a conclusion. Thus, by diversifying your risk by spreading your bets to several stocks from as many market sectors as possible, investors would have a higher chance of finding the best dividend stocks, which would generate the most returns for them for the future.

The article was included in the Carnival of Personal Finance #210 – Punch Out Edition

Full Disclosure: Long EMR, KO, PEP, JNJ, PG and MMM

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Target (TGT) and Clorox (CLX) confident in raising dividends

2009-06-15T04:30:00.000-07:00

The dividend aristocrats continued their streak of success after three more members of the elite dividend index announced another increase in their dividends. Their ability to pay a dividend with such regularity, while other companies have had to either cut or eliminate their dividend payments, speaks volumes about their business model. In addition to that, the diversification and careful management of these companies’ resources has provided shareholders with long-term sustainable results. The companies that continue their commitment in raising their distributions even in this tough economic period provide an exceptional value to their stockholders.

The Clorox Company (CLX), which manufacture and markets a range of consumer products, announced an 8.70% increase to its quarterly dividend from 46 to 50 cents per share. The Clorox Company is a member of the dividend aristocrats index, and has regularly increased its quarterly dividend for the past thirty-two years. The stock currently yields 3.40%. Check my analysis of Clorox (CLX).

Target Corporation (TGT), which operates general merchandise and food discount stores in the United States, increased its quarterly dividend by 6% to 17 cents per share. This marked the 42nd consecutive annual dividend increase for Target Corporation, which is also a dividend aristocrat. The stock currently yields only 1.70%. Check my analysis of Target (TGT).

C. R. Bard, Inc. (BCR), which engages in the design, manufacture, packaging, distribution, and sale of medical, surgical, diagnostic, and patient care devices worldwide, increased its quarterly dividend by 6% to 17 cents per share. C. R. Bard, Inc. is a dividend aristocrat which has regularly increased its quarterly dividend in each of the past thirty eight years. The stock currently yields 0.90%. The slow dividend growth and the low current yield are one of the reasons why I have never analyzed this stock.

W. P. Carey & Co. LLC (WPC), which is an investment management company, increased its quarterly dividend to 49.8 cents per share, up from 49.6 cents. W. P. Carey & Co. LLC is a dividend achiever, which has increased its quarterly dividend in each of the past eleven years. The stock currently yields 7.70%.

National Fuel Gas Company (NFG), which invests in health care and human service related facilities,, increased its quarterly dividend by 3.10% to 33.50 cents per share. National Fuel Gas Company is a dividend champion, which has increased its quarterly dividend in each of the past thirty-nine years. The stock currently yields 3.70%.

Oil-Dri Corporation of America (ODC), which engages in the development, manufacture, and marketing of sorbent products, increased its quarterly dividend by 7% to 15 cents per share. Oil-Dri Corporation of America has only increased its quarterly dividend in each of the past six years. The stock currently yields 3.00%.

VSE Corporation (VSEC), which provides program management, logistics, engineering, information technology (IT), construction program, and consulting services, boosted its quarterly dividend by 11% to 5 cents per share. VSE Corporation has increased its quarterly dividend in each of the past five years. The stock currently yields only 0.70%.

Florida Public Utilities Company (FPU), which engages in the purchase, transmission, distribution, and sale of electricity and natural gas to residential, commercial, and industrial customers in Florida, announced a 2.1% boost to its quarterly dividend to 12 cents per share. Florida Public Utilities Company has increased its quarterly dividend for over ten years. The stock currently yields 3.60%.

Full Disclosure: Long Clorox

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Clorox (CLX) Dividend Stock Analysis

2009-06-12T04:30:00.000-07:00

The Clorox Company manufactures and markets a range of consumer products. The company is also member of the S&P Dividend Aristocrats index. This diversified maker of household cleaning, grocery and specialty food products is also a top manufacturer of natural personal care products.
Clorox has paid uninterrupted dividends on its common stock since it was spun out of Procter and Gamble (PG) in 1968 and increased payments to common shareholders every year for 31 years.
From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 1.70% to its shareholders. While the stock has largely remained flat for the majority of the past most of the returns came from reinvested dividends.

At the same time company has managed to deliver an impressive 13.60% average annual increase in its EPS since 1999. Analysts are expecting an increase in 2009 earnings per share to $3.80 and $4.15 by 2010.

The Return on Assets increased to 11% in 2008 from 6% in 1999. I used return on assets, since the stockholders equity portion of the balance sheet was negative after in 2004 Clorox exchanged its ownership in a subsidiary for approximately 29% of the company’s outstanding shares at the time of this transaction. In addition to that the company spent over 1.65 billion in share buybacks in 2007 and 2008.

