Investors, who want to be treated as owners of a business, should focus on buying and holding onto solid businesses that throw excess cash every year, while still growing at a decent pace. Investing in stocksshould not be any different than investing in a business. Purchasing quality stocks with stability in earnings that can pay rising distributions, while also growing the business, will result in a positive return on investment during any market condition or economic cycle. Companies which consistently are able to generate rising incomes in order to support a consistent dividend growth are rare gems, yet they sell products or services that most consumers and businesses use fairly often.
Three companies which have raised distributions for over five years in a row and which raised distributions last week include:
Universal Corporation (UVV), together with its subsidiaries, operates as the leaf tobacco merchants and processors worldwide. The company raised its quarterly dividend by 2.10% to 48 cents/share. Thisdividend champion has consistently raised dividends for 40 years in a row. Yield: 4.40% (analysis)
Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology, as well as delivering engineering services and solutions to various industrial, commercial, and consumer markets worldwide. The company raised its dividends by 3% to 34.50 cents/share. Emerson is a member of the dividend aristocrats index, and has consistently raised dividends for 54 years in a row. Yield: 2.40% (analysis)
Aaron’s, Inc. (AAN) operates as a specialty retailer of consumer electronics, computers, residential and office furniture, household appliances, and accessories in the United States and Canada. The company raised its quarterly dividend by 8.30% to 1.30 cents/share. Aaron’s has regularly raised dividends since 2003. Yield: 0.30%
Of the three companies listed above, I view only Universal (UVV) as a buy candidate at current prices. The company not only has an above average dividend yield, but also has a sustainable dividend payout ratio. Emerson Electric (EMR) on the other hand has slowed down on distributions increases in the past few years, as it was hit by the recession. In addition to that it is yielding less than my minimum yield requirement of 2.50%. The problem with Aaron’s (AAN) is also its very low yield, caused by its low payout ratio.
Full Disclosure: Long UVV and EMR
Thursday, November 18, 2010
Saturday, November 13, 2010
My portfolio manager - SUSHIL FINANCE
Sushil Finance, how much I owe my success to these guys. They are simply marvelous. Their customer service, expertise, market research is simply appalling. I approached them a couple of years ago and they have been handling my finances ever since. If there is any such company who can’t sort out the worst of your situations, it has to be Sushil Finance.
If you’re interested in for a trading option and are in a lookout for something other than traditional stocks and bonds, then derivatives trading are the best option for you. Derivatives trading can offer you lesser risks, variety, flexibility, and they can be this really brilliant short term investment tool you’re looking for. And all of this can be best explained by Sushil Finance.
Like I said before all of my financial investments and trading are handled by Sushil Finance and they have advised me about my prospects in derivatives trading. Superbly, they have been of great help to me and my company.
If you’re interested in for a trading option and are in a lookout for something other than traditional stocks and bonds, then derivatives trading are the best option for you. Derivatives trading can offer you lesser risks, variety, flexibility, and they can be this really brilliant short term investment tool you’re looking for. And all of this can be best explained by Sushil Finance.
Like I said before all of my financial investments and trading are handled by Sushil Finance and they have advised me about my prospects in derivatives trading. Superbly, they have been of great help to me and my company.
Wednesday, October 27, 2010
Dividend Stocks for the next decade and beyond
Some of the best dividend stocks in the world are characterized by strong competitive advantages, which have allowed them to charge premium prices for their recognizable brands, which in turn have translated into rising profits. Most of those companies are also characterized by high returns on invested capital, which means that they generate more capital than they could successfully reinvest back into the business and still retain their high returns. As a result these companies manage to provide an ever increasing stream of dividend income to their long-term shareholders. While stock prices move higher during bubbles and lower during recessions, investors keep getting paid for holding their stocks. In fact, because dividends keep getting increased, some early investors in companies such as Abbott (ABT) have managed to generate mind-boggling yields on cost of their original investments. These early investors understood very well that a dividend payment should not come at the expense of growing the business and vice versa. While their stocks have typically been characterized by yields similar to those of the market, their dividend growth component has more than paid back for itself.
While dividend growth investing has been hugely successful for many investors, it is very important to understand that it could be profitable for future investors as well. The stocks which have had long histories of rising dividend payments are frequently found in such lists as the S&P Dividend Aristocrats or Mergents’ Dividend Achievers. These stocks are a strong example of newton’s law of physics that a body in motion keeps getting in moition.
The following six stocks have not only delivered consistent annual dividend increases to shareholders, but also above average capital gains over the past decade as well. The companies include:
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 48 consecutive years. Over the past decade, the company has managed to increase dividends by 13.50% annually. Yield: 3.40% (analysis)
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 38 consecutive years. Over the past decade, the company has managed to increase dividends by 9% annually. Yield: 3.40% (analysis)
McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 34 consecutive years. Over the past decade, the company has managed to increase dividends by 26.50% annually. Yield: 3.20% (analysis)
The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company is one of the most respected dividend aristocrats, and has consistently increased dividends for 54 years ina row. Over the past decade, the company has managed to increase dividends by 10.70% annually. Yield: 3% (analysis)
Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. This dividend champion has increased distributions for 40 years in a row. Over the past decade, the company has managed to increase dividends by 17% annually. Yield: 3.40% (analysis)
Chevron Corporation (CVX) operates as an integrated energy company worldwide. This dividend achiever has consistently raised distributions for 23 years in a row. Over the past decade, the company has managed to increase dividends by 8.30% annually. Yield: 3.40% (analysis)
The companies mentioned above are just a few of the best dividend stocks that could be found today. In order to be successful in dividend investing, one has to not only pay the right price for the right company, but also build a diversified income portfolio.
While dividend growth investing has been hugely successful for many investors, it is very important to understand that it could be profitable for future investors as well. The stocks which have had long histories of rising dividend payments are frequently found in such lists as the S&P Dividend Aristocrats or Mergents’ Dividend Achievers. These stocks are a strong example of newton’s law of physics that a body in motion keeps getting in moition.
The following six stocks have not only delivered consistent annual dividend increases to shareholders, but also above average capital gains over the past decade as well. The companies include:
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 48 consecutive years. Over the past decade, the company has managed to increase dividends by 13.50% annually. Yield: 3.40% (analysis)
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 38 consecutive years. Over the past decade, the company has managed to increase dividends by 9% annually. Yield: 3.40% (analysis)
McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 34 consecutive years. Over the past decade, the company has managed to increase dividends by 26.50% annually. Yield: 3.20% (analysis)
The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company is one of the most respected dividend aristocrats, and has consistently increased dividends for 54 years ina row. Over the past decade, the company has managed to increase dividends by 10.70% annually. Yield: 3% (analysis)
Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. This dividend champion has increased distributions for 40 years in a row. Over the past decade, the company has managed to increase dividends by 17% annually. Yield: 3.40% (analysis)
Chevron Corporation (CVX) operates as an integrated energy company worldwide. This dividend achiever has consistently raised distributions for 23 years in a row. Over the past decade, the company has managed to increase dividends by 8.30% annually. Yield: 3.40% (analysis)
The companies mentioned above are just a few of the best dividend stocks that could be found today. In order to be successful in dividend investing, one has to not only pay the right price for the right company, but also build a diversified income portfolio.
Wednesday, September 29, 2010
Another reason for companies to pay dividends
I am a firm believer that companies that pay dividends by default represent an elite group of sound enterprises which should comprise an investor’s watchlist for further research. The second criterion should be focusing on fundamentals in order to determine whether the company could afford to not only generate enough cash to grow and maintain its business, but also to be able to distribute any excess to shareholders in the form of dividends. The third criterion that I use is that the company has been able to grow distributions for at least ten consecutive years. These criteria pretty much decrease the list of eligible dividend stocks to less than 300.
Nonbelievers of dividend investing often claim that only poorly managed companies or companies which are in decline tend to pay dividends. This group of investors often is under the false belief that a company will be able to reinvest all of its earnings back into the business, while achieving high incremental returns on investment. The problem with this strategy is that in the real world of corporate governance, it is extremely difficult for companies to reinvest all of their earnings back into the business and still maintain high profitability on any excess reinvested dollars. This is because of constraints in the utilization of these assets, management’s desire to build an empire at all costs, expensive acquisitions, bad timing of capital allocations and simply because not all investments are guaranteed to earn a profit. Warren Buffett is often cited as the type of manager who has been able to allocate funds to profitable ventures, and thus has avoided paying dividends to shareholders of Berkshire Hathaway. The only issue with this analogy is that unfortunately few CEO’s have the business acumen of the Oracle of Omaha who built a small struggling textile mill into a diversified conglomerate with a market cap of over $200 billion.
