When to break your rules

As a dividend growth investor, my strategy is picking the right stocks that provide a decent balance between dividend yield and distribution growth. Thus I have maintained a rigid requirement for a 3% initial yield before investing in a dividend growth company’s securities.
Most dividend investors look for yield when purchasing income securities. Most dividend growth investors purchase securities so that they could enjoy a rising stream of dividend payments over time. Thus, maintaining a proper balance could be a challenge that could make or break your portfolio.

I realize that using a strict yield criteria I could miss out on potential dividend growth stories such as Wal-Mart (WMT) for example. Wal-Mart has never yielded 3% since it went public in the 1970s. The 29.1% annual dividend growth since 1975 has been truly spectacular however. This means that Wal-Mart’s dividend has doubled every 2.5 years for 34 consecutive years. Wal-Mart has delivered a 23.40% dividend growth since 1985 and a 20.20% dividend growth since 1995. Check my analysis of Wal-Mart.

My rationale behind selecting a minimum yield is to provide me with an adequate margin of safety should the stock stop raising dividends and should the stock price fall or remain flat for a large period of time. In the case of Wal-Mart, the stock has been trading in a range over the past decade. Back in 1999 the stock fluctuated between $70.25 and $38.68 and closed at $69.12. The stock wasn’t yielding much back then – about 0.30%. Even if the dividend were doubling every 2.5 years, it would take a retiree almost 13 years in order to reach a yield on cost of 10%. At the current dividend rate, the stock is actually yielding 1.60% on cost, assuming that you purchased it on the last day of 1999. The actual dividend growth over the past decade comes down to 20.80% per annum, which translates into the dividend payment actually doubling every three and a half years.

Now the down side to my having a strict initial yield requirement for entry is that I would miss out on some huge gains, which could lead to early financial freedom. If one had purchased Wal-Mart stock at the end of 1984, the tenth year in a row in which it increased its dividends, their entry price would have been $1.18 (adjusted for five stock splits) and their initial yield would have been only 0.55% at the time. Fast-forward 25 years and the yield on cost comes out to almost 100%.

Many dividend growth investors tend to project past dividend growth rates into infinity, which seems unsustainable to me. If a company with $1 billion in profits enjoyed a 15% annual growth forever, it would double its net income almost every five years. In reality, as the companies grow larger they would find less opportunities that could sustainably earn them higher incremental returns on investment. For example, with a company like McDonald’s (MCD) people could only eat so much burgers and fries. After a company hits a plateau, EPS growth could largely be sustained by increasing efficiencies, raising prices, repurchasingshares or buying other competitors.

This analysis is not meant to be used as a weapon against Wal-Mart or McDonald’s, which are fine companies. It just goes to show that once shouldn’t solely rely on past data in their investment decisions. Furthermore, projecting past data into the future, without adding a what if analysis of your common sense could prove costly in the long run. In addition, purchasing stocks solely for the dividend growth is as dangerous as chasing high yielding stocks blindly.

As far as my strategy is concerned, I am considering lowering the entry yield criteria to 2% for stocks, which appear to have a sustainable above average dividend growth ahead of them. My target allocation for such stocks would be half of what I would normally allocate to such dividend growth champions such asJohnson & Johnson (JNJ) or Procter & Gamble (PG) however.

Eight stocks with positive dividend momentum

A body in motion tends to stay in motion unless acted on by an outside force. The following dividendpayers kept the dividend momentum coming, by raising distributions to shareholders. What is particularly interesting is the fact that most of them have raised distributions consistently for more than one or two decades each. This is essentially what successful dividend growth investing is all about – finding a dividend grower in the early stages that keeps paying increasing amounts of dividends each and every year for years to come.

The companies which raised distributions include:

McCormick & Company (MKC), which engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide, increased its quarterly dividend by 8.30% to 26 cents per share. McCormick & Company is a dividend achiever, which has increased its quarterly dividend in each of the past twenty three years. The stock currently yields 2.60%.

The York Water Company (YORW), which engages in impounding, purifying, and distributing drinking water in Pennsylvania, increased its quarterly dividend by 1.60% to 12.80 cents per share. This marked the thirteenth consecutive year that this dividend achiever has raised its distributions. The stock currently yields 3.40%.

Hormel Foods Corp. (HRL), which engages in the production and marketing of various meat and food products in the United States and internationally, increased its quarterly dividend by 15% to 21 cents per share. Hormel Foods Corp. is a dividend champion, which has increased its quarterly dividend in each of the past forty-four years. The stock currently yields 2.00%.

Becton, Dickinson and Company (BDX), a medical technology company, which develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products worldwide, increased its quarterly dividend by 12.10% to 37 cents per share. Becton, Dickinson and Company is a dividend aristocrat, which has increased its quarterly dividend in each of the past thirty-seven years. The stock currently yields 1.70%.

United Bankshares, Inc. (UBSI), which provides commercial and retail banking services and products, increased its quarterly dividend by 3.4% to 30 cents per share. This marked the 36th consecutive year of dividend increases to United shareholders. The stock currently yields 6.70%.

Roper Industries, Inc. (ROP), which engages in designing, manufacturing, and distributing energy systems and controls, scientific and industrial imaging products and software, industrial technology products, and radio frequency products and services, raised its quarterly dividend by 15% to 9.5 cents per share. This is the seventeenth consecutive year of dividend increases for this dividend achiever. The stock currently yields 0.60%.

Oritani Financial Corp. (ORIT), which provides banking services to individual and business customers in New Jersey, increased its quarterly dividend by 50% to 7.5 cents per share. The stock currently yields 2.30%.

