The investment returns of most fund managers are generally compared against a common benchmark. This provides for an objective evaluation of their performance over a period of time. A common benchmark for most mutual fund managers is the total returns of the S&P 500 index. This benchmark is also useful for comparison to dividend investors as well. For many long-term dividend investors however, income growth is very important as well. Thus having an increase or decrease in dividend incomes does not mean much, unless it is being compared to a common benchmark.
While there have been several dividend indexes such as the Dividend Aristocrats and the Dividend Achievers, which have dividend ETFs that provide accurate information on dividend and price returns, these have not been around as much as the broad S&P 500 index. In addition to that the S&P 500 is sector diversified, and most information is widely available. Because of that, I would consider the changes in annual dividend income of the S&P 500 index as an important barometer against which to benchmark your dividend income over time.
Over the past 32 years, S&P 500 dividends have grown by 5% per year on average.
Below you could find a complete breakdown of annual changes in reported dividends of the S&P 500 companies:
(ALL charts could be accessed from this link)
The top ten holdings of S&P 500 have an almost 19% weight in the index. All of them pay dividends except for Apple Computers (AAPL), although three of them have cut distributions over the past one year. It is expected in a dividend portfolio that even some of the best dividend stocks are susceptible to dividend cuts or eliminations. General Electric (GE) and Bank of America (BAC) are two such examples of former dividend aristocrats which had to cut distributions during the financial crisis of 2007-2009. Many income investors which had an allocation to financial stocks, suffered similar drops in dividend income in 2008 and 2009.
(Ten S&P 500 components with the highest weight in the index)
Other companies such as International Business Machines (IBM), Johnson & Johnson (JNJ), Procter & Gamble (PG), AT&T (T) and Exxon-Mobil (XOM) continue raising dividends, despite the broad economic slowdown. Because of their large size, the companies in the S&P 500 are representative for most dividend stocks commonly held by dividend investors.
International Business Machines (IBM) has raised dividends for 15 consecutive years and thus is a member of the Dividend Achievers index. Yield: 2% (analysis)
Johnson & Johnson (JNJ) has raised dividends for 48 years in a row. Yield: 3.70%(analysis)
Procter & Gamble (PG) has boosted distributions for 54 consecutive years. Yield: 3.20% (analysis)
AT&T (T) has increased dividend payments for 26 years in a row. Yield: 6.80% (analysis)
Exxon-Mobil (XOM) has a record of 28 consecutive annual dividend increases. Yield: 3% (analysis)
Full Disclosure: Long CVX, PG, JNJ and XOM [more]
Johnson & Johnson 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. Johnson & Johnson is a major component of the S&P 500, Dow Industrials and the Dividend Aristocrats Indexes. One of the company’s largest shareholders includes Warren Buffett. JNJ has been consistently increasing its dividend for 48 consecutive years. Dividend author Dave Van Knapp has also included the company in his most recent book "The Top 40 Dividend Stocks for 2010".
Over the past decade this dividend stock has delivered a 4.90% average annual total return to its shareholders.
At the same time company has managed to deliver a 11.10% average annual increase in its EPS since 2000. Analysis expect a 9.80% increase in EPS to $4.83 in 2010, follow by an 8% increase to $5.23 in 2011.
Johnson & Johnson is the first stock that comes to mind when illustrating the benefits of dividend investing. The company has been enormously successful, has a strong competitive advantage and as a result has managed to boost distributions for 48 consecutive years. It is no surprise that it is found in the portfolios of most dividend investors. The company’s sales and earnings growth would be driven by the company’s ongoing acquisition program, its pharmaceutical pipeline as well as expansion in emerging markets. Remicade and Stelara are two drugs which could fuel growth in sales, as is a new blood thinner drug under development, which would prevent strokes in patients. The company should do well due to its diversified revenues coming from drugs, consumer products and medical devices. Despite its size, Johnson & Johnson is highly innovative and aggressively funding new product development in order to maintain leadership positions.
The ROE has remained largely between 25% and 30%, with the exception of 2006 and 2007.
Annual dividend payments have increased by an average of 13.40% annually since 2000, which is much higher than the growth in EPS. A 14% growth in dividends translates into the dividend payment doubling almost every five years. Since 1971 JNJ has indeed managed to double its dividend payment every 5 years.