The main issue with the Warren Buffett analogy however is that while he doesn’t like paying dividends to Berkshire Hathaway (BRK.B) shareholders he does enjoy investing in companies that pay dividends. Some of the top holdings of Berkshire Hathaway pay over $1.5 billion in dividends, not including the preferred dividends from Goldman Sachs (GS), General Electric (GE) and several other firms. In his 2007 letter to shareholders he explained the best type of business to own:
We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire. After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.
As seen above however, few companies can do this for extended periods of time. Most companies keep growing for a while, after which they are bound to generate excess cash flows, which fills their coffers. After a while this extra cash is bound to be misspent, the same way that many individuals in the US recklessly spend their income on things they don’t need. Some examples include Vivendi, which was transformed from a sleepy water utility into a media conglomerate through expensive acquisitions that almost bankrupted the company. Incidentally the water utility operations were spun off in early 2000s as Veolia (VEO) and they have outperformed the media empire they created.
Other examples of companies with extra cash that spent too much on projects that didn’t generate much in excess returns include Microsoft (MSFT), which has been able to dominate any technology for over two decades. The main driver of its earnings growth in the meantime however continue being the Windows operating system. Even tech giant Google (GOOG) was misallocating cash in 2007 when it announced the $30 million Google Space program.
Typical companies that don’t pay dividends besides new companies in existence for less than a decade, include either firms that need to reinvest all of their earnings back into the business in order to maintain their business or companies that are so weak that they cannot afford to pay dividends. The first type will generate returns to shareholders only if someone buys the business at a premium. If they do all the work and all they could show at the end of the year after all the work has been done is no more cash than what was in the coffers at the beginning of the year, then intelligent investors should definitely ignore them. Technology companies generally fall into this category, because of rapid product obsolescence, competition and weak consumer loyalty. While Altavista and Yahoo (YHOO) were popular internet search engines in the late 1990’s, Google (GOOG) was able to overthrown them by offering a better solution to customers. The second type of business that cannot afford to distribute any cash because of its inherent weakness includes such industries such as Airlines or US Automakers.
Just because a company pays dividends, doesn't mean that it cannot grow earnings in the process. Companies like McDonald's (MCD), Wal-Mart (WMT), Procter & Gamble (PG), Altria Group (MO) and Abbott Labs(ABT) are examples of that.
McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. This dividend aristocrat has raised dividends for 33 consecutive years. Yield: 2.90%(analysis)
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrathas rewarded shareholders with higher dividends for 36 years in a row. Yield: 2.30%(analysis)
The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. This dividend king has boosted dividends for over half a century. Yield: 3.10%(analysis)
Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. This dividend champion has rewarded shareholders with higher dividends for 43 consecutive years. Yield: 6.30% (analysis)
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The board of directors of this member of the S&P Dividend Aristocrats index has approved dividend increases for 38 consecutive years. Yield: 3.40%(analysis)
One issue with dividend stocks is that income earned by corporations is taxed twice. It is taxed first at the corporate level and then it is taxed at the individual shareholder income level once dividends are distributed. As a result of this double taxation some believe that investors are worse off. This being said I am a firm believer that if a company can reinvest all of its earnings in projects that would enable it to increase earnings while maintaining its returns on invested capitals it should not pay a dividend.
Unfortunately few investors realize that the IRS could tax companies on accumulated but undistributed earnings of corporations at its own discretion. The so called Accumulated Earnings Tax is imposed on regular C corporations whose accumulated retained earnings are in excess of $250,000 if improperly retained instead of being distributed as dividends to shareholders. To avoid unreasonable accumulation of earnings there should a specific plan for the use of accumulation. Otherwise the IRS will assess the tax at a flat 15%.
Nonbelievers of dividend investing often claim that only poorly managed companies or companies which are in decline tend to pay dividends. This group of investors often is under the false belief that a company will be able to reinvest all of its earnings back into the business, while achieving high incremental returns on investment. The problem with this strategy is that in the real world of corporate governance, it is extremely difficult for companies to reinvest all of their earnings back into the business and still maintain high profitability on any excess reinvested dollars. This is because of constraints in the utilization of these assets, management’s desire to build an empire at all costs, expensive acquisitions, bad timing of capital allocations and simply because not all investments are guaranteed to earn a profit. Warren Buffett is often cited as the type of manager who has been able to allocate funds to profitable ventures, and thus has avoided paying dividends to shareholders of Berkshire Hathaway. The only issue with this analogy is that unfortunately few CEO’s have the business acumen of the Oracle of Omaha who built a small struggling textile mill into a diversified conglomerate with a market cap of over $200 billion.
The main issue with the Warren Buffett analogy however is that while he doesn’t like paying dividends to Berkshire Hathaway (BRK.B) shareholders he does enjoy investing in companies that pay dividends. Some of the top holdings of Berkshire Hathaway pay over $1.5 billion in dividends, not including the preferred dividends from Goldman Sachs (GS), General Electric (GE) and several other firms. In his 2007 letter to shareholders he explained the best type of business to own:
We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire. After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.
As seen above however, few companies can do this for extended periods of time. Most companies keep growing for a while, after which they are bound to generate excess cash flows, which fills their coffers. After a while this extra cash is bound to be misspent, the same way that many individuals in the US recklessly spend their income on things they don’t need. Some examples include Vivendi, which was transformed from a sleepy water utility into a media conglomerate through expensive acquisitions that almost bankrupted the company. Incidentally the water utility operations were spun off in early 2000s as Veolia (VEO) and they have outperformed the media empire they created.
Other examples of companies with extra cash that spent too much on projects that didn’t generate much in excess returns include Microsoft (MSFT), which has been able to dominate any technology for over two decades. The main driver of its earnings growth in the meantime however continue being the Windows operating system. Even tech giant Google (GOOG) was misallocating cash in 2007 when it announced the $30 million Google Space program.
Typical companies that don’t pay dividends besides new companies in existence for less than a decade, include either firms that need to reinvest all of their earnings back into the business in order to maintain their business or companies that are so weak that they cannot afford to pay dividends. The first type will generate returns to shareholders only if someone buys the business at a premium. If they do all the work and all they could show at the end of the year after all the work has been done is no more cash than what was in the coffers at the beginning of the year, then intelligent investors should definitely ignore them. Technology companies generally fall into this category, because of rapid product obsolescence, competition and weak consumer loyalty. While Altavista and Yahoo (YHOO) were popular internet search engines in the late 1990’s, Google (GOOG) was able to overthrown them by offering a better solution to customers. The second type of business that cannot afford to distribute any cash because of its inherent weakness includes such industries such as Airlines or US Automakers.
Just because a company pays dividends, doesn't mean that it cannot grow earnings in the process. Companies like McDonald's (MCD), Wal-Mart (WMT), Procter & Gamble (PG), Altria Group (MO) and Abbott Labs(ABT) are examples of that.
McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. This dividend aristocrat has raised dividends for 33 consecutive years. Yield: 2.90%(analysis)
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrathas rewarded shareholders with higher dividends for 36 years in a row. Yield: 2.30%(analysis)
The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. This dividend king has boosted dividends for over half a century. Yield: 3.10%(analysis)
Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. This dividend champion has rewarded shareholders with higher dividends for 43 consecutive years. Yield: 6.30% (analysis)
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The board of directors of this member of the S&P Dividend Aristocrats index has approved dividend increases for 38 consecutive years. Yield: 3.40%(analysis)
One issue with dividend stocks is that income earned by corporations is taxed twice. It is taxed first at the corporate level and then it is taxed at the individual shareholder income level once dividends are distributed. As a result of this double taxation some believe that investors are worse off. This being said I am a firm believer that if a company can reinvest all of its earnings in projects that would enable it to increase earnings while maintaining its returns on invested capitals it should not pay a dividend.
Unfortunately few investors realize that the IRS could tax companies on accumulated but undistributed earnings of corporations at its own discretion. The so called Accumulated Earnings Tax is imposed on regular C corporations whose accumulated retained earnings are in excess of $250,000 if improperly retained instead of being distributed as dividends to shareholders. To avoid unreasonable accumulation of earnings there should a specific plan for the use of accumulation. Otherwise the IRS will assess the tax at a flat 15%.
Monday, August 30, 2010
Altria Delivers Another Smoking Hot Dividend Increase
Every week I check the list of companies that raise dividends. There are several reasons for that. The most of important reasons include checking whether companies I own keep raising distributions, as well as to identify companies which could be a potential addition to my portfolio at some point in time. The companies which announced increases in their dividend payments include:
Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. The company announced an 8.60% increase in its quarterly dividend to 38 cents/share. This was the second dividend increase this year. The company announced that the increase reflects the company's intention to return a large amount of cash to shareholders in the form of dividends, and is consistent with the company's dividend payout ratio target of approximately 80% of its adjusted diluted earnings per share. This is the 43rd consecutive dividend increase for Altria Group. The only reason why the company is not on the dividend aristocrat list is because its dividend payment is lower due to the spin-off of Phillip Morris International (PM) in 2008 andKraft Foods (KFT) in 2007. The stock yields 6.70%. Check my analysis of the stock.
