International Dividend Achievers for diversification

So far I have concentrated my attention primarily on the Dividend Aristocrats and the High-Yield Dividend aristocrats, both published by the S&P. Those lists include companies which are members of the S&P 1500and which have raised their dividends for more than 25 consecutive years. I have also tried investigating the Broad Dividend Achievers as well, which are stocks that have increased their dividends for at least ten consecutive years.

That wasn't enough for me, however. In my quest for creating a diversified portfolio I have been searching for international dividend growers. There are several lists out there that focus on international dividend growth stocks – Mergents International Dividend Achievers index, S&P/TSX Canadian Dividend Aristocrats, S&P Europe 350 Dividend Aristocrats (EUR).
The list that caught my attention was the International Dividend Achievers list, prepared by Mergent Inc. It is broader than the S&P Europe and Canadian dividend aristocrat’s lists. To quote from the company's website:

The International Dividend Achievers™ Index is designed to track the performance of dividend paying American Depositary Receipts and foreign common stocks trading on major US exchanges. To become eligible for inclusion in the International Dividend Achievers Index a stock must be incorporated outside the United States, trade on the NYSE, NASDAQ or AMEX, and have increased its annual regular dividend payments for the last five or more consecutive years. In addition, requires that a stock's average daily cash volume exceed $500,000 per day in Nov. and Dec. prior to reconstitution.

The international dividend achievers index has closely tracked its benchmark over the past 10 years. It performed better than the benchmark in only 3 of the past 10 years however.

According to Mergents Inc, a $10,000 investment in the International Dividend Achievers Index ten years ago would be worth about $19,279 by the end of July 2008.

There's an ETF that tracks the index. The Ticker is PID.

Relevant Articles:

- Why do I like Dividend Achievers

- Why do I like Dividend Aristocrats?

- High-Yield Dividend aristocrats,

- Historical changes of the S&P Dividend Aristocrats

The ultimate passive investment strategy

I recently read a paper from Jeremy Siegel and Jeremy Schwartz titled “The Long-term Returns on the Original S&P 500 Firms”.

In this paper the authors calculate the total returns of a buy and hold of the original 500 companies in 1957. They found that on average 20 stocks annually have been added and deleted from the index (without considering that a merger of two S&P 500 companies is an addition to the index) since 1957. The authors also used three methods of calculating the returns:

Survivors’ Portfolio (SP). The survivor portfolio consists only of shares of the original S&P 500 firms. Shares of other firms received through mergers are immediately sold and the proceeds invested in the remaining survivor firms in proportion to their market value. For example, when Mobil Oil was merged into Exxon in 1999, shareholders of Mobil are assumed to sell the shares they received from Exxon-Mobil and invest the proceeds in the remaining survivor firms. All spinoffs are immediately sold and the proceeds reinvested in the parent firm. Funds received from privatizations are sold and the proceeds re-invested in the original surviving firms in proportion to their market value.

Direct Descendants’ Portfolio (DDP), which consists of the shares of firms in the survivors’ portfolio plus the shares issued by firms acquiring an original S&P 500 firm. In the case of the Mobil-Exxon merger discussed above, we assume that shareholders of Mobil Oil hold the shares of Exxon that were issued in the merger. If an original firm was taken private, we assume that the cash distributed from the privatization was invested in an indexed portfolio whose returns matched the standard S&P 500 Index.12 If a firm that was taken private is subsequently reissued to the public again, we assume the portfolio repurchases shares in the reissued company with the funds that had been invested in the index at the time the firm went private. As before, spinoffs are immediately sold and the proceeds reinvested in the parent.

Total Descendants’ Portfolio (TDP) and includes all firms in the DDP plus all the spinoffs and other stock distributions issued by the firms in the Direct Descendants’ Portfolio. The only difference between the TDP and the DDP is that the TDP holds all the spinoffs rather than sell them and reinvest in the proceeds in the parent firm. The TDP is identical to the portfolio of a totally passive investor who holds all the spinoffs and shares issued from mergers and never sells any stock.
My favorite portfolio is the Total Descendants portfolio, since it basically represents a very passive investment strategy – buying stock in 500 companies and then forgetting about them for 50 years.

The authors looked into the return of equal weighted and value weighted returns for the three calculation types.

At the end of the paper they determined that by not updating your portfolio of the original 500 companies, with the annual changes in the S&P 500, you’d have outperformed the average pretty handsomely.

My take on this research is that by purchasing the current 500 stocks in the S&P 500, and allocating all stock equally, an investor will be better off in the long run than simply purchasing an ETF. The reason is that ETF’s tend to charge fees of 0.1% annually, which could really add up over time.