The dividend payout ratio has remained in a range between 36% and 45%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
JNJ is attractively valued at a price/earnings multiple of 12.50, a low dividend payout ratio and at a current dividend yield of 3.60%. In comparison Abbott Laboratories (ABT) trades at a P/E of 13.90 and yields 3.60% while Bristol-Myers Squibb (BMY) trades at a P/E of 5 and yields 5.00%. I would keep accumulating Johnson & Johnson (JNJ) stock. [more]
Many investors ignore dividend investing, because they associate them with boring unexciting investments which are destined to fall into oblivion.
Some investors believe that rather than wait for a whole year to collect a 3%-4% dividend, you could make 3-4 % per day in the market trading volatile technology stocks. The fact of the matter is that few if any investors could accurately forecast stock market moves in order to profit from large daily swings in some of the most volatile stocks in the market today. Dividend payments on the other hand are much less volatile than stock prices, which is what makes them ideal for investors who plan to live off their investments. The stability of the payments makes them a reliable source of income in virtually any market, without having to sell a portion of one’s portfolios and exposing yourself to market fluctuations.
Companies such as Clorox (CLX) are a good example of dividend payers which have raised distributions consistently, and which have a stable business model to support future dividend raises. (analysis) The company is currently valued attractively at a P/E of 15.30 and yielding 3.40%. It has managed to not only pay out decent amounts of its profits as distributions, but also to grow the business overtime.
Most of the components of the S&P Dividend Aristocrats index and the Dividend Achievers Index are a good starting point for dividend investors, as they include companies which have long histories of uninterrupted dividend growth.
Other investors believe that you need to start with a large portfolio size in order to generate any decent income off your investments. The fact is that you don’t need a large portfolio to benefit from dividend investing – you could start small and work your way to your desired level of income over time. By starting small, investors could lose small amounts in the process of fine-tuning their income strategies until they perfect them well enough to fit their personal investment goals and risk tolerances. Investors who start large and make mistakes have much more to lose in the process. An investor without a proper plan who placed all of their hard earned cash in a concentrated portfolio of financial stocks such as Citigroup (C), Bank of America (BAC) and American Capital Strategies (ACAS), would have experienced large losses of capital and income. Had this investor purchased only a small starter position in each of these companies, they would have had much more time to reassess the situation and diversify their holdings accordingly. There’s nothing wrong with starting out small, by dollar cost averaging your way into at least 30 stocks from different sectors and reinvesting dividends selectively. Through the power of compounding those portfolios would most probably grow over time to a large enough nest egg.
Another myth is that dividend investors mindlessly reinvest dividends, through bull markets and bear markets. While many drip (dividend reinvestment plan) investors tend to purchase stocks and reinvest dividends, many investors actually reinvest very selectively. They allocate the dividend cash received very carefully into the same stock or in stocks which have proper valuations and adequate coverage of its distributions, as well as having the solid fundamental framework to support increasing payments to the shareholder over time. Reinvesting dividends when stock prices are trading at a historic price/earnings ratio and record low yields is not a good idea, especially when the cash could be deployed in other companies which are offering better valuations. One example of a company which currently offers attractive valuations is Abbott Labs (ABT), which trades ata P/E of 14.30 and yields 3.60%. The company has raised distributions for 38 years in a row. (analysis).
Many retirees are constantly being sold on the idea that bonds are the best way to generate income in retirement. While the payout from fixed income securities, particularly US Treasury obligations is very stable, the main negative is the fact that it loses its purchasing value over time due to inflation. While TIPS (TIP) could be an exception to that, many investors might feel that the consumer price index adjustments in the TIPS’ coupon payments and principals do not adjust for the particular investors’ basket of goods and services used. Common stocks on the other hand could offer a better source of inflation adjusted income, despite the fact that they have certain amounts of risk involved with them. Dividend growth stocks should be of particular interest to investors, as most of these fine companies represent firms which have a product or service which investors need, which allows the company to charge higher prices over time. This ensures rising profits, which in turn trickles down to increased dividends. A bond which yields 4% today would likely yield 4% for you 30 years from now. On the other hand companies with strong competitive advantages, whose products consumers use on a daily basis such as retailer Wal-Mart (WMT), could pay a much higher yield on cost on your investment 3 decades from now. The number one retailer in the US has turned its price advantage over competitors into consistent growth in the US and internationally, which has fueled strong earnings and dividend growth. Check my analysis of the stock.
In addition to that, investors could purchase stocks which mimic their actual expenditures, and therefore have their dividends pay for these expenses. For example an investor who has a phone bill for $50/month, needs to invest almost $9,000in AT&T (T) or Verizon (VZ) in order to generate enough income to cover that charge.