MGE Energy, Inc. (MGEE), through its subsidiaries, operates as a public utility holding company. It engages in generating, purchasing, transmitting, and distributing electricity. The company raised its quarterly dividend from $0.3684 to $0.3751 per share. The company has increased its dividend annually for the past 35 years and is part of the dividend achievers index. Yield: 4.10%
Bob Evans Farms, Inc. (BOBE), a full-service restaurant company, owns and operates Bob Evans Restaurants and Mimi’s Cafes in the United States. The company’s Board of Directors approved an 11.1% increase in the quarterly cash dividend from 18 cents/share to 20 cents/share. The company has consistently raised distributions since 2001. Yield: 3.10%
Westlake Chemical Corporation (WLK) manufactures and markets basic chemicals, vinyls, polymers, and fabricated products. It operates in two segments, Olefins and Vinyls. The company’s Board of Directors raised quarterly distributions by 10% to 6.35 cents/share. The company has consistently raised dividends every year since going public in 2004. Yield: 1%
G&K Services, Inc. (GKSR) provides branded identity apparel and facility services programs in North America. The company’s Board of Directors announced a 27% increase in its quarterly dividend to 9.5 cents/share. The company has raised distributions for five consecutive years.
Lorillard, Inc. (LO), through its subsidiaries, engages in the manufacture and sale of cigarettes in the United States. The company’s board of directors approved a 12.5% increase in the quarterly dividend on its common stock from $1.00 per share to $1.125 per share. This was the second consecutive dividend increase since the company began trading on NYSE in 2008. Yield: 6%
Todd Shipyards Corporation (TOD), a private shipyard operator, engages in the ship repair, construction, conversion, and maintenance work on commercial and federal government vessels that offers various maritime activities in the Pacific Northwest. The company’s Board of Directors declared an increase in its dividend of two and one-half cents per share, bringing its quarterly dividend to ten cents per share. While this is the second dividend increase this year, bringing the total dividend increase to 100%, the new dividend is still 33% lower than the distribution paid in 2008. The company has cut distributions in 2009. Yield: 2.70%
Stage Stores, Inc. (SSI) operates as a specialty department store retailer in the United States. The company’s Board of Directors raised the quarterly dividend by 50% to 7.5 cents/share. This was the first dividend increase since 2006. Yield: 2.70%
The companies, which seem worthy for further research include utility MGE Energy, Inc. (MGEE) and restaurant operator Bob Evans Farms, Inc. (BOBE). Both companies seem to have an adequately covered dividend, a price/earnings ratio that is below 20, a dividend yield that is higher than 2.50% and also have a history of raising dividends for 10 years or more. Westlake Chemical Corporation (WLK), G&K Services, Inc. (GKSR) and Lorillard, Inc. (LO) are a few years away from reaching a status of dividend achiever, which requires ten years of consecutive annual dividend increases. Nevertheless I would keep monitoring whether they keep rewarding shareholders with higher dividends.
Altria Group on the other hand also seems like an interesting play on tobacco. Some readers however might have something against the type of product the company is selling. In addition to that the high payout ratio is a little troubling, despite the assurance that management intends to share 80% of the profits with shareholders. Analysts do expect FY 2010 EPS to be $1.90 and then to increase to $2 by FY 2011. This means that future dividend increases will be more exposed to earnings fluctuations. As always, tread cautiously.
Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. The company announced an 8.60% increase in its quarterly dividend to 38 cents/share. This was the second dividend increase this year. The company announced that the increase reflects the company's intention to return a large amount of cash to shareholders in the form of dividends, and is consistent with the company's dividend payout ratio target of approximately 80% of its adjusted diluted earnings per share. This is the 43rd consecutive dividend increase for Altria Group. The only reason why the company is not on the dividend aristocrat list is because its dividend payment is lower due to the spin-off of Phillip Morris International (PM) in 2008 andKraft Foods (KFT) in 2007. The stock yields 6.70%. Check my analysis of the stock.
MGE Energy, Inc. (MGEE), through its subsidiaries, operates as a public utility holding company. It engages in generating, purchasing, transmitting, and distributing electricity. The company raised its quarterly dividend from $0.3684 to $0.3751 per share. The company has increased its dividend annually for the past 35 years and is part of the dividend achievers index. Yield: 4.10%
Bob Evans Farms, Inc. (BOBE), a full-service restaurant company, owns and operates Bob Evans Restaurants and Mimi’s Cafes in the United States. The company’s Board of Directors approved an 11.1% increase in the quarterly cash dividend from 18 cents/share to 20 cents/share. The company has consistently raised distributions since 2001. Yield: 3.10%
Westlake Chemical Corporation (WLK) manufactures and markets basic chemicals, vinyls, polymers, and fabricated products. It operates in two segments, Olefins and Vinyls. The company’s Board of Directors raised quarterly distributions by 10% to 6.35 cents/share. The company has consistently raised dividends every year since going public in 2004. Yield: 1%
G&K Services, Inc. (GKSR) provides branded identity apparel and facility services programs in North America. The company’s Board of Directors announced a 27% increase in its quarterly dividend to 9.5 cents/share. The company has raised distributions for five consecutive years.
Lorillard, Inc. (LO), through its subsidiaries, engages in the manufacture and sale of cigarettes in the United States. The company’s board of directors approved a 12.5% increase in the quarterly dividend on its common stock from $1.00 per share to $1.125 per share. This was the second consecutive dividend increase since the company began trading on NYSE in 2008. Yield: 6%
Todd Shipyards Corporation (TOD), a private shipyard operator, engages in the ship repair, construction, conversion, and maintenance work on commercial and federal government vessels that offers various maritime activities in the Pacific Northwest. The company’s Board of Directors declared an increase in its dividend of two and one-half cents per share, bringing its quarterly dividend to ten cents per share. While this is the second dividend increase this year, bringing the total dividend increase to 100%, the new dividend is still 33% lower than the distribution paid in 2008. The company has cut distributions in 2009. Yield: 2.70%
Stage Stores, Inc. (SSI) operates as a specialty department store retailer in the United States. The company’s Board of Directors raised the quarterly dividend by 50% to 7.5 cents/share. This was the first dividend increase since 2006. Yield: 2.70%
The companies, which seem worthy for further research include utility MGE Energy, Inc. (MGEE) and restaurant operator Bob Evans Farms, Inc. (BOBE). Both companies seem to have an adequately covered dividend, a price/earnings ratio that is below 20, a dividend yield that is higher than 2.50% and also have a history of raising dividends for 10 years or more. Westlake Chemical Corporation (WLK), G&K Services, Inc. (GKSR) and Lorillard, Inc. (LO) are a few years away from reaching a status of dividend achiever, which requires ten years of consecutive annual dividend increases. Nevertheless I would keep monitoring whether they keep rewarding shareholders with higher dividends.
Altria Group on the other hand also seems like an interesting play on tobacco. Some readers however might have something against the type of product the company is selling. In addition to that the high payout ratio is a little troubling, despite the assurance that management intends to share 80% of the profits with shareholders. Analysts do expect FY 2010 EPS to be $1.90 and then to increase to $2 by FY 2011. This means that future dividend increases will be more exposed to earnings fluctuations. As always, tread cautiously.
Thursday, July 29, 2010
Chubb Corporation (CB) Dividend Stock Analysis
The Chubb Corporation, through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company operates through three segments: Personal Insurance, Commercial Insurance, and Specialty Insurance. The company is member of the S&P Dividend Aristocrats index.Chubb has increased dividends for 45 years in a row. The company announced a 5.70% dividend increase in February 2010, plus a 14 million share repurchase initiative.
Over the past decade this dividend stock has delivered an average total return of 5.90% annually.
The company has managed to deliver a 13.30% average annual increase in its EPS between 2000 and 2009. Chubb is expected to earn $5.30 share in FY 2010, followed by $5.60/share in FY 2011.
The Return on Equity has remained around 15% for the latter part of the last decade, after falling to as low as 2% earlier. 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 8.70 % annually since 2000, which is slower than the growth in EPS. The disparity is mostly due to a gradual decrease in the dividend payout ratio and the billions of dollars the insurer has spent on stock buybacks.A 9 % growth in dividends translates into thedividend payment doubling almost every eight years. If we look at historical data, going as far back as 1984, Chubb has actually managed to double its dividend payment every nine years on average.
