Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. This dividend king has paid dividends since 1948 and increased distributions on its common stock for 56 years in a row.
The company’s last dividend increase was in February 2012 when the Board of Directors approved a 10% increase to 49.50 cents/share. The company’s largest competitors include W.W. Grainger (GWW), Autozone (AZO) and Advanced Auto Parts (AAP).
Over the past decade this dividend growth stock has delivered an annualized total return of 9.30% to its shareholders.
The company has managed to deliver a 6.10% in annual EPS growth since 2002. Analysts expect Genuine Parts Company to earn $4.07 per share in 2012 and $4.39 per share in 2013. In comparison Genuine Parts Company earned $3.58/share in 2011.
The growth in EPS was helped by stock buybacks, where the company repurchased about 1% of their outstanding stock each year over the past decade. The company’s near term prospects should be aided by sales growth, triggered by the expansion in the US economy. It should also be able to leverage its distribution networks to increase sales in acquired companies. Margins should also be higher on cost cutting and higher volumes. Longer term the company could benefit from increased complexity of vehicles and the rising number of automobiles. The company seems to be very conservative in its finances and has a low level of debt coupled with strong cash flow from operations to fund future dividend increases. The industry will force a lot of smaller competitors out, which could result in more opportunities for Genuine Parts Company. Long-term growth will be driven by internal growth and acquisitions.
Genuine Parts Company has managed to earn a higher return on equity over the past decade. In fact, this indicator increased from 16.40% in 2002 to 20.30% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 4.80% per year over the past decade, which is lower than to the growth in EPS. Over the past two years however, dividends have been raised at a rate of 10% per year. Given company’s EPS projections, I would expect another high single digit increase in 2013, followed by a return to the 5% growth in distributions.
A 5% growth in distributions translates into the dividend payment doubling every fifteen years. If we look at historical data, going as far back as 1983 we see that Genuine Parts Company has actually managed to double its dividend every ten years on average.
The dividend payout ratio has closely followed the rise and fall of the economic cycle. It decreased between 2003 and 2007, rose in 2008 – 2009 and has been on the decline ever since. Overall, it has remained firmly above 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Genuine Parts Company is attractively valued at 16.50 times earnings, yields 3.10% and has an adequately covered dividend. I would consider initiating a position in the stock on dips, subject to availability of funds.
Full Disclosure: Long GWW
- Eleven Dividend Kings, Raising dividends for 50+ years
- Dividends versus Share Buybacks/Stock repurchases
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One fundamental question that all investors ask themselves is how much money do I need in order to be able to retire. There are many methods that could help retirees generate enough cash in retirement. I have discussed the shortcomings of the popular four percent rule in previous articles. Today, I am going to discuss the concept of using dividend paying stocks for generating income in retirement.
The concept is relatively simple and involves a few easy to follow rules:
1) Accumulate a certain amount of money
2) Invest that money regularly in quality companies that pay a dividend
3) When the dividends from these income stocks exceed your expenses you are financially independent
I rarely discuss accumulating money on this site. I assume that individuals reading this article have the means to figure out means to accumulate a certain level of capital. The goal of this article is to discuss specific strategies, which will assist in investing that money until the goal of financial independence is achieved.
The goal of the dividend investor is to have a portfolio, which throws off a sufficient amount of cash to pay for their expenses. Dividends are a more stable source of returns than capital gains, which makes them an ideal source of income for retirees. While stocks are said to deliver long-term returns of 10% per year, it is not uncommon for investors to experience severe losses, followed by strong bullish moves. This roller coaster ride makes relying on total returns a very risky proposition for retired investors.
Assume that you have saved enough to have a portfolio worth $500,000, yielding 4% and growing distributions at 6% annually. This portfolio generates $20,000 in annual dividend income. If the income needs of the investor are $20,000/year, then they can easily retire. If income grows at 6% per year, the retiree will generate $21,200.
With dividends, retired investors know exactly when to expect a return on their investment. This makes planning for retirement expenses much easier. In addition, dividend payments do not fluctuate as much as the prices of common stocks. As a result, investors in dividend paying stocks receive a form of income which is stable, reliable and is deposited in your account at predictable intervals of time. In addition, because dividend stocks represent ownership in actual businesses, they can afford to raise distributions at or above the rate of inflation by simply passing on rising costs to consumers. This provides an inflation adjusted stream of income for retirees.