Other investors believe that you need a high dividend yielder in order to generate a decent return on your investment. Actually you don’t need to select the company with the highest dividend yield in order to be successful at dividend investing. In fact companies which have a track record of consistent dividend increases for over ten years could generate higher yields on cost in the future which could surpass even the highest yielding stock of today. Those companies have achieved a perfect balance between the need to fund the growth in their business and the need to return cash to shareholders. This is a powerful combination which ensures that investors could not only have a solid foundation for future distribution growth but also the opportunity to enjoy solid capital gains as well. Consumer giant Johnson & Johnson (JNJ), which has raised dividends for 48 years in a row is a prime example of such a company. The firm is attractively valued at the moment, trading at a P/E of 12.40, yielding 3.60%, and having a 10 year average annual dividend growth rate of 13.30%.
The truth of the matter is that dividend stocks are a superior way to not only enjoy the market upside, but to also receive a positive return during bear market declines. Dividend payments could also generate much needed capital to investors to deploy into the market, thus further compounding investor returns over time.
Full Disclosure: Long ABT, CLX, JNJ, T, WMT
- Why Dividend Growth Stocks Rock?
- Dividend Investors are getting paid for waiting
- Dividend Investing Works in All Markets
- Living off dividends in retirement [more]
Air Products and Chemicals, Inc. offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. The company is member of the S&P 500, Dow Jones Industrials and the S&P Dividend Aristocrats indexes. Air Products and Chemicals has paid uninterrupted dividends on its common stock since 1954 and increased payments to common shareholders every year for 28 years.
Over the past decade this dividend stock has delivered an average total return of 11.80% to its shareholders.
The company has managed to deliver a 20.20% average annual increase in its EPS over the past decade, largely due to low earnings in 2000. Analysts are expecting an increase in EPS to $4.98 for 2010 and $5.63 by 2011. This would be a nice increase from the 2009 earnings per share of $3.
The company is one of the largest producers of industrial gases and also owns a large specialty chemicals business. The potential areas of growth include growth in industrial gases, including electronics, hydrogen for petroleum refining, health care and Asian operations. The market for industrial gases gas increased at double the rate of the economy over the past years, which could be another driver of revenue growth. Air Products and Chemicals has announced its intent to acquire Airgas (ARG) in an unfriendly take-over in February 2010. This deal could benefit the company through cost savings if successful.
The Return on Equity has been stable around 15% over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividend payments have increased by an average of 10.30% since 2000, which is lower than the growth in EPS. The company last raised its dividend by 8.90% in February 2010, for the 28th year in a row.
A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1983, Air Products and Chemicals has indeed managed to double its dividend payment every seven years on average.
The dividend payout ratio remained below 50% for the majority of the past decade, with the exception of 2000 and 2009. 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 Air Products and Chemicals is trading at 17.30 times earnings and yields 2.90%. In comparison Praxair (PX) trades at a P/E multiple of 19 and yields 2.40%. I consider Air Products and Chemicals attractively valued at the moment.
Full Disclosure: Long APD
Relevant Articles: [more]
Many dividend investors pick stocks simply for their yield. This could be detrimental to investment returns, since most high yielding stocks are concentrated in few sectors and distribute almost all of their earnings. This leaves the dividend payment exposed to fluctuations in operating performance. Most successful dividend investors on the other hand tend to focus on companies that have solid fundamentals. Only such companies can afford to raise dividends consistently over the long run. Despite the importance of dividends however, investors should not forget about capital gains are important as well, particularly because they provide the other 50%-60% of annual total returns. The beauty of dividends is that they are always positive; they don't fluctuate as much as the price returns, and as such present a somewhat more stable source of income.The truth is that dividend investors also diversify across the ten major sectors, and also geographies, continents, industries etc. Academic studies cite that company specific risk is reduced substantially in a diversified portfolio consisting of 30-40 securities from different sectors of market. Thus a portfolio of 30 companies should perform similarly to the returns of S&P 500 (the market). If you compared the returns of Dow Jones Industrials Average, which is a subjectively selected portfolio of 30 stocks, you would notice its returns are close to that of S&P 500. The latter has 470 stocks more than the Dow Industrials Average. As a result, investors do not need to own more than 30 or 40 individual stocks, in order to generate market like returns.
There are several issues with indexing; some of it stemming from the fact that decisions affecting inclusion of firms are not made in accordance with a consistent strategy in mind. Back at the top of the internet bubble, many tech companies were added at inflated prices, only to be removed when prices were at their lows. This excessive turnover lowers portfolio returns. In fact, if the S&P 500 never added or removed any of its original components, it would have outperformed the results of the S&P 500 over the past 50 years.