The dividend payout ratio has been on the decline, and is still much lower than my 50% threshold. 2001 and 2002 stick as outliers, since earnings per share were lower on high underwriting combined ratios. 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 Chubb is trading at 9.20 times earnings, yields 3.10% and has an adequately covered dividend payment. In comparison rival Travelers Cos (TRV) trades at a P/E multiple of 8 and yields 2.90% , while Cincinnati Financial (CINF) trades at a P/E multiple of 9 and yields 5.90%. Berkshire Hathaway (BRK.B) is also a competitor to Chubb(CB), although it trades at a P/E of 22, and does not pay a dividend. The company does spend a lot of its cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort. I like the company and its business model. Insurance companies like Chubb (CB) are a way for investors to fill in the need for exposure to the financial sector, after several high profile payers like Citigroup (C) and Bank of America (BAC) cut their distributions.I believe that the company is attractively valued at the moment; thus I would be looking forward to adding to my position in Chubb (CB).
Over the past decade this dividend stock has delivered an average total return of 5.90% annually.
The company has managed to deliver a 13.30% average annual increase in its EPS between 2000 and 2009. Chubb is expected to earn $5.30 share in FY 2010, followed by $5.60/share in FY 2011.
The Return on Equity has remained around 15% for the latter part of the last decade, after falling to as low as 2% earlier. 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 8.70 % annually since 2000, which is slower than the growth in EPS. The disparity is mostly due to a gradual decrease in the dividend payout ratio and the billions of dollars the insurer has spent on stock buybacks.A 9 % growth in dividends translates into thedividend payment doubling almost every eight years. If we look at historical data, going as far back as 1984, Chubb has actually managed to double its dividend payment every nine years on average.
The dividend payout ratio has been on the decline, and is still much lower than my 50% threshold. 2001 and 2002 stick as outliers, since earnings per share were lower on high underwriting combined ratios. 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 Chubb is trading at 9.20 times earnings, yields 3.10% and has an adequately covered dividend payment. In comparison rival Travelers Cos (TRV) trades at a P/E multiple of 8 and yields 2.90% , while Cincinnati Financial (CINF) trades at a P/E multiple of 9 and yields 5.90%. Berkshire Hathaway (BRK.B) is also a competitor to Chubb(CB), although it trades at a P/E of 22, and does not pay a dividend. The company does spend a lot of its cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort. I like the company and its business model. Insurance companies like Chubb (CB) are a way for investors to fill in the need for exposure to the financial sector, after several high profile payers like Citigroup (C) and Bank of America (BAC) cut their distributions.I believe that the company is attractively valued at the moment; thus I would be looking forward to adding to my position in Chubb (CB).
Sunday, June 20, 2010
How much money do you really need to retire with dividend stocks?
Many investors are being told that in order to retire, one needs to accumulate a minimum nest egg of $1,000,000. Some advisers do recommend that even one million dollars might not be enough to ensure comfortable retirement to individuals, given higher life expectancies or variability of investment returns. This is discouraging many investors, who are starting to believe that they would be working forever. Instead of focusing on the amount of money one needs to accumulate however, I think that a much better way should be to focus on the income from your investments.
After all, a million dollar investment in your home would most likely lead to thousands of dollars in annual property taxes, but no income. Thus, having even a million dollars invested in the wrong asset might not be enough to ensure a comfortable retirement. If that same investor purchased dividend stocks, which increase distributions regularly, they would be able to generate and inflation adjusted stream of income, which would be sustainable for extended periods of time.
If our dividend investor built a portfolio consisting of stocks which yield 10% on average, they should be able to generate $100,000 in annual pre-tax income on that $1,000,000 nest egg. Companies which yield more than 10% include American Capital Agency Corp. (AGNC), Hatteras Financial Corp. (HTS) or Annaly Capital Management, Inc. (NLY).
If our dividend investor build a portfolio consisting of dividend stocks yielding 6% on average, they should be able to generate a $60,000 annual pre-tax dividend income on the $1,000,000 nest egg. Companies yielding more than 6% include Universal Health Realty Income Trust(UHT) and Kinder Morgan Energy Partners, L.P. (KMP).
While it is possible to find companies yielding much more than 6% in today’s market, investors have to look at those investments with a questioning mind. It is highly unlikely that a company which pays a 10% dividend is able to reinvest anything back into growing the business. In addition to that, chances are that such a company is also using a special corporate tax form, which might add in further to the risk of income depletion provided that this income tax form is disallowed. Many investors in the Canadian income trustshave suffered huge losses in income and principal since 2006, when Canadian government announced that it would be phasing out the tax advantaged income trust structure in 2011. Many US investors have allocated excess amounts into Master Limited Partnerships, Business Development Companies or Real Estate Investment trusts, all of which pass through all of their income to the individual holders. A change in the tax code could certainly jeopardize these investors. In addition to that, most of those corporate structures have not been around for as long as common stocks, which makes it difficult to backtest their performance during various market conditions.
Common stocks on the other hand, have been around for several hundred years. Some studies suggest thatspending 4% from your portfolio annually should ensure maximum longevity for you. Given the fact that dividend yields were typically around 4% during the time of the studies, I have concluded that a starting 4% average portfolio yield should be sustainable for at least four decades. A portfolio yielding 4% could include high yielding stocks with low or average dividend growth such as Kinder Morgan (KMP), Realty Income (O) or Royad Dutch (RDS.B). It could also include low yielding stocks with high dividend growth such as Archer Daniels Midland (ADM) or Family Dollar (FDO). The portfolio could also include stocks in the sweet spot such as Coca Cola (KO),McDonald's (MCD) or Johnson & Johnson (JNJ). As a result, a $1,000,000 investment could result in $40,000 in annual dividend income.
Truth however is that investors do not truly need $1,000,000 in order to retire. If you focus on companies which regularly raise distributions, it is possible to construct a portfolio with much less than $1 million dollars. For example, let assume that one wants to retire in 24 years and assumes a 3% inflation rate. Let’s also assume that this individual also requires $40,000 in dividend income in 2010. Using the rule of 72, a 3% inflation rate would erode the purchasing power of $40,000 in 2010 dollars by half by the year 2034. As a result the investor would need to generate $80,000 in 2034. Let’s assume that this investor is able to purchase a well rounded portfolio of dividend growth stocks, which currently yield 4%, but which will increase distributions by 6% for the next 24 years. This is not an unreasonable dividend growth rate, since it slightly exceeds the 5.4% average dividend growth rates achieved by Dow Jones Industrials average for the 85 year period ending in 2005. This means that our investor needs only $500,000 to invest at 4%, which would generate income of $20,000 in year one, $40,000 in year 12 and $80,000 in year 24.
Of course if our investor decides to reinvest dividends for 24 years they would need much less in start up costs in order to generate sufficient dividend income. Most strong brand names which sell consumer products have been able to generate such returns over time.
The type of stocks that enterprising dividend growth investors should be focusing on include:
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company yields 3.40%, but has managed to grow dividends at 13.50% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 29.10%. (analysis)
The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. The company yields 3.00%, but has managed to grow dividends at 10.70% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 22%. (analysis)
Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company yields 3.30%, but has managed to grow dividends at 7.90% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 17%. (analysis)
McDonald’s (MCD) franchises and operates McDonald's restaurants that offer various food items, soft drinks, coffee, and other beverages. The company yields 3.10%, but has managed to grow dividends at 26.50% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 28.30%. (analysis)
Abbott Labs (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. The company yields 3.50%, but has managed to grow dividends at 9% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 20.70%. (analysis)
Coca Cola (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company yields 2.80%, but has managed to grow dividends at 9.90% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 18.20%. (analysis)
Pepsi Co (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company yields 3.00%, but has managed to grow dividends at 12.70% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 18%. (analysis)
Clorox (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. The company yields 3.50%, but has managed to grow dividends at 9.70% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 21%. (analysis)
Colgate Palmolive (CL) manufactures and markets consumer products worldwide. The company yields 2.80% t has managed to grow dividends at 11.30% annually over the past decade. The yield on cost ofa 1989 investment in the company would be a staggering 34.40%. (analysis)
At the end of the day those dividend machines would not only generate substantial yields on cost but they would most likely generate substantial capital gains as well. Dividends are typically taxable in the year they have been received, whereas capital gains are only taxable when you sell your stocks. If someone inherits company stock, their basis is increases to the fair value at the time of the transfer. As a result investing in these dividend growth stocks is similar to planting a tree, and then harvesting its fruit for decades, without having the necessity to cut the branches you are sitting on.
After all, a million dollar investment in your home would most likely lead to thousands of dollars in annual property taxes, but no income. Thus, having even a million dollars invested in the wrong asset might not be enough to ensure a comfortable retirement. If that same investor purchased dividend stocks, which increase distributions regularly, they would be able to generate and inflation adjusted stream of income, which would be sustainable for extended periods of time.