Dividends can get cut however. To minimize this risk, investors need to be diversified and only purchase the right stocks after rigorous screening criteria. Investors need to have a diversified income portfolio consisting of at least 30 individual stocks from as many sectors and countries as possible, without sacrificing quality of the positions of course. Investors also need to purchase stocks which are priced attractively and have the right competitive advantages to ensure their business model will keep delivering in the future. Even if a dividend cut occurs, investors should act quickly and replace this stock with another candidate, in order to minimize any further downside risk to that share of their portfolio dividend income.Chasing yield and focusing only on the highest yielding sectors will certainly lead to problems for yield chasing gamblers.
Accumulating dividend stocks is a long term process. The type of stocks I tend to invest in have wide moats, long histories of dividend increases, attractive valuations and multi-national operations. Four such examples include:
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. This dividend aristocrat has raised distributions for 40 years in a row and has a ten year dividend growth rate of 8.70%/year. Yield: 3.10% (analysis)
Johnson & Johnson (JNJ) engages in the research, development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has raised distributions for 50 years in a row and has a ten year dividend growth rate of 12.40%/year. Yield: 3.60% (analysis)
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. This dividend aristocrat has raised distributions for 35 years in a row and has a ten year dividend growth rate of 27.40%/year. Yield: 3.10% (analysis)
PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. It operates in four divisions: PepsiCo Americas Foods (PAF); PepsiCo Americas Beverages (PAB); PepsiCo Europe; and PepsiCo Asia, Middle East, and Africa (AMEA). This dividend aristocrat has raised distributions for 40 years in a row and has a ten year dividend growth rate of 13.30%/year. Yield: 3.10% (analysis)
Full Disclosure: Long all stocks listed above
- When can you retire on dividends?
- How to generate income from your nest egg?- Inflation Proof your income in retirement with Dividend Stocks
- Don't Chase High Yield Stocks Blindly [more]
Casey’s General Stores, Inc. (CASY), together with its subsidiaries, operates convenience stores under the Casey’s General Store, HandiMart, and Just Diesel names in 11 Midwestern states, primarily Iowa, Missouri, and Illinois. This dividend achiever has paid dividends since 1990 and increased distributions on its common stock for 12 years in a row.
The company’s last dividend increase was in February 2012 when the Board of Directors approved a 11.10% increase to 15 cents/share. The company’s largest competitors include Weis Markets (WEIS), Supervalu (SVU) and Fresh Market (TFM).
Over the past decade this dividend growth stock has delivered an annualized total return of 18% to its shareholders.
The company has managed to deliver a 14.80% in annual EPS growth since 2002. Analysts expect Casey’s to earn $3.11 per share in 2012 and $3.54 per share in 2013. In comparison Casey’s earned $2.22/share in 2011.
The improved financial performance at Casey’s has been driven by increase in number of store locations, increase in in-store promotional activities as well as implementation of a product mix with higher profit margins. The company grew by 109 stores in 2011 to 1,637 stores. It currently has a presence in 11 states, although just four states account for the majority of store locations. As a result, the number of Casey’s stores is far from saturated. The company grows the number of stores through purchasing existing locations from competitors or by building new stores. The company’s goal is to increase number of stores by 4% - 6% per year. The company is also expecting to spend significant amounts on renovating a large number of stores, in an effort to increase its appeal to customers, and increase foot traffic.
Gasoline accounted for 71% of Casey’s sales in 2011, but 24.10% of gross profits. Higher gasoline prices over the past three years have led to higher sales and higher profit margins. The company’s grocery and other merchandise accounted for 21.20% of sales, but 43.70% of gross profits. Prepared foods and fountain segment contributed 7.40% of revenues and 29.30% of gross profits. Although gasoline only accounts for a quarter of gross profits, it brings in customers, who are then more likely to come in the store and purchase some of its high margin products. Casey’s has been under increased pressure in its prepared foods, as bread, meat and cheese prices have been increasing, and it has been unable to pass on price increases to consumers.
Casey’s business is seasonal, and generally the Company experiences higher sales and profitability during the first and second fiscal quarters (May-October), when customers tend to purchase greater quantities of gasoline and certain convenience items such as beer and soft drinks.
Approximately 60% of all Casey’s General Stores are located in areas with populations of fewer than 5,000 persons, while approximately 15% of all stores are located in communities with populations exceeding 20,000 persons. The company has calculated that its stores can be profitable even if it operates in communities with as little as 500 persons, as long as there isn’t any competition. Casey’s operates a central warehouse, the Casey’s Distribution Center, adjacent to its Corporate Headquarters facility in Ankeny, Iowa, through which they supply grocery and general merchandise items to our stores. The Company owns the land and the buildings behind 99% of its stores.