Another problem with indexing is that there is too much turnover, and also there are management fees of 0.10% annually even for the lowest cost mutual fund. If your portfolio is $100K, that's $100/annually out of the door. Currently there are many brokerages offering free trades, which would essentially lower investment costs to zero. For example last year I paid $0 in commissions. So far this year I have also paid $0 in commissions. Thus I get to keep my $100/ annually while I am also statistically close to at least matching market returns. Another issue with index funds is that the top 30 firms in the S&P 500 account for 40% of its returns. As a result, it seems that less than 6% of the companies included account for the majority of returns over time. This proves that a diversified dividend portfolio, which has a proper allocation to as many sectors appropriate would do equally well relative to the S&P 500 index over time. One such portfolio includes the S&P Dividend Aristocrats index, a well diversified index of companies which have raised distributions for 25 consecutive years, which has outperformed the S&P 500 over the past decade.
Dividend investors do not have to be successful stock pickers, in order to be perform well over time. They just need to learn where to find the best dividend growth stocks – either in the Dividend Aristocrats Index or in the Dividend Achievers index. Next, they need to open a low cost brokerage account and start building a well diversified portfolio over time.
In addition to that, dividend stocks have provided superior returns among S&P 500 companies according to Ned Davis Research. One hundred dollars invested in non dividend payers of the S&P 500 in 1972 would have underperformed $100 invested in dividend payers during the same timeframe.
Some of the companies with the highest weights in the S&P 500, which also happen to be some of the best dividend stocks in the world include:
Johnson & Johnson (JNJ) is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. Johnson & Johnson owns more than 250 operating companies under 3 segments – Consumer, Pharmaceutical as well as Medical Devices and Diagnostics. Johnson & Johnson has increased its dividend for forty-eight consecutive years. This dividend aristocrat has a ten year distribution growth rate of 13.30% per year. Check my analysis of the stock. Yield: 3.60%
The Procter & Gamble Company (PG) is focused on providing branded consumer packaged goods. The Company’s products are sold in over 180 countries worldwide primarily through mass merchandisers, grocery stores, membership club stores, drug stores and in high-frequency stores, the neighborhood stores, which serve consumers in developing markets. The Company was organized into three Global Business Units: Beauty; Health and Well-Being, and Household Care. Procter & Gamble has increased its dividend for fifty-four consecutive years. This dividend aristocrat has a ten year dividend growth rate of 10.70% per year. Check my analysis of the stock. Yield: 3.10%
Chevron Corporation (CVX) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations, power generation and energy services. This dividend achiever has managed to boost distributions for 23 consecutive years. Check my analysis of the stock. Yield: 3.90%
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. Coca Cola has increased dividends for 48 consecutive years. This dividend aristocrat has a ten year distribution growth rate of 10.00% per year. Check my analysis of the stock. Yield: 3.30%
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The world’s largest retailer has a 36 year record of annual dividend raises. I would be a buyer of WMT on dips. Check my analysis of the stock. Yield: 2.00%
Full Disclosure: Long JNJ, PG, KO, CVX, WMT
Relevant Articles: [more]
There are over 10,000 stocks traded on NYSE, NASDAQ and AMEX. Out of this wide universe of stocks only about 300 or so have managed to increase dividends for 10 consecutive years. The typical dividend achiever is a strong recognizable brand and is characterized by solid competitive advantages, which translate in the ability to churn out higher profits and high returns on investment. These companies generate so much in excess cash flow, that it makes sense to deliver consistently higher dividend payouts to shareholders.
One such company is Target Corporation (TGT), which operates general merchandise and food discount stores in the United States. The company raised its quarterly dividend by 47% from $0.17 to $0.25 per share. The company has raised dividends for 43 consecutive years. This dividend aristocrat yields 1.90%. (analysis )
"Target's cash generation is well above the amount needed for optimal reinvestment in our core business," said Gregg Steinhafel, chairman, president and chief executive officer of Target Corporation. "Because we expect to continue to return excess cash to our shareholders through a combination of regular dividends and opportunistic share repurchase, we believe it is appropriate to increase the amount returned through the quarterly dividend."