RGC Resources, Inc. (RGCO), which operates as an energy services company, increased its quarterly dividend by 3% to 33 cents per share. RGC Resources, Inc. has increased its quarterly dividend in each of the past five years. The stock currently yields 4.70%.

This list is only a starting point in the process of weeding out companies in the pursuit of identifying promising candidates however. As the market has gone ahead of itself in recent months, a wise move might be to wait for weakness in the broad averages before initiating a position in any of the above names, after researching them thoroughly.

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Sherwin-Williams (SHW) Dividend Stock Analysis

The Sherwin-Williams Company engages in the development, manufacture, distribution, and sale of paints, coatings, and related products. It operates in three segments: Paint Stores Group, Consumer Group, and Global Finishes Group. The company, which has raised dividends for 31 consecutive years, is a member of the S&P Dividend Aristocrats index. Back in February 2009 Sherwin-Williams announced a 1.40% dividend increase.

Over the past decade this dividend growth stock has delivered an average total return of 5.70% annually. Sherwin-Williams’ stock price is currently trading almost 20% lower from its all-time highs set in 2007.

The company has managed to deliver a 9.30% average annual increase in its EPS between 1999 and 2008. Sherwin-Williams is expected to earn $3.60 share in FY 2009, followed by $4.10/share in FY 2010. Despite the housing crisis, and expectations of 10% declines in sales for Sherwin-Williams, homeowners would still need to use paint in order to freshen the look of their houses. Home renovation and remodelingprojects could be a driver for growth even in a slow economy. Residences are typically the largest investment for homeowners, who tend to spend regularly on maintenance and improvement projects in order to increase their values.
I believe that the company has a strong cash flow generation ability, which should serve it well in the longer term. Strategic acquisitions could add to growth, as could new store openings abroad.

The Return on Equity has generally trended upwards, and has stayed above 20% over the past 7 years. 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 12.60% annually since 1999, which is higher than the growth in EPS. The company has also managed to decrease the number of dillluted shares outstanding from 168 million in 1999 to 117 million in 2008 through share repurchases. In 2008, the Sherwin-Williams purchased 7.25 million shares of its common stock in the open market, and continued its policy of paying out approximately 30% of the previous year’s diluted net income per share in the form of a cash dividend.
A 12 % growth in dividends translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1989, Sherwin-Williams has actually managed to double its dividendpayment every seven years on average.


The dividend payout ratio has largely remained under 40% over the past decade, with the exception of 2000. 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 Sherwin-Williams is trading at 16.70 times earnings, yields 2.40% and has an adequately covered dividend payment. I would be looking forward to adding to my position in Sherwin-Williams (SHW) on dips below $48.

Altria Group's 6% Dividend Hike

When companies decide to share a portion of their earnings with their shareholders, it is a sign of prudent fiscal discipline. Shareholders who are rewarded on a timely basis in the form of dividend payments are less likely to sell their holdings, even during a steep market correction. However, when companies decide to raise their distributions they exert strong confidence in their near-term performance. This dividend increase is a strong bullish signal especially if it comes after a long string of consecutive dividend increases.

Several companies announced that their boards of directors have approved dividend increases. The companies include:

Altria Group, Inc. (MO), which engages in the manufacture and sale of cigarettes and other tobacco products in the United States, increased its quarterly dividend by 6.3% to 34 cents per share. The stock currently yields 7.50%. Check my analysis of the stock.

MGE Energy, Inc. (MGEE), which engages in generating, purchasing, transmitting, and distributing electricity, increased its quarterly dividend by 8% to 14 cents per share. MGE Energy, Inc. is a dividend achiever, which has increased its quarterly dividend for 34 consecutive years. The stock currently yields 3.90%.

HCC Insurance Holdings, Inc. (HCC), which provides property and casualty, surety, group life, accident, and health insurance coverage, as well as related agency and reinsurance brokerage services to commercial customers and individuals., increased its quarterly dividend by 8% to 13.50 cents per share. HCC Insurance Holdings, Inc. is a dividend achiever, which has increased its quarterly dividend in each of the past thirteen years. The stock currently yields 1.90%.

Delta Natural Gas Company, Inc. (DGAS), which sells and distributes or transports natural gas to customers in central and southeastern Kentucky., increased its quarterly dividend by 1.6% to 32.50 cents per share. The company has raised dividends consistently since 2005. The stock currently yields 5.20%.

G&K Services, Inc. (GKSR), which provides branded identity apparel and facility services programs in North America., increased its quarterly dividend by 7% to 7.5 cents per share The stock currently yields only 1.30%.

Alliance Financial Corporation (ALNC), which which provides various banking products and services to commercial, retail, government, and investment management customers, increased its quarterly dividend by 7.7% to 28 cents per share. The stock currently yields 4.00%.

Guess?, Inc. (GES), which designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children., increased its quarterly dividend by 25% to 12.5 cents per share. The stock currently yields 1.40%.

ESSA Bancorp, Inc. (ESSA), which provides financial services to individuals, families, and businesses in Pennsylvania, increased its quarterly dividend by 25% to 5 cents per share. The stock currently yields only 1.20%.

Harris Corporation (HRS), which operates as a communications and information technology company that serves government and commercial markets worldwide, increased its quarterly dividend by 10% to 22 cents per share. The stock currently yields 1.90%.

In summary I view Altria's dividend increase as a bullish sign for the company stock. The company seems to be following its policy of consistent dividend increases that it used to follow before the spin-offs of Philip Morris International (PM) and Kraft Foods (KFT) I do however also own some Philip Morris Internationalin order to benefit from international exposure to the tobacco sector.