If our dividend investor built a portfolio consisting of stocks which yield 10% on average, they should be able to generate $100,000 in annual pre-tax income on that $1,000,000 nest egg. Companies which yield more than 10% include American Capital Agency Corp. (AGNC), Hatteras Financial Corp. (HTS) or Annaly Capital Management, Inc. (NLY).
If our dividend investor build a portfolio consisting of dividend stocks yielding 6% on average, they should be able to generate a $60,000 annual pre-tax dividend income on the $1,000,000 nest egg. Companies yielding more than 6% include Universal Health Realty Income Trust(UHT) and Kinder Morgan Energy Partners, L.P. (KMP).
While it is possible to find companies yielding much more than 6% in today’s market, investors have to look at those investments with a questioning mind. It is highly unlikely that a company which pays a 10% dividend is able to reinvest anything back into growing the business. In addition to that, chances are that such a company is also using a special corporate tax form, which might add in further to the risk of income depletion provided that this income tax form is disallowed. Many investors in the Canadian income trustshave suffered huge losses in income and principal since 2006, when Canadian government announced that it would be phasing out the tax advantaged income trust structure in 2011. Many US investors have allocated excess amounts into Master Limited Partnerships, Business Development Companies or Real Estate Investment trusts, all of which pass through all of their income to the individual holders. A change in the tax code could certainly jeopardize these investors. In addition to that, most of those corporate structures have not been around for as long as common stocks, which makes it difficult to backtest their performance during various market conditions.
Common stocks on the other hand, have been around for several hundred years. Some studies suggest thatspending 4% from your portfolio annually should ensure maximum longevity for you. Given the fact that dividend yields were typically around 4% during the time of the studies, I have concluded that a starting 4% average portfolio yield should be sustainable for at least four decades. A portfolio yielding 4% could include high yielding stocks with low or average dividend growth such as Kinder Morgan (KMP), Realty Income (O) or Royad Dutch (RDS.B). It could also include low yielding stocks with high dividend growth such as Archer Daniels Midland (ADM) or Family Dollar (FDO). The portfolio could also include stocks in the sweet spot such as Coca Cola (KO),McDonald's (MCD) or Johnson & Johnson (JNJ). As a result, a $1,000,000 investment could result in $40,000 in annual dividend income.
Truth however is that investors do not truly need $1,000,000 in order to retire. If you focus on companies which regularly raise distributions, it is possible to construct a portfolio with much less than $1 million dollars. For example, let assume that one wants to retire in 24 years and assumes a 3% inflation rate. Let’s also assume that this individual also requires $40,000 in dividend income in 2010. Using the rule of 72, a 3% inflation rate would erode the purchasing power of $40,000 in 2010 dollars by half by the year 2034. As a result the investor would need to generate $80,000 in 2034. Let’s assume that this investor is able to purchase a well rounded portfolio of dividend growth stocks, which currently yield 4%, but which will increase distributions by 6% for the next 24 years. This is not an unreasonable dividend growth rate, since it slightly exceeds the 5.4% average dividend growth rates achieved by Dow Jones Industrials average for the 85 year period ending in 2005. This means that our investor needs only $500,000 to invest at 4%, which would generate income of $20,000 in year one, $40,000 in year 12 and $80,000 in year 24.
Of course if our investor decides to reinvest dividends for 24 years they would need much less in start up costs in order to generate sufficient dividend income. Most strong brand names which sell consumer products have been able to generate such returns over time.
The type of stocks that enterprising dividend growth investors should be focusing on include:
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company yields 3.40%, but has managed to grow dividends at 13.50% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 29.10%. (analysis)
The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. The company yields 3.00%, but has managed to grow dividends at 10.70% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 22%. (analysis)
Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company yields 3.30%, but has managed to grow dividends at 7.90% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 17%. (analysis)
McDonald’s (MCD) franchises and operates McDonald's restaurants that offer various food items, soft drinks, coffee, and other beverages. The company yields 3.10%, but has managed to grow dividends at 26.50% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 28.30%. (analysis)
Abbott Labs (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. The company yields 3.50%, but has managed to grow dividends at 9% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 20.70%. (analysis)
Coca Cola (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company yields 2.80%, but has managed to grow dividends at 9.90% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 18.20%. (analysis)
Pepsi Co (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company yields 3.00%, but has managed to grow dividends at 12.70% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 18%. (analysis)
Clorox (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. The company yields 3.50%, but has managed to grow dividends at 9.70% annually over the past decade. The yield on cost of a 1989 investment in the company would be a staggering 21%. (analysis)
Colgate Palmolive (CL) manufactures and markets consumer products worldwide. The company yields 2.80% t has managed to grow dividends at 11.30% annually over the past decade. The yield on cost ofa 1989 investment in the company would be a staggering 34.40%. (analysis)
At the end of the day those dividend machines would not only generate substantial yields on cost but they would most likely generate substantial capital gains as well. Dividends are typically taxable in the year they have been received, whereas capital gains are only taxable when you sell your stocks. If someone inherits company stock, their basis is increases to the fair value at the time of the transfer. As a result investing in these dividend growth stocks is similar to planting a tree, and then harvesting its fruit for decades, without having the necessity to cut the branches you are sitting on.
Thursday, May 20, 2010
Another reason for companies to pay dividends
I am a firm believer that companies that pay dividends by default represent an elite group of sound enterprises which should comprise an investor’s watchlist for further research. The second criterion should be focusing on fundamentals in order to determine whether the company could afford to not only generate enough cash to grow and maintain its business, but also to be able to distribute any excess to shareholders in the form of dividends. The third criterion that I use is that the company has been able to grow distributions for at least ten consecutive years. These criteria pretty much decrease the list of eligible dividend stocks to less than 300.
Nonbelievers of dividend investing often claim that only poorly managed companies or companies which are in decline tend to pay dividends. This group of investors often is under the false belief that a company will be able to reinvest all of its earnings back into the business, while achieving high incremental returns on investment. The problem with this strategy is that in the real world of corporate governance, it is extremely difficult for companies to reinvest all of their earnings back into the business and still maintain high profitability on any excess reinvested dollars. This is because of constraints in the utilization of these assets, management’s desire to build an empire at all costs, expensive acquisitions, bad timing of capital allocations and simply because not all investments are guaranteed to earn a profit. Warren Buffett is often cited as the type of manager who has been able to allocate funds to profitable ventures, and thus has avoided paying dividends to shareholders of Berkshire Hathaway. The only issue with this analogy is that unfortunately few CEO’s have the business acumen of the Oracle of Omaha who built a small struggling textile mill into a diversified conglomerate with a market cap of over $200 billion.
The main issue with the Warren Buffett analogy however is that while he doesn’t like paying dividends to Berkshire Hathaway (BRK.B) shareholders he does enjoy investing in companies that pay dividends. Some of the top holdings of Berkshire Hathaway pay over $1.5 billion in dividends, not including the preferred dividends from Goldman Sachs (GS), General Electric (GE) and several other firms. In his 2007 letter to shareholders he explained the best type of business to own:
We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire. After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.
As seen above however, few companies can do this for extended periods of time. Most companies keep growing for a while, after which they are bound to generate excess cash flows, which fills their coffers. After a while this extra cash is bound to be misspent, the same way that many individuals in the US recklessly spend their income on things they don’t need. Some examples include Vivendi, which was transformed from a sleepy water utility into a media conglomerate through expensive acquisitions that almost bankrupted the company. Incidentally the water utility operations were spun off in early 2000s as Veolia (VEO) and they have outperformed the media empire they created.
Other examples of companies with extra cash that spent too much on projects that didn’t generate much in excess returns include Microsoft (MSFT), which has been able to dominate any technology for over two decades. The main driver of its earnings growth in the meantime however continue being the Windows operating system. Even tech giant Google (GOOG) was misallocating cash in 2007 when it announced the $30 million Google Space program.
Typical companies that don’t pay dividends besides new companies in existence for less than a decade, include either firms that need to reinvest all of their earnings back into the business in order to maintain their business or companies that are so weak that they cannot afford to pay dividends. The first type will generate returns to shareholders only if someone buys the business at a premium. If they do all the work and all they could show at the end of the year after all the work has been done is no more cash than what was in the coffers at the beginning of the year, then intelligent investors should definitely ignore them. Technology companies generally fall into this category, because of rapid product obsolescence, competition and weak consumer loyalty. While Altavista and Yahoo (YHOO) were popular internet search engines in the late 1990’s, Google (GOOG) was able to overthrown them by offering a better solution to customers. The second type of business that cannot afford to distribute any cash because of its inherent weakness includes such industries such as Airlines or US Automakers.