In the past year, Casey’s rejected an unsolicited bid to acquire it, and spent a considerable amount in legal fees as well as fees related to its recapitalization program. These one-time items amounted to 41 cents/share. Without them, EPS would have been $2.65 in 2011. As part of that program, Casey’s was able to repurchase $500 million worth of its stock at an average price of $38.25/share in 2011.
Casey’s has managed to earn a higher return on equity over the past decade. In fact, this indicator increased from 9% in 2002 to 15.40% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 21.70% per year over the past decade, which is higher than to the growth in EPS. This has led to an expansion in the dividend payout ratio for the company.
A 22% growth in distributions translates into the dividend payment doubling almost every three and a half years. If we look at historical data, going as far back as 1990 we see that Casey’s has actually managed to double its dividend every four and a half years on average.
The dividend payout ratio has increased over the past decade, rising from a low of 12.50% in 2002 to almost 23% in 2011. This explains the fact that dividend growth has been faster than earnings growth over 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.
I have been familiar with Casey’s since at least 2008, and have purchased gasoline and some of its in-store products from them. Their pizzas are good, and some customers I have spoken to go out of their way just so they can buy them. I never really researched whether Casey’s is even publicly traded, until it popped up during my weekly reviews of dividend increases. While stock price has increase significantly over the past decade, I still believe that there is room for growth. However, if the company gets acquired, investors would be giving up their share of potential future growth.
Currently, Casey’s is attractively valued at 18.70 times earnings, and has an adequately covered dividend. It only yields 1.10%, which is too low per my entry criteria. I do realize that some of the great growth stories end up yielding little, but could more than compensate for that through strong total returns over time. I added a quarter position in this stock on recent weakness over the past month. Companies like Casey’s have the potential to be a multibagger over the next few years. [more]
You have worked all your life and accumulated a nest egg. Now that it is time to live off that pile of money, there is no concrete advice on how to accomplish this task. Some of the most common methods that retirees are typically sold by Wall Street include annuities, mutual funds and bonds.
There are many issues with these investments. The main issue with annuities is that they are not liquid, and could be sold back only after steep fees are paid, enriching the broker and/or the insurance company that sold them to the investor. Another issue with annuities is that once the participant and his/her spouse are deceased, the income stream would not continue for future generations.
The main issue with mutual funds is that total returns are widely unpredictable. Distributing a certain amount of funds every year using the four percent rule could result in rapid depletion of funds if retirement started at a major market peak such as the ones in 2000-2001 or 2007 -2008. In addition, the fees associated with these mutual funds in addition to any front loads make them big earners for the companies selling them.
The major positive of fixed income securities such as US Treasuries is that the income is guaranteed by the US Government. Investors would have a certainty as to the amount and timing of income they would receive. The major issue with treasury bonds is that the payments will never increase, which leads to a lower purchasing power of the interest income over time.
For my own retirement, I am using the dividend retirement strategy, which has the following positives:
1) My capital produces income
2) My capital is in totally liquid investments that can be sold at a moment’s notice
3) I do not pay management fees or other expenses associated with my account
4) My capital generates income that will grow over time
5) My capital generates an income stream which is taxed favorably
The way to pensionize your nest egg is by building a diversified portfolio consisting of at least 30 dividend growth stocks. The portfolio should have stock representation of as many sectors as possible, without sacrificing quality however. The portfolio should focus on dividend growth stocks, since most of these are companies with strong businesses that generate rising amounts of profits. This has created a culture of sharing the wealth with shareholders by paying out higher distributions over time.
In order to stack the odds in your favor, the following guidelines for successful portfolio management should be implemented:
1) Investors should screen from a list such as the dividend achievers, using a set of predetermined criteria
2) Investors should then analyze the remaining securities one by one, trying to determine whether they have any wide moats, or strong competitive advantages
3) Investors should try to avoid overpaying for their income stocks, since doing so would lead to lower dividend incomes for a long period of time.
4) Investors should also focus on companies with sustainable dividends, which will minimize the risk of dividend cuts over time
5) Investors should try to own at least 30 individual securities, representative of as many sectors as possible. Buying a lower quality stock simply for diversification purposes is to be avoided.
The types of stocks that will be added to a portfolio could be any of these core dividend growth stocks or might even be any of these companies I hold in my dividend portfolio.