The price of higher current yield -Canadian Royalty Trusts

There are several Canadian royalty trusts which trade on the NYSE.

Advantage Energy Income Fund (AAV), based in Calgary, currently yields 11%. Its monthly dividendpayments have declined from $0.23/unit in 2004 to $0.12/unit in 2008.

Baytex Energy Trust (BTE), also based in Calgary, currently yields 7.50%. Its monthly dividend payments have increased from $0.16/unit in 2006 to $0.20/unit in 2008.

Enerplus Resources fund (ERF) currently yields 10.70%. Its monthly dividend payments have greatly fluctuated between $0.20/unit and $0.52/unit since 2000.

Harvest Energy Trust (HTE) currently yields 14.40%. Its monthly dividend payments have fluctuated significantly less than other trusts – between $0.29/unit and $0.36/unit since 2005.

Pengrowth Energy Trust (PGH) currently yields 13.50%. Its monthly dividend payments have also fluctuated significantly less than other trusts – between $0.19/unit and $0.23/unit since 2004.

Penn West Energy Trust (PWE) currently yields 12.20%. Its monthly trust distributions have fluctuated between $0.29/unit and $0.35/unit since 2006.

They do look appealing to investors because of their high dividend yields of 10%-15% annually. Not only are the dividends paid monthly, which allows for a better dividend income compounding, but some of them also allow investors to purchase shares through DRIPs at discounted prices. Unlike most other “normal” stocks, dividend payments from the Canadian income trusts tend to fluctuate a lot.

Most trusts are engaged in oil and gas production and have average reserve lives of about 10 years. Unlike similar US trusts however, Canadian Royalty trusts can purchase new assets and make acquisitions, which could extend their lives forever.

The Canadian government applies a 15% non-resident withholding tax on distributions to U.S. investors. U.S. investors can apply for a refund for at least a portion of the amount withheld. Many Canadian trusts provide information for income tax filing instructions for U.S. unitholders on their Websites. Nevertheless, it can be a complicated process at tax time, thus U.S. investors should consult with a qualified tax advisor before investing.

Like any other investment that offers above-average dividend yields however there’s a catch: the reason why CanRoy’s are able to pay huge dividends is because they are not taxed at the corporate level and pass all of their income to shareholders. This is going to change in January 2011. Since many trusts pay all of their income in distributions to unit holders, they expand their operations through sales of additional units. The uncertainty related to the 2011 tax law changes make it difficult for trusts to expand. For example trusts that were formed before October 31 2006 cannot sell more than a certain amount of new units (stock), otherwise they will lose their preferential tax status even earlier than 2011.

Under the existing provisions of the Tax Act, income trusts can generally deduct in computing their income for a taxation year any amount of income that they distribute to unitholders for the year. According to the new bill, introduced in 2006, Income trusts will not be able to deduct certain portions of their distributed income (referred to as specified income).
Pursuant to the draft legislation, the distribution tax will only apply in respect of distributions of income and will not apply to returns of capital. Some trusts have substantial tax pools that could be applied to reduce the impact of the new tax for several years post-2011.

Under the new legislation the proposed tax will be 29.5 percent in 2011 and 28.0 percent in 2012 based upon a 13 percent provincial tax rate and a federal tax of 16.5 percent reducing to 15 percent in 2012. Add this to the 15% tax that US investors already pay on income trust distributions, and the higher yields might not look so good. Under the budget released by the Minister of Finance on February 26, 2008, the 13 percent provincial tax will be replaced under an allocation formula with the applicable provincial incometax rates for each province in which the income trust has a permanent establishment. Trust are likely to continue to take advantage of growth opportunities with an increased focus on assessing international acquisition opportunities given that revenue from outside Canada will likely not be subject to the new tax. In addition, trusts will likely continue to carefully manage their substantial tax pools to mitigate the impact of the new tax on our unitholders.

American Capital Strategies (ACAS) Dividend Analysis

American Capital Strategies, Ltd. is a principal investment firm specializing in management and employee private equity buyouts, acquisitions, recapitalizations, mergers and acquisition, add-on acquisitions, securitizations, special situations, growth capital investments in middle market companies, early stage in mature private and public companies, corporate divestitures, acquisitions of portfolio companies of private equity firms, acquisitions of family-owned or closely held businesses, change of control, or the exit of minority shareholders, going private transactions, and ownership transitions.

American Capital Strategies is not a dividend aristocrat but is a component in S&P 500 index. It has been increasing its dividends for the past 10 consecutive years however, while delivering an impressive average total return of 19.50 % annually to its loyal shareholders.