Annual dividends have increased by an average of 8.60% annually since 1999, which is lower than the growth in EPS. Clorox has an ever-evolving dividend payment policy, which doesn’t stop the company from raising the annual distributions for 31 years in a row. There have been times such as in 2007 when dividend were raised twice while there are times such as 2003-2004 and 2000-2002 when dividends are not being raised for 6 to 9 quarters.
A 9 % growth in dividends translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1983, The Clorox Company has actually managed to double its dividend payment every six years on average. The dividend is very well covered at the moment and is safe.

The dividend payout ratio remained above 50% until 2002. Since then the dividend payout ratio has consistently 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.

Currently Clorox is trading at a P/E of 14 and yields 3.50%. I believe that the company is attractively valued at current levels and would consider adding to my position in the stock.

In comparison Procter & Gamble (PG) trades at a P/E multiple of 12 and yields 3.40%, Kimberly-Clark (KMB) trades at a P/E multiple of 13 and yields 4.70%, while Colgate Palmolive (CL) trades at a P/E multiple 18 while yielding 2.70%.

Full Disclosure: Long CLX, PG, and KMB

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Best International Dividend Stocks

2009-06-10T04:30:00.000-07:00

In a previous article I provided a list with the best dividend stocks for the long run. Since the list included only US stocks several readers asked for a similar list with international dividend growth stocks instead. Furthermore, I am also looking to expand my portfolio to include at least some allocation to global dividend companies.

I do agree that in the globalized society of the 21st century it is important do be able to diversify your stock investments away from the US. By purchasing international stocks one essentially receives income in a different currency, which is a decent hedge against a possible devaluation of the US dollar. Another benefit of shopping for quality dividend stocks abroad is the huge potential for economic growth and development that both established and emerging economies posses.

There are some differences between US and international based dividend stocks. The first is that the dividend payments of foreign dividend stocks closely follow the earnings trend for the corporation. This is a problem for international dividend growth investors as it does not lead to a consistently increasing dividend income stream, which they are used to by investing in US companies. In the US companies are reluctant to cut dividends if the company had a bad year, while in Europe the dividends are more likely to be cut in response to short term fluctuations in earnings.

Another difference with global dividend stocks is that most pay dividends on an annual or semi-annual basis, which decreases the compounding effect of your payments. In addition to that, a certain percentage of your foreign dividends could be withheld directly from your payment, which decreases your income and makes individual dividend investing in a tax-deferred account inefficient. For example dividends paid from Canadian Companies to US investors are subject to a 15% withholding tax. The IRS however does give a tax credit for the current 15% Canadian withholding tax for foreign investors.
Different countries might have different taxation treaties for taxing dividends, thus you might consider hiring a good tax advisor.

Speaking of accounting matters, most foreign companies do not report results using the US GAAP but using IFRS. This could create material differences when analyzing foreign stocks, as there could be distortions in the amounts of net income, balance sheet values and cash flows.

In addition to that, most US based corporations have operations on a global scale, which derive a large portion of their revenues from abroad. I found that the ten stocks with the highest weights in the S&P 500 index derive about 44% of their aggregate financial contributions from foreign operations then the overall contribution to financial performance would be similar for the index as a whole. Thus an investor, who is simply invested in an S&P 500 index fund, is also properly diversified internationally. Adding any further international stocks could increase my international exposure, without adding any further incremental benefits.

I focused my study only on international stocks trading on the US exchanges. This does provide some limitations to the pool of available investments, but the risks to opening a non-US brokerage account in a foreign currency, paying taxes to foreign governments and paying higher brokerage fees for trades are not worth the incremental rewards for individual investors.

The companies I selected were foreign-based corporations, which have increased their dividends for at least five consecutive years. I tried creating a diversified list of foreign stocks, in order to avoid putting all my eggs in one basket.

Consumer Discretionary

SJR Shaw Communications Inc. (Cl B)
TRI Thomson Reuters Corporation

Consumer Staples

BTI British American Tobacco PLC (ADS)
CBY Cadbury PLC ADR
DEO Diageo (analysis)
UN/UL Unilever PLC/Unilever N.V.

Energy

BP BP PLC (ADS) (analysis)
ENB Enbridge Inc.
TK Teekay Corp.
TNP Tsakos Energy Navigation Ltd.
TRP TransCanada Corp.