Nonbelievers of dividend investing often claim that only poorly managed companies or companies which are in decline tend to pay dividends. This group of investors often is under the false belief that a company will be able to reinvest all of its earnings back into the business, while achieving high incremental returns on investment. The problem with this strategy is that in the real world of corporate governance, it is extremely difficult for companies to reinvest all of their earnings back into the business and still maintain high profitability on any excess reinvested dollars. This is because of constraints in the utilization of these assets, management’s desire to build an empire at all costs, expensive acquisitions, bad timing of capital allocations and simply because not all investments are guaranteed to earn a profit. Warren Buffett is often cited as the type of manager who has been able to allocate funds to profitable ventures, and thus has avoided paying dividends to shareholders of Berkshire Hathaway. The only issue with this analogy is that unfortunately few CEO’s have the business acumen of the Oracle of Omaha who built a small struggling textile mill into a diversified conglomerate with a market cap of over $200 billion.
The main issue with the Warren Buffett analogy however is that while he doesn’t like paying dividends to Berkshire Hathaway (BRK.B) shareholders he does enjoy investing in companies that pay dividends. Some of the top holdings of Berkshire Hathaway pay over $1.5 billion in dividends, not including the preferred dividends from Goldman Sachs (GS), General Electric (GE) and several other firms. In his 2007 letter to shareholders he explained the best type of business to own:
We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire. After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.
As seen above however, few companies can do this for extended periods of time. Most companies keep growing for a while, after which they are bound to generate excess cash flows, which fills their coffers. After a while this extra cash is bound to be misspent, the same way that many individuals in the US recklessly spend their income on things they don’t need. Some examples include Vivendi, which was transformed from a sleepy water utility into a media conglomerate through expensive acquisitions that almost bankrupted the company. Incidentally the water utility operations were spun off in early 2000s as Veolia (VEO) and they have outperformed the media empire they created.
Other examples of companies with extra cash that spent too much on projects that didn’t generate much in excess returns include Microsoft (MSFT), which has been able to dominate any technology for over two decades. The main driver of its earnings growth in the meantime however continue being the Windows operating system. Even tech giant Google (GOOG) was misallocating cash in 2007 when it announced the $30 million Google Space program.
Typical companies that don’t pay dividends besides new companies in existence for less than a decade, include either firms that need to reinvest all of their earnings back into the business in order to maintain their business or companies that are so weak that they cannot afford to pay dividends. The first type will generate returns to shareholders only if someone buys the business at a premium. If they do all the work and all they could show at the end of the year after all the work has been done is no more cash than what was in the coffers at the beginning of the year, then intelligent investors should definitely ignore them. Technology companies generally fall into this category, because of rapid product obsolescence, competition and weak consumer loyalty. While Altavista and Yahoo (YHOO) were popular internet search engines in the late 1990’s, Google (GOOG) was able to overthrown them by offering a better solution to customers. The second type of business that cannot afford to distribute any cash because of its inherent weakness includes such industries such as Airlines or US Automakers.
Just because a company pays dividends, doesn't mean that it cannot grow earnings in the process. Companies like McDonald's (MCD), Wal-Mart (WMT), Procter & Gamble (PG), Altria Group (MO) and Abbott Labs(ABT) are examples of that.
McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. This dividend aristocrat has raised dividends for 33 consecutive years. Yield: 2.90%(analysis)
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend aristocrat has rewarded shareholders with higher dividends for 36 years in a row. Yield: 2.30%(analysis)The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. This dividend king has boosted dividends for over half a century. Yield: 3.10%(analysis)
Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. This dividend champion has rewarded shareholders with higher dividends for 43 consecutive years. Yield: 6.30% (analysis)
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The board of directors of this member of the S&P Dividend Aristocrats index has approved dividend increases for 38 consecutive years. Yield: 3.40%(analysis)
One issue with dividend stocks is that income earned by corporations is taxed twice. It is taxed first at the corporate level and then it is taxed at the individual shareholder income level once dividends are distributed. As a result of this double taxation some believe that investors are worse off. This being said I am a firm believer that if a company can reinvest all of its earnings in projects that would enable it to increase earnings while maintaining its returns on invested capitals it should not pay a dividend.
Unfortunately few investors realize that the IRS could tax companies on accumulated but undistributed earnings of corporations at its own discretion. The so called Accumulated Earnings Tax is imposed on regular C corporations whose accumulated retained earnings are in excess of $250,000 if improperly retained instead of being distributed as dividends to shareholders. To avoid unreasonable accumulation of earnings there should a specific plan for the use of accumulation. Otherwise the IRS will assess the tax at a flat 15%.
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The board of directors of this member of the S&P Dividend Aristocrats index has approved dividend increases for 38 consecutive years. Yield: 3.40%(analysis)
One issue with dividend stocks is that income earned by corporations is taxed twice. It is taxed first at the corporate level and then it is taxed at the individual shareholder income level once dividends are distributed. As a result of this double taxation some believe that investors are worse off. This being said I am a firm believer that if a company can reinvest all of its earnings in projects that would enable it to increase earnings while maintaining its returns on invested capitals it should not pay a dividend.
Unfortunately few investors realize that the IRS could tax companies on accumulated but undistributed earnings of corporations at its own discretion. The so called Accumulated Earnings Tax is imposed on regular C corporations whose accumulated retained earnings are in excess of $250,000 if improperly retained instead of being distributed as dividends to shareholders. To avoid unreasonable accumulation of earnings there should a specific plan for the use of accumulation. Otherwise the IRS will assess the tax at a flat 15%.
Friday, April 30, 2010
A record 22 companies boost dividend payouts
Over the past week twenty-two companies announced that they would be rewarding shareholders withhigher dividend payouts. Several solid blue chip companies such as IBM, Costco and Exxon Mobil raised their payouts as well.
In order to make it easier to read through the list, I have separated the number of companies into three lists: Dividend Achievers and Dividend Aristocrats; Master Limited Partnerships; and Dividend Growth Stocks.
Dividend Achievers and Dividend Aristocrats
Dividend Achievers are companies which have boosted payouts for at least ten consecutive years. Companies that are members of the elite Dividend Aristocrats index, are members of the S&P 500 and have raised distributions for over a quarter of a century.
International Business Machines Corporation (IBM) is an information technology (IT) company. The company increased its dividend by 18% to 55 cents/share. This is the 15th year in a row that IBM has increased its quarterly cash dividend. This dividend achiever yields 2%. (analysis)
W.W. Grainger, Inc. (GWW) and its subsidiaries distribute facilities maintenance and other related products and services in the United States, Canada, Japan, and Mexico. The company raised its quarterly dividend by 17% from $0.46 to $0.54 per share. This is the thirty-ninth dividend increase in a row for this dividend aristocrat. The stock yields 2%. (analysis)
Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company raised its quarterly dividends to 44 cents/share, up from 42 cents/share. This is the twenty-eight consecutive annual dividend increase for this dividend aristocrat. The stock yields 2.60%. (analysis)
Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company raised its quarterly dividends by 5.90% 72 cents/share. This is the twenty-third consecutive annual dividend increase for this dividend achiever. The stock yields 3.50%. (analysis)
Cullen/Frost Bankers, Inc., (CFR) through its subsidiaries, provides various banking and financial products and services primarily in Texas. The company increased its quarterly dividend by 4.70% to 45cents/share. This is the seventeenth consecutive annual dividend increase for this dividend achiever. The stock yields 3%.
Community Bank System, Inc. (CBU) operates as the holding company for Community Bank, N.A. that provides various banking and financial services to the retail, commercial, and municipal customers. It offers loans and accepts deposits. The Company’s Board of Directors approved a $0.02, or 9.1%, increase in its quarterly dividend on its common stock, to $0.24 per share. This is the seventeenth consecutive annual distribution increase for this dividend achiever. The stock yields 3.70%.
Master Limited Partnerships
Williams Partners L.P. (WPZ) is a limited partnership formed that owns, operates and acquires a portfolio of energy assets. This master limited partnership announced that the distribution its unit holders receive has been increased to $0.6575 per unit, a 3.5% increase over the previous dividend of $0.635. The partnership has consistently raised annual distribution since 2006. The units yield 6.30%.
Inergy Holdings, L.P. (NRGP) is engaged in the investment in propane and other natural gas liquids companies. This master limited partnership announced an increase in its quarterly cash distribution to $0.975 per limited partner unit, which was a 3.7% increase over the previously declared quarterly distribution. Inergy has boosted distributions since 2006. The stock yields 5.40%.
Holly Energy Partners, L.P. (HEP) operates a system of petroleum product and crude oil pipelines, storage tanks, distribution terminals, and loading rack facilities. This master limited partnership declared an increase in its distribution to $0.815 per unit, up from $0.805 that was distributed last quarter. Holly Energy Partners, L.P. has consistently boosted distributions since 2005. The units yield 6.90%.