Universal Health Realty Income Trust (UHT) operates as a real estate investment trust (REIT) in the United States. This dividend achiever increased its quarterly dividend by $0.005 to $0.605 per share. The company has raised distributions for 22 consecutive years and yields 7.40%. (analysis)
C. R. Bard, Inc (BCR), engages in the design, manufacture, packaging, distribution, and sale of medical, surgical, diagnostic, and patient care devices worldwide. The company raised dividends by 6%, to $0.18 per share. This dividend aristocrat has raised distributions for 39 consecutive years. The stock yields 0.90%.
National Fuel Gas Company (NFG), through its subsidiaries, operates as a diversified energy company primarily in the United States. The company raised its quarterly dividend by about 3% from $0.335 to $0.345/share. This high yield dividend aristocrat has raised dividends for 40 consecutive years. The stock yields 2.80%.
Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide. The company raised its quarterly dividend by 4.80% to 44 cents/share, which was the first dividend increase since 2008. Despite keeping flat its quarterly distributions for 8 quarters, this dividend achiever has still managed to record increases in its annual dividend for 17th consecutive years. The stock yields 2.90%.
The relatively small universe of dividend achievers, allows investors to concentrate on a smaller number of stocks. By applying a set of a few criteria investors could find a manageable diversified list of companies, representative of many industries and geographic locations.
Full Disclosure: Long UHT
- Dividend Aristocrats List for 2010
- H.J.Heinz and Lowe’s reward shareholders with higher dividends
- Why Dividend Growth Stocks Rock?
- How to Uncover Hidden Dividend Gems [more]
The woes of BP’s oil spill are still making headlines these days. After several unsuccessful attempts at capping the oil spill, British Petroleum (BP) is still unable to stop the oil from flowing in the water. With liabilities expected to reach several billion dollars, investors have been selling off BP’s stock, which has caused it to decline almost 50% from its highs in April. The uncertainties regarding BP's future liabilities, have caused the Obama administration to push for a dividend cut, in order to ensure that the company would have the cash to pay its obligations.
Right now British Petroleum (BP) is generating profits in excess of $6 billion/quarter, paying out $2.6 billion in dividends and reinvests the rest in the business. The oil spill so far costs approximately $1.5 billion so far, but the overall liability could exceed tens of billions of dollars. The biggest risk is Continue Reading... [more]
Dividend investing could be helpful for those investors who are trying to establish a viable income stream that would support their lifestyle in retirement. To get to that point however, investors have to give themselves several years of regular investing in income producing assets that they understand, before they generate enough in dividend income. While the recent financial crisis has not let the universe of dividend stocks unscatered, most diversified portfolios did not experience large drops in incomes. Dividend investing is different than traditional retirement investing strategies, since it focuses on living off the income stream generated by the portfolio and does not focus on selling a chunk of one’s portfolio each year in retirement.
There are three major factors, which will allow you to build a viable income stream in retirement.
The first one is to invest in dividend growth stocks, or companies which have followed a policy of regular dividend increases for at least ten years. While companies cannot control the dividend yields or the stock prices their securities are selling for in the public markets, they could control the amount of distributions paid to stockholders on a quarterly or annual basis. Good starting places for investors interested in researching companies with long dividend growth histories are the dividend achievers, the dividend aristocrats and the dividend champion’s lists. The goal is to include companies which raise dividends consistently in order to produce an income stream which increases at or above the average rate of inflation. Two companies which have managed to achieve that over the past four or five decades include Johnson & Johnson (JNJ) and Procter & Gamble (PG).
Johnson & Johnson (JNJ) is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. Johnson & Johnson owns more than 250 operating companies under 3 segments – Consumer, Pharmaceutical as well as Medical Devices and Diagnostics. Johnson & Johnson has increased its dividend for forty-seven consecutive years. This dividend aristocrat has a ten year distribution growth rate of 13.30% per year. Check my analysis of the stock. Yield: 3.60%
The Procter & Gamble Company (PG) is focused on providing branded consumer packaged goods. The Company’s products are sold in over 180 countries worldwide primarily through mass merchandisers, grocery stores, membership club stores, drug stores and in high-frequency stores, the neighborhood stores, which serve consumers in developing markets. The Company was organized into three Global Business Units: Beauty; Health and Well-Being, and Household Care. Procter & Gamble has increased its dividend for fifty-three consecutive years. This dividend aristocrat has a ten year dividend growth rate of 10.70% per year. Check my analysis of the stock. Yield: 3.10%
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. Coca Cola has increased dividends for 48 consecutive years. This dividend aristocrat has a ten year distribution growth rate of 10.00% per year. Check my analysis of the stock. Yield: 3.30%
Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. This dividend champion has rewarded shareholders with dividend raises for 47 years in a row. The company has a ten year dividend growth rate of 12.90%. Check my analysis of the stock. Yield: 2.70%.