Financials

BMO Bank of Montreal
BNS Bank of Nova Scotia
CM Canadian Imperial Bank of Commerce
MFC Manulife Financial Corp.
PRE PartnerRe Ltd.
TD Toronto-Dominion Bank (analysis)

Health Care

ACL Alcon Inc.
AZN AstraZeneca PLC (ADS)
FMS Fresenius Medical Care AG & Co. KGaA (ADS)
NVO Novo Nordisk A/S (ADS)

Industrials

MITSY Mitsui & Co. Ltd. (ADS)

Materials

BHP BHP Billiton Ltd. (ADS)
SQM Sociedad Quimica y Minera de Chile S.A. (ADS)

Telecommunication Services

NTT Nippon Telegraph & Telephone Corp. (ADS)
TEF Telefonica S.A. (ADS)
TU TELUS Corp.
VOD Vodafone Group PLC (ADS)

Utilities

NGG National Grid PLC (ADS)
VE Veolia Environnement (ADS)

The portfolio is not a recommendation to buy or sell any stocks, as it reflects my specific financial risk tolerance. Always do your own research before initiating a position in any financial instrument.

Full Disclosure: Long BP, TD and looking to enter other stocks mentioned here on dips

This post was featured on 209th Carnival of Personal Finance

Relevant Articles:

- Best Dividends Stocks for the Long Run
- International Over Diversification
- International Dividend Achievers for diversification
- My Dividend Growth Plan - Diversification

Dividends and Stock Buybacks in the news

2009-06-08T04:30:00.000-07:00

Risk Tolerance and Smart Investing: When Fear shouldn't be a Factor

2009-06-06T04:30:00.000-07:00

This is a guest post by Carson Brackney, writer for Personal Finance Analyst. Personal Finance Analyst is an online community of bloggers dedicated to taking the mystery out of money and helping you to live a happier, more successful life with the money you have.

New Jersey's Cooperative Extension Services (operated out of Rutgers University) offer a great online quiz that will calculate your level of investment risk tolerance. If you don't like that one, you can take a look at Yahoo's free calculator. Still not happy? Merrill Lynch has their own. And there are others. Many others.

And all of the calculators attempt to do the same thing--they want to tell you how much risk you're comfortable taking in your financial planning. Obviously, that's a tough nut to crack. We don't really have a standard unit of measurement for risk, after all. So, what you end up with is a numerical score that corresponds with a few sentences describing the way the calculator believes you feel about risk and money.

Is that valuable information? For some people, it might be. There are undoubtedly a few folks out there who aren't big fans of introspection who've never considered whether they're devil-may-care or risk aversive. Those horoscope-like explanations of what the results mean might give people a slightly better sense of what their feeling really mean in some senses.

In those ways, you could consider the risk assessment tools valuable. They also have some potential value if you find that your attitudes about risk are in direct conflict with your optimal personal finance objectives (more on that later).

Even though there is some value in calculating your risk tolerance, you shouldn't fool yourself into believing this information is truly mighty. Don't make the common mistake of assuming that your comfort level should dictate your resource management.

That's right, the argument that you should only invest at a risk level compatible with your own comfort level is wrong, wrong, wrong. If you're tolerance for risk is out of whack (in either direction), you don't necessarily need to change your investment pattern. You need to adjust your attitude instead.

That argument assumes an optimized investment plan, of course. The argument is quite simple. You should be following the best possible system to reach your financial objectives. If you are using that system and your personal sense of risk tolerance runs contrary to it, you need to change your attitude, not your plan.

Not everyone agrees with that. Statements like, "Your risk tolerance should determine a suitable asset allocation that is right for you" are common. There's a belief out there that you shouldn't invest if the move makes you uncomfortable.

That's a backwards perspective, though. You should be focused on developing a plan of action that will meet your needs and objectives. If you can do that while staying in your psychological "comfort zone", that's great. If, however, it moves you into uncomfortable territory, you need to change the dimensions of that "comfort zone".

Otherwise, you're setting yourself up for a long-term failure. If you need to undertake a certain level of risk to reach your goals, anything short of that is going result in you falling short of those goals. If the plan is sound and the strategy is workable, you should be at least somewhat comfortable in knowing you're doing the right thing. If you don't feel that way, it's time to either (a) persuade yourself to start or (b) prepare to be nervous for a while.

InvestorGuide.com lays out the argument:

We need to remember that it is not only our personal risk tolerance that we want to consider, but we also want to ask ourselves, "What is the appropriate risk to take?"

Asking how you feel about something is wonderful. Letting the answer dictate your personal finance strategy, however, isn't. Instead, you should be making decisions based on your own financial interests.

If you don't have a good plan and you're living on a personal finance roller coaster, it's fine to take stock of your comfort level and to act accordingly. If you're following the kind of smart plan you need to get ahead, however, your comfort level needs to take a backseat.