Sunoco Logistics Partners L.P. (SXL) engages in the transport, terminalling, and storage of refined products and crude oil, as well as the purchase and sale of crude oil in the United States. The company increased quarterly distribution to $1.11 per share, from $1.09 prior. This master limited partnership has consistently raised distributions almost every quarter since 2002. The units yield 6.60%.
Alliance Holdings GP, L.P., (AHGP) through its subsidiaries, produces and markets coal primarily to utilities and industrial users in the United States. The company announced a boost in its quarterly distribution to 46.5 cents/share which represents a 12.0% increase over the $0.415 per unit distribution (for the quarter ended March 31, and an increase of 2.8% over the fourth quarter 2009 distribution of $0.4525 per unit. This master limited partnership has consistently boosted distributions since 2007. The units yield 5.60%.
Future Dividend Growth Stocks
EarthLink, Inc. (ELNK) is an Internet service provider (ISP), providing nationwide Internet access and related value-added services to individual and business customers. The company's Board of Directors has increased the amount of its quarterly cash dividend on its common stock from $0.14 per share to $0.16 per share. This is the first dividend increase since EarthLink initiated a dividend policy in 2009. The stock yields 7.40%.
Ameriprise Financial, Inc. (AMP) provides financial planning, products and services that are designed to be utilized as solutions for its clients' cash and liquidity, asset accumulation, income, protection, and estate and wealth transfer needs. The company raised its quarterly dividend from $0.17 to $0.18. The company has had higher annual dividend payments for four years in a row. The stock yields 1.50%.
Costco Wholesale Corporation (COST) operates membership warehouses that offer a selection of branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities. The company approved a quarterly increase from $0.18 to $0.205 per share. This is the sixth consecutive dividend increase since the company initiated a dividend policy in 2004. The stock yields 1.40%.
Kellogg Company (K), together with its subsidiaries, engages in the manufacture and marketing of ready-to-eat cereal and convenience foods. The Company's Board of Directors announced plans to increase the quarterly dividend by 8% to $0.405 per share beginning with the third quarter of 2010. This would have been the sixth consecutive dividend increase for the company. The stock yields 2.90%.
International Paper Company (IP) operates as a paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia, and North Africa. The company approved an increase in its quarterly common stock dividend from $0.025 per share to $0.125 per share. This is the first dividend increase since the company slashed distributions by 90% in 2009. The stock yields 1.70%.
Celanese Corporation (CE) is an integrated producer of chemicals and advanced materials. The company approved a 25% increase in the company’s quarterly dividend to $0.05 per share. The stock yields 0.60%.
Legg Mason, Inc., (LM) through its subsidiaries, operates as a diversified group of global asset management firm serving individual and institutional investors worldwide. The company’s Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.04 per share which is a 33.33% increase over the previous dividend of $0.03. This is the first dividend increase for the company since it slashed dividends by 87.50 % in 2009 and lost its status as a dividend aristocrat after just one year in the elite index. The stock yields 0.50%.
Valmont Industries, Inc. (VMI) produces fabricated metal products; pole and tower structures; and mechanized irrigation systems in the United States and internationally. The board of directors increased the Company's quarterly cash dividend by 10% from $0.15 to $0.165 per share. This is the ninth consecutive annual dividend increase for the company. The stock yields 0.80%
Sturm, Ruger & Company, Inc. (RGR) engages in the design, manufacture, and sale of firearms in the United States. The company increased its quarterly dividend by 55% to 9.3 cents/share. The stock yields 2.10%.
TransAlta Corporation (TAC) operates as a non-regulated electricity generation and energy marketing company. The company raised its quarterly dividends by 6.40% to 29 cents/share. This is the third consecutive annual dividend increase for the company.The stock yields 5.60%.
Duff & Phelps Corporation (DUF), through its subsidiaries, provides independent financial advisory and investment banking services worldwide. The company increased quarterly dividend by 20% to $0.06 per share. This is the first dividend increase for the company since its started paying dividends in 2009. The stock yields 1.50%.
The list of dividend increases should not be viewed as a buy recommendation. Readers are advised to use it only as a starting reference point for further research, provided that any of those companies interest you.
In order to make it easier to read through the list, I have separated the number of companies into three lists: Dividend Achievers and Dividend Aristocrats; Master Limited Partnerships; and Dividend Growth Stocks.
Dividend Achievers and Dividend Aristocrats
Dividend Achievers are companies which have boosted payouts for at least ten consecutive years. Companies that are members of the elite Dividend Aristocrats index, are members of the S&P 500 and have raised distributions for over a quarter of a century.
International Business Machines Corporation (IBM) is an information technology (IT) company. The company increased its dividend by 18% to 55 cents/share. This is the 15th year in a row that IBM has increased its quarterly cash dividend. This dividend achiever yields 2%. (analysis)
W.W. Grainger, Inc. (GWW) and its subsidiaries distribute facilities maintenance and other related products and services in the United States, Canada, Japan, and Mexico. The company raised its quarterly dividend by 17% from $0.46 to $0.54 per share. This is the thirty-ninth dividend increase in a row for this dividend aristocrat. The stock yields 2%. (analysis)
Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company raised its quarterly dividends to 44 cents/share, up from 42 cents/share. This is the twenty-eight consecutive annual dividend increase for this dividend aristocrat. The stock yields 2.60%. (analysis)
Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company raised its quarterly dividends by 5.90% 72 cents/share. This is the twenty-third consecutive annual dividend increase for this dividend achiever. The stock yields 3.50%. (analysis)
Cullen/Frost Bankers, Inc., (CFR) through its subsidiaries, provides various banking and financial products and services primarily in Texas. The company increased its quarterly dividend by 4.70% to 45cents/share. This is the seventeenth consecutive annual dividend increase for this dividend achiever. The stock yields 3%.
Community Bank System, Inc. (CBU) operates as the holding company for Community Bank, N.A. that provides various banking and financial services to the retail, commercial, and municipal customers. It offers loans and accepts deposits. The Company’s Board of Directors approved a $0.02, or 9.1%, increase in its quarterly dividend on its common stock, to $0.24 per share. This is the seventeenth consecutive annual distribution increase for this dividend achiever. The stock yields 3.70%.
Master Limited Partnerships
Williams Partners L.P. (WPZ) is a limited partnership formed that owns, operates and acquires a portfolio of energy assets. This master limited partnership announced that the distribution its unit holders receive has been increased to $0.6575 per unit, a 3.5% increase over the previous dividend of $0.635. The partnership has consistently raised annual distribution since 2006. The units yield 6.30%.
Inergy Holdings, L.P. (NRGP) is engaged in the investment in propane and other natural gas liquids companies. This master limited partnership announced an increase in its quarterly cash distribution to $0.975 per limited partner unit, which was a 3.7% increase over the previously declared quarterly distribution. Inergy has boosted distributions since 2006. The stock yields 5.40%.
Holly Energy Partners, L.P. (HEP) operates a system of petroleum product and crude oil pipelines, storage tanks, distribution terminals, and loading rack facilities. This master limited partnership declared an increase in its distribution to $0.815 per unit, up from $0.805 that was distributed last quarter. Holly Energy Partners, L.P. has consistently boosted distributions since 2005. The units yield 6.90%.
Sunoco Logistics Partners L.P. (SXL) engages in the transport, terminalling, and storage of refined products and crude oil, as well as the purchase and sale of crude oil in the United States. The company increased quarterly distribution to $1.11 per share, from $1.09 prior. This master limited partnership has consistently raised distributions almost every quarter since 2002. The units yield 6.60%.
Alliance Holdings GP, L.P., (AHGP) through its subsidiaries, produces and markets coal primarily to utilities and industrial users in the United States. The company announced a boost in its quarterly distribution to 46.5 cents/share which represents a 12.0% increase over the $0.415 per unit distribution (for the quarter ended March 31, and an increase of 2.8% over the fourth quarter 2009 distribution of $0.4525 per unit. This master limited partnership has consistently boosted distributions since 2007. The units yield 5.60%.
Future Dividend Growth Stocks
EarthLink, Inc. (ELNK) is an Internet service provider (ISP), providing nationwide Internet access and related value-added services to individual and business customers. The company's Board of Directors has increased the amount of its quarterly cash dividend on its common stock from $0.14 per share to $0.16 per share. This is the first dividend increase since EarthLink initiated a dividend policy in 2009. The stock yields 7.40%.
Ameriprise Financial, Inc. (AMP) provides financial planning, products and services that are designed to be utilized as solutions for its clients' cash and liquidity, asset accumulation, income, protection, and estate and wealth transfer needs. The company raised its quarterly dividend from $0.17 to $0.18. The company has had higher annual dividend payments for four years in a row. The stock yields 1.50%.