At the same time the company has managed to deliver a notable 11.60 % average annual increase in its EPS since 1998. If we look at the earnings chart though, it looks as if the EPS has been range bound, never been able to exceed $7.

The trend in ROE has followed the trend in EPS closely over the past decade, rising as high as 31% in 1999 and falling as low as a negative 1% in 2000. The average return on equity has remained at 11.30%.Annual dividend payments have increased over the past 10 years by an average of 9.80% annually, which is slightly below the growth in EPS. A 10% growth in dividends translates into the dividend paymentdoubling every 7 years. If we look at historical data, going as far back as 1998, ACAS has indeed managed to double its quarterly dividend payments every four and a half years on average.If we invested $100,000 in ACAS on December 31, 1997 we would have bought 6906 shares. Your first quarterly check would have been $1,726.50 in March 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $17,095 by December 2007. For a period of 10 years, the quarterly dividend has increased by 300 %. If you reinvested it though, your quarterly dividend income would have increased by 890%.
The dividend payout has fluctuated greatly, along with the EPS and ROE. The current ratio of 94% does look a little high. When put into the perspective of the past 5 year’s average of 88% though, it looks pretty normal for the company. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.I think that ACAS is attractively valued with its low price/earnings multiple and above average dividend yield. ACAS is every dividend investors dream stock with its above average dividend yield and dividend growth rate. It should be part of every dividend investor’s portfolio.

Disclosure: I own shares of ACAS

Relevant Articles:

- Gannett Co (GCI) Dividend Analysis

- Valspar Corporation (VAL) Dividend Analysis
- Dover Corp (DOV) Dividend Analysis

- RPM Dividend Analysis

APD Dividend Analysis

Air Products and Chemicals, Inc. offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide.
It is a dividend aristocrat as well as a major component of the S&P 500 index. It has been increasing its dividends for the past 26 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 11.30 % to its shareholders.

At the same time company has managed to deliver a 7.30% average annual increase in its EPS since 1998.

The ROE has remained in the 10-20%. Range over the past 10 years with the exception of the 2000 lows below 5%.

Annual dividend payments have increased over the past 10 years by an average of 10% annually, which is higher than the growth in EPS. A 10% growth in dividends translates into the dividend payment doubling almost every 7 years. If we look at historical data, going as far back as 1985, APD has actually managed to double its dividend payment every seven years on average.

If we invested $100,000 in APD on December 31, 1997 we would have bought 2432 shares (Adjusted for two 2:1 stock split in June 1998). In March 1998 your quarterly dividend income would have been $366. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1121 by December 2007. For a period of 10 years, your quarterly dividend income has increased by 153 %. If you reinvested it though, your quarterly dividend income would have increased by 207%.

The dividend payout has remained at or below 50% over our study period with the exception of a brief spike in 2000. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. 

I think that APD is attractively valuedwith its low price/earnings multiple of 20 and low DPR. The yield is below my 2% threshold though. I would consider entering into a position below $88.

Anheuser-Busch Dividend Analysis

Anheuser-Busch Companies, Inc., through its subsidiaries, engages in the production and distribution of beer. The company operates in four segments: Domestic Beer, International Beer, Packaging, and Entertainment.

It is a dividend aristocrat as well as a major component of the S&P 500 index. Over the past 10 years this dividend growth stock has delivered an annual average total return of 12.40% to its shareholders. The company has managed to deliver an impressive 9.60% average annual increase in its EPS through organic growth and share buybacks. Management has consistently bought back 3% of outstanding shares each year for the past 10 years, spending a little over $12.5 billion in the process. Without the buybacks the growth in EPS would have been 6.60% annually.

The ROE has been increasing steadily over our study period, rising from a 27% in 1998 to 67% by 2007.

Annual dividend payments have increased over the past 10 years by an average of 9.6% annually, which matches the growth in EPS. A 10% growth in dividends translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1983, BUD has actually managed to double its dividend payments every six years.

If we invested $100,000 in BUD on December 31, 1997 we would have bought 4545 shares (Adjusted for 2:1 stock split in September 2000). Your first quarterly check would have provided you with $590.85 in dividend income in February 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1799.16 by November 2007. For a period of 10 years, your quarterly dividend payment has increased by 154 %. If you reinvested it though, your quarterly dividend income would have increased by 204%.

The dividend payout has remained below 50% over the past 10 years. This is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that BUD is attractively valued with its low price/earnings multiple of 16 and above-average yield at 2.86%.

Disclosure: I do own shares in BUD. This is my analysis of the stock and is not investment advice. Please consult with a licenced investment professional before investing.