Relevant Articles:

- Diversifying into small and mid cap dividend stocks
- Dividend Investing vs Trading
- My Dividend Growth Plan - Diversification
- Don’t chase High Yielding Stocks Blindly

Colgate Palmolive (CL) Dividend Stock Analysis

2009-06-05T04:30:00.000-07:00

Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. It operates in two segments, Oral, Personal, and Home Care; and Pet Nutrition. The company is a Dividend Achiever and a Champion. Colgate-Palmolive has paid uninterrupted dividends on its common stock since 1895 and increased payments to common shareholders every year for 46 years.

From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 5.90% to its shareholders. While the stock has largely remained flat for the majority of the past decade (except for the breakout in the stock price in 2007) most of the returns came from reinvested dividends.

At the same time company has managed to deliver an impressive 10.70% average annual increase in its EPS since 1999.

The ROE has consistently remained high, ranging between 57% and 475% over the past decade.

Annual dividends have increased by an average of 11.40% annually since 1999, which is slightly higher than the growth in EPS.
An 11 % growth in dividends translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1977, Colgate Palmolive has actually managed to double its dividend payment every eight years on average. Just a few weeks ago Colgate Palmolive boosted its dividend by 10% for the 46th year in a row. The dividend is very well covered at the moment.

The dividend payout has ranged between a high of 51% in 2006 and a low of 33% in 2002. One positive fact is that the payout ratio has consistently 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.

Despite the low dividend payout ratio and low P/E ratio, I require a dividend yield of at least 3% in order to initiate a position in Colgate Palmolive. Currently the yield is at 2.80%, and price earnings ratio is 17.

In comparison Procter & Gamble (PG) trades at a P/E multiple of 12 and yields 3.40%, Kimberly-Clark (KMB) trades at a P/E multiple of 13 and yields 4.70%, while Clorox (CLX) trades at a P/E multiple 14 while yielding 3.60%.
I would consider initiating a position in Colgate Palmolive on dips below $58.66.

Full Disclosure: Long PG, KMB and CLX

Get an updated Trend analysis for CL, KMB, PG and CLX.

- Kimberly-Clark (KMB) Dividend Analysis

- Procter & Gamble (PG) Dividend Stock Analysis

- Clorox (CLX) Dividend Analysis

- Abbott Labs (ABT) Dividend Stock Analysis

Replacing dividend stocks sold

2009-06-03T04:30:00.000-07:00

Dividend investors should not rely too much on the dividend income from a single stock or a single sector. In an ideal situation, in a portfolio consisting of 40 stocks, each security would have an equal weighting. In other words one shouldn’t have more than 2.5% in a single security at the end of his or her target period.

In real life however things are usually far from ideal. What could happen is that some dividend stocks would outperform the others and thus their weightings could be disproportionately large. In order to maintain the equal weights, investors have several choices besides selling the best performers and placing the proceeds in the underdogs.
One of them includes reinvesting the dividends from the stocks with the highest weights into the stocks with the lowest weights.

Another option includes adding extra funds to the stocks which have a below average weighting in your portfolio, as part of your process of regular contributions toward your portfolio.
An important thing to add is that one should not consider adding to a position, which no longer fits two or more points from your entry criteria. My entry criteria consists of several bullet points including:

1) A stock which has increased annual dividends for at least the past ten consecutive years (preferably for at least 25 years)
2) A price/earnings ratio of under 20
3) A dividend payout ratio of less than 50%. In certain cases such as Master Limited Partnerships, Utilities or Real Estate Investment Trusts, which distribute the majority of their earnings to stockholders, compare the current payout ratio to the historical one.
4) A dividend yield, which at least matches the dividend yield on the S&P 500. This criterion used to be a 2% initial yield for the majority of 2008, until yields on the S&P 500 rose to the highest levels since the early 1990’s. Currently I prefer to invest in stocks with a current dividend yield of at least 3%.

For example, if you have a position in M&T Bank (MTB), you would be receiving a quarterly dividend of $0.70/share. M&T Bank last raised its dividends in July 2007. Unless the bank raises its dividends by the end of 2009, it would lose its dividend aristocrat status.
Because of the unchanged dividend, I stopped re-investing dividends in the stock by the end of 2008. I also stopped adding to this position as well. The dividend payout is slightly above 50%, while the P/E and the yield are pretty attractive at 12.7 times earnings and 6%. Another thing that concerns me about M&T Bank is that it took $600 million in TARP money back in December 2008. My experience with other banks, which received TARP money, such as Bank of America (BAC), US Bancorp (USB), Wells Fargo (WFC) and BB&T (BBT), is that TARP receivers are very likely to cut their dividends.

Since I have started reinvesting my MTB dividends into other companies I own, my allocation in the stock has dropped to about 1.7% of my total portfolio value. This position contributes about 2.20% of my total annual dividend income. My yield on cost is 4%. If the dividend were cut while the stock was trading at $46 however, I would sell the stock.