The second tool that would help investors increase their dividend income is the power of dividend reinvestment. During the accumulation stage, dividends should be re-invested back by purchasing more stock, which further compounds investment returns over time.
The last but not least factor includes portfolio contributions on a regular basis. The general rule of thumb is that for each dollar saved in your twenties in stocks, one would be able to generate one dollar in income in their sixties. Therefore, investing even only a small amount regularly should add to the income potential of one’s portfolio.
Let’s illustrate this point with the following example. Let’s assume that we have an investor with $1000 at the end of 1979. They have selected Johnson & Johnson (JNJ) as their investment choice and have three options to consider:
1) Spend all of their dividends and never contribute anything to the portfolio
2) Reinvest dividends in JNJ stock
3) Reinvest dividends in JNJ stock and also add $100 to the account each year
By the end of 2009 the first option would be generating almost $1169 in annual dividend income, for an yield on cost of 116.90%. The second option would be generating $2072 in annual dividend income, while the third option would be generating $3228 in annual dividend income. With the last option, the investor would have invested a total of $4000 throughout their lifetime.
To check the calculations behind the chart, open the spreadsheet from this location.
Full Disclosure: Long CL, JNJ,KO and PG
- Dividend Aristocrats List for 2010
- The case for dividend investing in retirement
- Dividend Grouping for Dividend Income
- Inflation Proof your income in retirement with Dividend Stocks [more]
As a dividend growth investor you would find that over time some stocks tend to fall off your radar and no longer fit the rising income stream criteria that you purchased them for in the first place. Thus it is important to monitor your portfolio on a regular basis and place such stocks on your sell radar. M&T Bank (MTB) and British Petroleum (BP) are two companies which I am closely monitoring, since they have both frozen dividends for several quarters in a row.
The four important characteristics of successful dividend portfolios include entry and exit criteria, diversification, dollar cost averaging and selective dividend reinvestment. I have built my dividend portfolio around those important characteristics over the past few years. I have grouped the stocks I own by sector. I have also included additional information about each company, and I have also marked any companies which I do not find attractive at the moment with "HOLD". Just because a company is not attractively valued at the moment however does not mean that it is automatically a sell. Any companies which I have considered to be a sell have been sold off. Continue Reading... [more]
The woes of BP’s oil spill are making national headlines these days. After several unsuccessful attempts at capping the oil spill, British Petroleum (BP) is still unable to stop the oil from flowing in the water. With liabilities expected to reach several billion dollars, investors have been selling off BP’s stock, which has caused it to decline over 30% from its highs in April. Many investors are now wondering whether now is the time to capitalize on the weakness in BP’s stock price and purchase the stock at a discount.
On the positive side, the company earned $16.5 billion in 2009, or $5.28/share. It earned $1.92/share in the first quarter of 2010, which was more than enough to cover its quarterly dividend of $0.84/share. With a dividend yield of 9% and a Price/Earnings ratio of 6, the company definitely looks attractive. The main issue here is the total liabilities that the company would have to incur in order to clean up the mess from the oil spill. If hurricane season is especially intense this year, the environment of the whole Gulf of Mexico region could be severely affected. This could make it very expensive to clean up the oil spill mess. With all the uncertainty around, analysts are forecasting either the implosion of the company or a takeover of BP. Given the company’s strong cash flow generation however, BP should be able to shoulder the costs financially. The main problem is the damage to its reputation.
At the same time other quality oil companies have gone down in tandem with BP, falling oil prices and falling equity indices worldwide. If investors are not willing to take the company specific risk of BP, they could look elsewhere to purchase quality oil companies at a discount. Three dividend growth oil stocks which look attractively priced at the moment include Chevron (CVX), Exxon Mobil (XOM) and Royal Dutch Shell (RDS-B).
Exxon Mobil Corporation (XOM) is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. It also has interests in electric power generation facilities. This dividend aristocrat has raised dividends for 28 consecutive years. The stock yields 2.90% and trades at a P/E of 14. (analysis)
Chevron Corporation (CVX) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations, power generation and energy services. This dividend achiever has managed to boost distributions for 23 consecutive years. The stock trades at a P/E of 11 and yields 3.90%.(analysis)
Royal Dutch Shell (RDS.B) is engaged worldwide in the aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. The Company operates in three segments: Upstream, Downstream and Corporate. This dividend stock has raised distributions since 1993. The stock yields 6.40% and trades at a P/E of 11. (analysis)
For enterprising investors looking for a bargain, BP stock might look like the ultimate value play. That being said, investors should do well over time with a lower amount of risk by allocating their capital to other oil companies. My personal favorite is Chevron (CVX), with its adequately covered dividend payment, above average yield and low price/earnings ratio of 11. I also like the dividend growth prospects of Chevron as well, which makes it my top oil pick.