Costco Wholesale Corporation (COST) operates membership warehouses that offer a selection of branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities. The company approved a quarterly increase from $0.18 to $0.205 per share. This is the sixth consecutive dividend increase since the company initiated a dividend policy in 2004. The stock yields 1.40%.
Kellogg Company (K), together with its subsidiaries, engages in the manufacture and marketing of ready-to-eat cereal and convenience foods. The Company's Board of Directors announced plans to increase the quarterly dividend by 8% to $0.405 per share beginning with the third quarter of 2010. This would have been the sixth consecutive dividend increase for the company. The stock yields 2.90%.
International Paper Company (IP) operates as a paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia, and North Africa. The company approved an increase in its quarterly common stock dividend from $0.025 per share to $0.125 per share. This is the first dividend increase since the company slashed distributions by 90% in 2009. The stock yields 1.70%.
Celanese Corporation (CE) is an integrated producer of chemicals and advanced materials. The company approved a 25% increase in the company’s quarterly dividend to $0.05 per share. The stock yields 0.60%.
Legg Mason, Inc., (LM) through its subsidiaries, operates as a diversified group of global asset management firm serving individual and institutional investors worldwide. The company’s Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.04 per share which is a 33.33% increase over the previous dividend of $0.03. This is the first dividend increase for the company since it slashed dividends by 87.50 % in 2009 and lost its status as a dividend aristocrat after just one year in the elite index. The stock yields 0.50%.
Valmont Industries, Inc. (VMI) produces fabricated metal products; pole and tower structures; and mechanized irrigation systems in the United States and internationally. The board of directors increased the Company's quarterly cash dividend by 10% from $0.15 to $0.165 per share. This is the ninth consecutive annual dividend increase for the company. The stock yields 0.80%
Sturm, Ruger & Company, Inc. (RGR) engages in the design, manufacture, and sale of firearms in the United States. The company increased its quarterly dividend by 55% to 9.3 cents/share. The stock yields 2.10%.
TransAlta Corporation (TAC) operates as a non-regulated electricity generation and energy marketing company. The company raised its quarterly dividends by 6.40% to 29 cents/share. This is the third consecutive annual dividend increase for the company.The stock yields 5.60%.
Duff & Phelps Corporation (DUF), through its subsidiaries, provides independent financial advisory and investment banking services worldwide. The company increased quarterly dividend by 20% to $0.06 per share. This is the first dividend increase for the company since its started paying dividends in 2009. The stock yields 1.50%.
The list of dividend increases should not be viewed as a buy recommendation. Readers are advised to use it only as a starting reference point for further research, provided that any of those companies interest you.
Wednesday, March 31, 2010
Four Percent Rule for Dividend Investing in Retirement
The four percent rule is commonly used by financial planners in order to estimate the optimum amount of money to withdraw from client portfolios each year. The goal is to ensure longevity of client portfolios in retirement. Retirees are typically expected to sell a portion of their portfolios each year and adjust their withdrawals for inflation.
The possible reason for selecting 4% as a “safe” withdrawal strategy could be the fact that dividend yields have typically been around 4% on average for the decades covering the study.
In contrast, dividend investors tend to create portfolios which are concentrated around generating asustainable income stream each year. By owning a diverse mix of income producing assets, dividend investors would ensure that a hiccup in one sector of the economy would not have lasting effects on their lifestyles in retirement.
Another positive of dividend portfolios is that investors tend to live off solely from the income that the basket of stocks produces each year. In contrast, the four percent rule contains an inherent risk because of the possibility of selling off portions of ones portfolio during a flat or down market, which could deplete the portfolios much faster, leaving retirees to rely solely on social security. By concentrating only on spending a portion of the income that the portfolio produces, investors are leaving their invested capital intact and letting it grow overtime. This is similar to having your cake and eating it too as well.
The research behind the four percent rule is still sound however, especially since index funds tended to yield approximately four percent on average over the study period. Thus I believe that a portfolio which yields between three and four percent would provide investors with adequate income for a lifetime. Even if ones income portfolio generates a starter yield which is higher than four percent, it would still be wise not to spend more than 4%. This would leave some room for maneuvering in case the income generating assets in the higher yielding portfolio cut distributions.
If I were starting an income portfolio today, I would break it down to four equally weighted basic components.
The first component would be fixed income securities such as 30 year Treasury Bonds. Having some stability in the principal and income would provide at least some cushion in certain catastrophic events such as reliving the Great Depression of 1929-1932 in US or the lost two decades in Japan between 1989 to 2009. In both scenarios stocks lost 80% of their values.
The second component would consist of higher yielding stocks with low dividend growth. Likely inclusions in this list include Master Limited Partnerships such as Kinder Morgan Partners (KMP), Enbridge Energy Partners (EEP) or Energy Transfer Partners (ETP). These companies have stable revenues from transporting natural gas and petroleum products through their pipelines. Another sector could include Real Estate Investment trusts such as Realty Income (O) or National Retail Properties (NNN). These companies also tend to generate stable cash flows from their long-term property leases. A third high yielding sector for current income could be utilities such as Con Edison (ED) or Dominion Resources (D).Utilities are natural monopolies in their specific geographic area, supplying electricity, water or natural gas to consumers.
The third component of the portfolio would include mature companies which offer yields similar to average market yields, but which have enjoyed solid dividend growth. Examples of such companies include consumer products giant Johnson & Johnson (JNJ), fast food giant McDonald’s (MCD) or Kimberly-Clark(KMB).
The last component will include companies with low current yields, which have the ability to generate double digit earnings increases. This could generate solid dividend growth in the future. Companies that fit this criteria include Walgreens (WAG), Becton Dickinson (BDX) and Medtronic (MDT).
The last two portions of the portfolio might only end up yielding between 3% and 4%, although they would provide the growth factor that would insulate the dividend income from inflation.
The possible reason for selecting 4% as a “safe” withdrawal strategy could be the fact that dividend yields have typically been around 4% on average for the decades covering the study.
In contrast, dividend investors tend to create portfolios which are concentrated around generating asustainable income stream each year. By owning a diverse mix of income producing assets, dividend investors would ensure that a hiccup in one sector of the economy would not have lasting effects on their lifestyles in retirement.
Another positive of dividend portfolios is that investors tend to live off solely from the income that the basket of stocks produces each year. In contrast, the four percent rule contains an inherent risk because of the possibility of selling off portions of ones portfolio during a flat or down market, which could deplete the portfolios much faster, leaving retirees to rely solely on social security. By concentrating only on spending a portion of the income that the portfolio produces, investors are leaving their invested capital intact and letting it grow overtime. This is similar to having your cake and eating it too as well.
The research behind the four percent rule is still sound however, especially since index funds tended to yield approximately four percent on average over the study period. Thus I believe that a portfolio which yields between three and four percent would provide investors with adequate income for a lifetime. Even if ones income portfolio generates a starter yield which is higher than four percent, it would still be wise not to spend more than 4%. This would leave some room for maneuvering in case the income generating assets in the higher yielding portfolio cut distributions.
If I were starting an income portfolio today, I would break it down to four equally weighted basic components.
The first component would be fixed income securities such as 30 year Treasury Bonds. Having some stability in the principal and income would provide at least some cushion in certain catastrophic events such as reliving the Great Depression of 1929-1932 in US or the lost two decades in Japan between 1989 to 2009. In both scenarios stocks lost 80% of their values.
The second component would consist of higher yielding stocks with low dividend growth. Likely inclusions in this list include Master Limited Partnerships such as Kinder Morgan Partners (KMP), Enbridge Energy Partners (EEP) or Energy Transfer Partners (ETP). These companies have stable revenues from transporting natural gas and petroleum products through their pipelines. Another sector could include Real Estate Investment trusts such as Realty Income (O) or National Retail Properties (NNN). These companies also tend to generate stable cash flows from their long-term property leases. A third high yielding sector for current income could be utilities such as Con Edison (ED) or Dominion Resources (D).Utilities are natural monopolies in their specific geographic area, supplying electricity, water or natural gas to consumers.
The third component of the portfolio would include mature companies which offer yields similar to average market yields, but which have enjoyed solid dividend growth. Examples of such companies include consumer products giant Johnson & Johnson (JNJ), fast food giant McDonald’s (MCD) or Kimberly-Clark(KMB).
The last component will include companies with low current yields, which have the ability to generate double digit earnings increases. This could generate solid dividend growth in the future. Companies that fit this criteria include Walgreens (WAG), Becton Dickinson (BDX) and Medtronic (MDT).
The last two portions of the portfolio might only end up yielding between 3% and 4%, although they would provide the growth factor that would insulate the dividend income from inflation.
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