The question now is what should I do with the money I received from the sale. My dividend income would be lowered, and I would now have $46 to invest, which is lower than my average cost of $69/share. In order to maintain my dividend income of $2.80/share, I would have to purchase $46 worth of shares in a dividend stock, which currently yields at least 6%. In the current market it is possible to find a solid dividend stock, which yields at least 6%. One example that comes to mind is Consolidated Edison (ED). Another is Kinder Morgan Partners (KMP). It is important to try and keep sector weights as well however.

On the other hand I could simply accept that my dividend income for this portion of my portfolio would be lower and simply invest in a promising candidate such as Johnson & Johnson (JNJ) or Abbott (ABT). It is more important to have a diversified stream of dividend income, rather than chase the highest yielding stocks when replacing dividend stocks sold in an effort to maintain your previous levels of dividend income. Check my example with General Electric (GE) for more clarification.

Back in February 2009, General Electric (GE), which was one of my favorites until the end of 2008 announced its intention to cut its quarterly dividends to the lowest levels since 1997. I immediately sold my position at a loss for $8.63/share. My cost basis was $28.97/share. My dividend income was $1.24/share, while my yield on cost was 4.30 %. The new dividend would have been $0.40/share, which makes up for a yield on cost of only 1.40%, much worse than rates on Certificates of Deposit. Even though I had stopped contributing to my GE position by the beginning of the fourth quarter 2008,GE made up about 1.00% of my portfolio value. This position also contributed about 3% of my total annual dividend income. Thus, in order for me to generate $1.24 in dividend income for every GE share that I sold, I would need to purchase a stock yielding 14.40%. In the current market, most stocks that pay such a high current dividend are very likely to cut their distributions. Thus, maintaining the dividend income just for this portion of my dividend portfolio was not worth the risk of chasing the highest yielding stocks. Instead I purchased shares in Abbott Labs (ABT), which generate almost the same income that I would have received had I not sold my GE shares. While in retrospect my sale of GE stock seems foolish as the shares have risen almost 50% since then, I do not see the same potential for dividend growth that I see for Abbott (ABT). With Abbott (ABT) I see the potential for stable dividend growth, fueled by its strong new product pipeline and the potential for initiatives in the medical device and pharmaceuticals fields. In retrospect I could have added to my position in Kinder Morgan instead, but this could have lead to me being overweight the largest master limited partnership in the US, which is something I try to avoid.

My overall dividend income is up almost 3% year to date, after several reliable companies such as Johnson & Johnson (JNJ), Procter and Gamble (PG) and Coca Cola (KO) continued their long history of sharing prosperity with shareholders through regular annual dividend increases.

Dividend investors who are trying to replace the lost dividend income from stocks, which cut or eliminated their dividends, should realize that it is important to diversify the number of holdings that generate income for them. While a dividend cut or elimination from a stock that generated 3% of your portfolio income hurts, one should keep an eye on the big picture and not repeat their mistakes. It is the diversified income stream that counts and not replacing dividend stocks sold with the highest yielding stocks matter, which would certainly increase risk. At the end of the day, the dividend cutter has already compromised your dividend income. Taking on a higher risk only leads to a vicious circle of not focusing on dividend growth potential, but on chasing the highest yielders, which is a game of wealth destruction.

Relevant Articles:

- Abbott Labs (ABT) Dividend Stock Analysis
- Dividend Cuts - the worst nightmare for dividend investors
- When to sell my dividend stocks?
- More Dividend Stocks to Avoid