Full Disclosure: Long BP, CVX, RDS.B and XOM
- Chevron Corporation (CVX) Dividend Stock Analysis
- Exxon Mobil (XOM) Dividend Stock Analysis
- Chevron (CVX) Raises Dividends; MLPs follow suit
- Royal Dutch Shell Stock Analysis [more]
The Coca-Cola Company manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company is member of the S&P 500, Dow Jones Industrials and the S&P Dividend Aristocrats indexes. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for 48 years. One of the largest holders of Coca-Cola stock is no other than the Oracle Warren Buffett, who is the chairman of Berkshire Hathaway (BRK.A;BRK.B) and one of the best investors in the world.
Over the past decade this dividend stock has delivered an average total return of 3.60% to its shareholders. The stock has largely traded between $65 and $40 over the past decade.
The company has managed to deliver a 14.30% average annual increase in its EPS over the past decade. Analysts are expecting an increase in EPS to $3.45 for 2010 and $3.76 by 2011. This would be a nice increase from the 2009 earnings per share of $2.93. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time, as well as increases in volumes in emerging markets such as China.
The acquisition of Vitaminwater in 2007 has increased growth in the company’s non-soda business, which is where Coke lags behind PepsiCo. The acquisition of CCE’s North American bottling business, should bring in sufficient cost savings for the company’s North American supply chain, which would result in increase in cash flows. The deal is expected to deliver approximately $350 million dollars in cost savings over the first four years of implementation. In addition to that, it will bring more control over North American operations, deliver more flexibility in the company’s strategy implementation and reduce conflicts over the product mix with bottlers.
The Return on Equity has been in a decline after hitting a high in 2001. It has stabilized since 2005 at a very impressive 30%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The reason for the high returns on equity is that the company does not generally own the high capital intensive bottlers or fountain wholesalers, which produce and distribute the actual drinks. Instead it sells syrups, which are then mixed at the bottlers plants, and then are packaged and distributed. Coca Cola does have partial interests in 38 bottlers and distributors however, which accounted for over half of its worldwide volumes. Coca Cola Enterprises (CCE), in which Coca Cola (KO) owns a 34% stake, accounts for almost half of Coca-Cola’s US concentrate sales.
Annual dividend payments have increased by an average of 10.30% since 2000, which is lower than the growth in EPS. The company last raised its dividend by 7.30% in February 2010, for the 48th year in a row.
A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1968, The Coca Cola Company has aindeed managed to double its dividend payment every seven years on average.
The dividend payout ratio remained above 50% for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Coca Cola is trading at 17.30times earnings and yields 3.40%. In comparison arch rival in the cola wars Pepsi Co (PEP) trades at a P/E multiple of 16.10 and yields 3.10%. Check my analysis of Pepsi Co (PEP). I consider Coca Cola Company is just as attractively valued at the moment as Pepsi Co. I would add to my position in the stock as long as it trades below $58.60.
Full Disclosure: Long KO and PEP
- Capitalize on China’s Growth with these dividend stocks
- Seven dividend aristocrats that Buffett owns
- Buffett the dividend investor
- Four notable dividend increases [more]
Chevron Corporation operates as an integrated energy company worldwide. Chevron Corporation is a component of the S&P 500 and Dow Jones Industrials Indexes. The company is also a dividend achiever, which has consistently raised its dividends for 23 years in a row.
Over the past decade this dividend stock has delivered an annual average total return of 10.30% to its shareholders.
At the same time company has managed to deliver a 3.10% average annual increase in its EPS since 2000. The increase in prices of crude oil and natural gas definitely helped with earnings. The rapid fall of energy prices in late 2008 and early 2009 and weak global demand led to a 55% decrease in earnings per share in 2009 to $5.24. For fiscal year 2010 analysts expect earnings to increase by 53% to $8/share. Analysts also expect earnings per share to rise 25% from there to $10/share by FY 2011.
Any analysis of earnings trends for an oil and gas producer such as Chevron would definitely depend of the future prices of energy commodities over the next few years. Nevertheless the dividend is sustainable at current levels and there definitely is some room for dividend growth in 2011 and beyond.