General Motors (GM) bankruptcy trade

2009-06-01T05:04:00.000-07:00

With General Motors expected to file for bankruptcy soon, GM stock price has been in a freefall. In fact shares have hit the lowest levels since 1932, which was the year Dow Jones Industrials Average bottomed amidst the Great Depression. The stock price is also below $1, making shorting the stock almost impossible. Bankruptcy was one of the options for the major US automakers, when I analyzed the sector back in November.
According to this Bloomberg article, once the company files for bankruptcy , the US government would get $30 billion from the US federal government as well as 9.5 billion from the Canadian government. In return the US government would own 60% of the “new” General Motors once it emerges from bankruptcy, while the Canadian government would own 12%. The United Auto Workers health trust fund for retirees will end up owning 17.5 percent of the new company with warrants to purchase an additional 2.5 percent in exchange for forgiving GM the $20 billion it is owed by the Detroit automaker. Bondholders and other creditors would get a 10 percent stake in the new GM, with warrants for an additional 15 percent, in exchange for $27.1 billion unsecured debt according to Bloomberg. If successful, GM will emerge as a leaner company with a smaller work force, fewer plants and a trimmed dealership network.
Shareholders would most likely get wiped out, with their shares being worthless once GM emerges from bankruptcy.
So how can you play the GM bankruptcy and potentially make money in the process? First, If you hold GM stock, I wouldn’t hope for the company rising to $10 anytime soon, so I would consider selling. Otherwise the answer is pretty simple: play it with options.
If you buy puts on GM, and the stock does become worthless you would end up making a nice gain in the process. Options are contracts which give the right but not the obligation to buy ( call) or sell (puts) a security on a given date ( expiration date) at a given price (strike price). In GM’s scenario, a bearish investor would consider purchasing puts on the stock.
I would consider GM puts with a strike price of $1 for this trade. The June 2009 $1 puts closed at $0.60;July 2009 $1 puts closed at 0.67 , while September and December $1 puts closed at $.71 and $.75 respectively.
The far out puts such as the September and December 2009 ones are much more likely to yield any significant profits, since this leaves investors ample time for the company to go bankrupt.
This is a highly speculative trade that shouldn’t be entered with more than 0.5% of your total portfolio.

Full Disclosure: None ( But I am looking to open a position in Sep or Dec 2009 $1 puts).

Relevant Articles:

- The future for US Auto Stocks
- GM Bankruptcy Filing Will Bring Taxpayer Ownership, Less Debt
- General Motors (GM) bankruptcy trade

Dividend Investors Running With the bulls

2009-06-01T04:30:00.000-07:00

The stock market index S&P 500 has risen by 37.8% from its lows in early march. The S&P 500 is also almost 1.80% higher since the beginning of 2009. Investors are now being bombarded with conflicting advice from both from the bullish and the bearish camp. The bears claim that the rally overextended and due for a sharp correction once S&P 500 falls below 878. The bulls believe that bears are in for a surprise once S&P 500 breaks out through the resistance above 930 and the next leg of the new bull market begins.

Dividend Investors on the other hand represent a camp of their own. They keep receiving their dividend checks, holding on to the dividend growers and disposing of their dividend cutters and eliminators. Dividend Investors are quietly re-investing their distributions into more shares and are watching their income grow in the process. It doesn’t matter to them if the S&P 500 is at 1500 or at 700 as long as the dividends are being paid, and most importantly dividends are not being cut, which shouldn’t be a problem for most diversified dividend growth portfolios.

Several companies rewarded their patient investors with dividend raises.

SUPERVALU INC. (SVU), which operates combination stores, food stores, and limited assortment food stores, increased its quarterly dividend by 1.45% to 17.5 cents per share. In addition to that the company announced a program authorizing it to purchase up to $70 million of the company's common stock. SUPERVALU INC. is a dividend aristocrat, which has increased its quarterly dividend in each of the past thirty-six years. The stock currently yields 4.30%.

Lowe's Companies, Inc. (LOW), which operates as a home improvement retailer in the United States and Canada, approved a 5.9% boost in its quarterly dividends to 9 cents/share. Lowe's Companies, Inc. is a dividend aristocrat, which has increased its quarterly dividend in each of the past forty-seven years. The stock currently yields 1.80%.

The H. J. Heinz Company (HNZ), which engages in the manufacture and marketing of food products for consumers, and foodservice and institutional customers, raised its quarterly dividend from 41.5 to 42 cents per share. The H. J. Heinz Company had been a member of the S&P dividend aristocrats index between 1990 and 2002, before it cut its distributions in 2003. The company has resumed increasing its dividends to shareholders since 2004.
The stock currently yields 4.60%.

PPD, Inc. (PPDI), a contract research organization, that provides drug discovery and development services, post-approval expertise, and compound partnering programs, increased its annual dividend payments by 20% to 60 cents per share. PPD, Inc. has consistently increased its quarterly dividends since 2006. The stock currently yields 3.00%.

Monro Muffler Brake, Inc. (MNRO), which provides automotive undercar repair and tire services, increased its quarterly dividend by 16.70% to 7 cents per share. Monro Muffler Brake, Inc. started raising dividends regularly since it initiated its dividend policy in 2005. The stock currently yields 0.90%.

Fred's, Inc. (FRED), which sells general merchandise through retail discount stores and pharmacies, increased its quarterly dividend by 50% to 3 cents per share. Fred's, Inc. doesn’t have a history of regular dividend increases. The stock currently yields 0.90%.

Flowers Foods' (FLO), which engages in the production and marketing of bakery products in the United States, raised its quarterly dividend by 17% to 17.50 cents per share. Flowers Foods has increased its quarterly dividend in each of the past 7 years. The stock currently yields 2.90%.

Full Disclosure: None

- When to sell my dividend stocks?

- Should you re-invest your dividends?

- Dividend Investing vs Trading

- MLPs for tax-deferred accounts

MLPs for tax-deferred accounts

2009-05-29T04:30:00.000-07:00

Master Limited Partnerships are very good investment vehicles for individuals looking for high current dividend income. There are some tax issues with reporting MLP income in a taxable account, which led me to explore investing in MLPs through an IRA or ROTH IRA account.
In a taxable account, most of the distributions are considered a return of capital, and thus you do not pay taxes on that portion. This tax deferral does decrease your cost basis however, which could mean higher capital gains or ordinary income taxes if you sell. Because of the supposedly complicated tax returns from MLPs, some investors are shunning MLPs as a class althogether. Others are considering simply purchasing those MLPs in a tax advantaged account, and forget about them.
For non-taxable accounts however, there is a gray area from a tax perspective whether or not one could hold MLPs there. The distributions that an individual that holds a master limited partnership in an individual retirement account receives could be considered unrelated business taxable income subject to taxation. As long as the UBTI from all MLPs in an IRA does not exceed $1000 in a given year, your partnership distributions won’t be taxed.
If the UBTI does exceed $1000 however, the custodian that holds your IRA would have to file a form 990T to the IRS. The tax is paid out of the IRA on the net income from your MLP distributions, which are taxed at the corporate rate.
The UBTI has generally been a non-issue for most MLPs over the past few years, but this isn’t guaranteed. Some like Kinder Morgan (KMP) have even had a negative UBTI in some years, which could be offset against any positive UBTI amounts from other MLPs. Kinder Morgan is one of my Best High Yielding Stocks for 2009.
I do believe however that paying a small tax out of your MLP distributions in an IRA shouldn’t be a big hassle, since distributions are rich and taxed at the corporate rate. One should check with their IRA custodian however in order to asses the amount of fees that the IRA has to pay if the UBTI threshold is exceeded.
If you do not feel comfortable putting ordinary master limited partnerships in a tax-deferred account but feel that you might be missing out, there are still workarounds for this situation. There is an easy way to invest in two MLPs without worrying about taxes too much – Kinder Morgan (KMP) and Enbridge Energy Partners (EEP). They pay their distributions directly as additional shares, which is similar to automatic dividend reinvestment. If you choose to invest in KMP or EEP in an IRA, consider investing in KMR and EEQ.
KMR and EEQ are great vehicles for taxable accounts as well since their distributions are not taxable when received, and thus shareholders are not issued an annual 1099 tax form. You would pay taxes only when you sell your units.
The taxation characteristics of your investments are just one part of the investment puzzle. Always make sure to investigate the company’s fundamentals and do your homework before investing in stocks.

Several publicly traded closed end funds such as Tortoise Energy Infrastructure Corporation (TYG), Tortoise Energy Capital (TYY), Tortoise North American Energy Corp. (TYN), and Kayne Anderson MLP Investment Company (KYN) provide a proper diversification within the MLP sector. They are suitable for IRAs since they send out Form 1099-DIV instead of K-1, which also makes it easier for investors with taxable accounts to file their annual tax returns. In most cases the dividends received are treated as a return of capital, which reduces your cost basis. In such cases the distributions are not treated as taxable income. Investors would only have a tax liability when they sell their closed end fund.
These closed end funds also do not generate any unrelated business taxable income (UBTI). The main disadvantage of these closed end funds are their steep annual management fees.

Tortoise Energy Infrastructure Corporation (TYG) has an annual management fee of 0.95% plus a 0.19% charge for other expenses for a total annual expense ratio of 1.14%.Tortoise Energy Capital (TYY) has an annual management fee of 0.95% plus a 0.25% charge for other expenses for a total annual expense ratio of 1.20%.Tortoise North American Energy Corp. (TYN) has an annual management fee of 1.00% plus a 0.71% charge for other expenses for a total annual expense ratio of 1.71%.

Kayne Anderson MLP Investment company (KYN) spots an annual management fee of 2.50% in addition to other fees of 3.40% for a total expense of 5.90%.
Because of high expense ratios, I would think twice before investing in those closed end funds. One thing that is certain in the investment world is that higher fees are not necessarily indicative of superior investment performance. If you cut your costs to the bone, you are much more likely to at least track your index benchmark.

Full Disclosure: Long KMR

Get an updated Trend analysis for KMP and EEP.