Returns on Equity decreased to 11.70% in 2009, after a few years of consistently being above 20%. Year over year this indicator will fluctuate, due to the changes in the value of oil and natural gas. The company should be able to generate sufficient average returns on equity in excess of 20% in the long run.
Annual dividend payments have increased by an average of 8.30% annually since 2000, which is higher than the growth in EPS. The reason for this is that earnings have a much higher volatility than dividend payments. In my analysis of Chevron from last year, the growth in earnings was much higher than the dividend growth.
An 8 % growth in dividends translates into the dividend payment doubling almost every nine years. Since 1989 Chevron Corporation has actually managed to double its dividend payment almost every ten years on average. The company recently raised its quarterly dividend by 5.90% to 72 cents/share.The dividend payout ratio has followed the trend in earnings and returns on equity. It largely remained at or below 50% after 2003. Before that it did shoot up above 50% in 2000 and in 2002. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Chevron Corporation is trading at a P/E of 11.70, yields 3.70% and has an adequately covered dividend payment. The forward P/E for 2010 earnings is close to 10. In comparison Exxon Mobil (XOM) trades at a P/E multiple of 14.50 and yields 2.80%, while British Petroleum (BP) trades at a P/E multiple 8 while yielding 6.80%.I find Chevron attractively valued at current levels given its stable dividend growth history. If you are looking to add exposure to the energy sector for your dividend portfolio then CVX could just be the right stock for you. [more]
Few companies can afford to consistently boost dividends. The ones that can do it are characterized by strong competitive advantages and are widely recognized brand names. Consumers are willing to pay a higher price for the quality of the goods or services which those companies provide, which drives sales and profitability for the corporations. The companies raising distributions last week included Lowe’s Companies (LOW) as well as Heinz (HNZ).
Lowe's Companies, Inc. (LOW) , together with its subsidiaries, operates as a home improvement retailer in the United States and Canada. The company raised its quarterly dividend by 22% from $0.09 to $0.11 cents/share. This dividend aristocrat has raised dividends for 49 consecutive years. The stock yields 1.70%.
H. J. Heinz Company (HNZ) manufactures and markets food products for consumers, foodservice, and institutional customers. The company raised its quarterly distributions by 75 to 45 cents/share. This dividend stock has consistently raised distributions since 2004. The H. J. Heinz Company had been a member of the S&P dividend aristocrats index between 1990 and 2002, before it cut its distributions in 2003. The stock yields 4.10%.
SEI Investments Company provides investment processing, fund processing, and investment management business outsourcing solutions to corporations, financial institutions, financial advisors, and high-net-worth families. SEI Investments (SEIC) announced a 10% increase in its semi-annual dividend from $0.09 to $0.10 per share. The company has raised dividends for 19 consecutive years. This dividend achiever yields 0.95%.
UnitedHealth Group Incorporated (UNH) provides healthcare services in the United States. The company sharply raised its annual dividend from 3 cents to 50 cents/share and switched to paying distributions every quarter. The stock yields 1.70%.
Deere & Company (DE) provides products and services primarily for agriculture and forestry worldwide. The company raised quarterly distributions by 7% to 30 cents/share. While this was the first quarterly increase since 2008, the company’s annual dividend has consistently increased since 2004. The stock yields 2.10%.
McKesson Corporation (MCK) offers medicines, pharmaceutical supplies, and information and care management products and services for the healthcare industry. The company increased the quarterly dividend by 50% to 18 cents/share. The stock yields 1%.
The Cato Corporation (CATO) operates as a fashion specialty retailer for fashion and value conscious females principally in the southeastern United States. The company raised its quarterly distribution by 12% to 18.50 cents/share. This was the first dividend increase since 2007. The stock yields 3.10%.
Williams-Sonoma, Inc. (WSM) operates as a specialty retailer of home products. The company raised its quarterly dividend to 15 cents/share. This was the second dividend increase this year. The company last raised distributions in 2008 before that. The stock yields 2%.
Quanex Building Products Corporation (NX) provides engineered products and aluminum sheet products. The company’s Board of Directors authorized 33.33% increase in its quarterly dividend to 4 cents/share. The stock yields 0.90%.
Full Disclosure: None
- Why Dividend Growth Stocks Rock?
- How to Uncover Hidden Dividend Gems
- Are Dividend Investors Stock Pickers?
- A record 22 companies boost dividend payouts [more]