Relevant Articles:

- Master Limited Partnerships (MLPs) – an island of stabiliity for dividend investors
- Kinder Morgan Energy Partners (KMP) Dividend Analysis
- Best High Yield Dividend Stocks for 2009
- General vs Limited Partners in MLP's

Diversifying into small and mid cap dividend stocks

2009-05-27T04:30:00.000-07:00

As a dividend growth investor, my goal is to generate a rising stream of dividend income. Thus I would have to be selective not only about picking individual stocks, but also about selecting companies from a variety of industries, countries and size, in order to avoid a widespread implosion in overall dividend income.

An investor who diversified their holdings across several sectors, shouldn’t have gotten as many dividend cuts in 2008 and 2009, in comparison to an investor whose portfolio was concentrated in certain high-yielding sectors such as financials, Canadian income trusts or business development corporations. In that case diversification mattered.
One troubling fact however is that most of the successful dividend growth stocks that I tend to focus on such as Coca Cola (KO), Johnson & Johnson (JNJ) and Abbott Labs (ABT) are large cap stocks. This could be both good and bad for my portfolio. Most dividend growth stocks have solid competitive advantages as well as large economies of scale, against which few competitors could compete. In addition to that the entry in those markets might be too costly for a smaller producer to challenge the “big guys”. However if I added small or mid cap stocks to my portfolio, my dividend income could be diversified even further.

According to Investopedia, Large Cap stocks are those whose market capitalization is above $10 billions dollars; Mid Cap stocks are those whose market capitalization is between $2 billion and $10 billion dollars while companies whose market capitalization is between $200 million and $2 billion typically represent Small Cap Stocks.
Most large cap companies are the ones, which are mature and stable cash flow generators, which throw off enough cash to expand, reward shareholders and maintain liquidity. It would be difficult for a company with $100 billion in sales to expand at the rate that a company with $1 billion in sales could. Because of this fact stable dividend growth stocks tend to enjoy a lower price earnings multiple. In comparison, most small and mid cap stocks could spend most of their earnings to reinvest back into the business, thus paying little or no dividends to shareholders in the process.
A potential negative for holding the large cap market leader in any industry however is that if the activity in the whole sector declines significantly, chances are that the leader would feel the pinch as well. Despite the fact that the market leader could likely gain market share if competitors go bankrupt or by acquiring weaker rivals, a broad slowdown could hurt it badly.

At the same time a smaller competitor could be flexible enough to gain market share by utilizing some sort of a competitive advantage and actually achieve superior earnings growth and reward dividend investors with higher distributions as its sales skyrocket. Smaller dividend growth companies could have a higher price earnings multiple as the market prices in solid future growth. On the other hand, if earnings growth slows down, the price earnings multiple could shrink, leaving investors with large unrealized losses.
Even if you pick a promising small or mid cap dividend growth stock, chances are it could get acquired by one of the leaders in the industry. Thus, investors won’t be able to fully realize the full growth potential of the small dividend stock. Although shareholders could generate a large capital gain in the process, they would have to find a new promising candidate for their money instead of patiently reinvesting their dividends.

According to Mergent’s, 80% of the constituents of the Broad US Dividend Achievers index are large cap companies, while 14.10% and 5.90% are mid cap and small cap stocks respectively. The Dividend Achievers are corporations, which have increased annual dividends for at least the past 10 consecutive years.
The Dividend Aristocrats, which are S&P 500 constituent stocks with history of increased dividends of more than 25 consecutive years, must have a minimum capitalization of $3 billion dollars before they are eligible to join the elite dividend index. Of the 43 companies presently in the index (after omitting the dividend cutters year-to-date and Rohm & Haas, acquired by Dow Chemical), 21 or almost half have market capitalizations of less than $10 billion dollars.
You could find a list of mid cap Dividend Aristocrats below:

Link to the table
Just remember that not all of the stocks presented below are investment recommendations. At this moment only Stanley works (SWK),Cincinnati Financial (CINF), Dover (DOV), VF Corp(VFC), Sherwin Williams (SHW), Clorox (CLX), Consolidated Edison (ED) and McGraw Hill (MHP) fit my entry criteria to initiate positions or re-invest dividends.

For a full list of the current dividend aristocrats ranked by market capitalization (minus any acquired companies and minus any dividend cutters in 2009), check the chart below:
Link to the table

Full Disclosure: Long CINF, FDO, MTB, GWW, SHW, CLX, ED, MHP, APD, AFL, ADM, ADP, KMB, EMR, MMM, MCD, PEP, KO, JNJ, PG, WMT

Get an updated Trend analysis for your stocks.

This post was featured on The 208th Carnival of Personal Finance: Lobster Roll Edition

Relevant Articles:

- My Dividend Growth Plan - Diversification
- Why do I like Dividend Achievers
- Why do I like Dividend Aristocrats?
- My Dividend Growth Plan - Stock Selection