Some examples include:
McDonalds Corporation (MCD), together with its subsidiaries, franchises and operates McDonalds restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. The company has increased dividends for years in a row and has a ten year dividend growth rate of 27.40%/year. Yield: 3.20% (analysis)
PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide.The company has increased dividends for years in a row and has a ten year dividend growth rate of 13.30%/year. Yield: 3.10% (analysis)
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has increased dividends for since the spin off from Altria in 2008. Yield: 3.60% (analysis)
Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has increased dividends for years in a row and has a ten year dividend growth rate of 12.90%/year. Yield: 2.50% (analysis)
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. The company has increased dividends for years in a row and has a ten year dividend growth rate of 8.80%/year. Yield: 3.60% (analysis)
Full Disclosure: Long all stocks mentioned in this article
- Margin of Safety in Dividends
- Seven wide-moat dividends stocks to consider
- Why Sustainable Dividends Matter
- Roth IRA’s for Dividend Investors [more]
Back in September 2011, several dividend bloggers and I launched a dividend growth index. Basically, each one of us selected three income stocks, and the end result was a moderately diversified dividend portfolio. The three stock picks I selected included Enterprise Product Partners, McDonald’s and Chevron. You can read the reasoning behind each selection in this article:
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. This dividend aristocrat has boosted distributions for 35 years in a row. The company boasts a 10 year dividend growth rate of 27.40%/year. The latest increase of the quarterly dividend was 14.75% to 70 cents/share. McDonald’s earned $5.27/share in 2011, and analysts expect it to earn $5.58/share in 2012 and $6.17/share in 2013. Future profitability will be closely tied to same store sales performance, innovations in the menu and ability to expand in key international markets. Currently, the annual dividend payment of $2.80/share is adequately covered. I expect distributions to be in the low double digits for the foreseeable future. The stock has returned a negative 6.60% so far in 2012, and 8% since the selection on Sep 23. Currently, McDonald’s is attractively valued at 17.50 times earnings and yields 3%. Check my analysis of the stock.
Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, refined products, and petrochemicals in the United States and internationally. This dividend achiever has boosted distributions for 15 years in a row. The company boasts a 10 year dividend growth rate of 27.40%/year. Over the past year the quarterly distribution was boosted by 5% to 63.50 cents/unit. Currently, the annual distribution of $2.54/unit is adequately covered from distributable cash flow. Future growth in distributable cash flow per unit will be closely tied to expanding its pipeline asset base, growing volumes through it and ability to raise prices for transporting carbons on its vast pipeline network. I expect distributions to be in the middle single digits for the foreseeable future. The units have returned 13.30% so far in 2012, and 31.10% since the selection on Sep 23. Currently, Enterprise Products Partners is attractively valued and yields 5%. Check my analysis of this master limited partnership.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. This dividend champion has boosted distributions for 25 years in a row. The company boasts a 10 year dividend growth rate of 8.80%/year. The latest increase of the quarterly dividend was 11.11% to 90 cents/share. Chevron Corporation earned $13.44/share in 2011, and analysts expect it to earn $13.03/share in 2012 and $13.54/share in 2013. Future profitability will be closely tied to prices of crude oil and natural gas, as well as the company’s ability to replace reserves successfully. Currently, the annual dividend payment of $3.60/share is more than adequately covered. I expect distributions to be in the high single to low double digits for the foreseeable future. The stock has returned 1.30% so far in 2012, and 20.70% since the selection on Sep 23. Currently, Chevron is attractively valued at 7.90 times earnings and yields 3.40%. Check my analysis of the stock.
The three companies have generated a 20% return since Sep 23, versus 21.50% for the S&P 500 (total returns). Overall, these companies present solid long term selections that I plan to hold in my income portfolio for the next several decades. In order to be successful at dividend investing, I do recommend that a portfolio
The other dividend newsletters submitting stock selections for the dividend growth index include:
Passive Income Earner
My Own Advisor
Full Disclosure: Long MCD, EPD, CVX
- Dividend Growth Portfolio Project
- Enterprise Products Partners (EPD): A Pipeline Cash Machine
- Best Dividend Stocks for 2012
- Top Dividend Stocks to own in 2012 [more]
Several dividend paying companies with long histories of dividend growth raised distributions over the past week. These companies pay stable distributions to shareholders and have regularly raised them for at least five years each. The companies include:
Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the United States and internationally. This master limited partnership raised its quarterly distributions to 63.50 cents/unit. This is the fourth distribution increase for this dividend achiever, which has boosted distributions for limited partners for 15 years in a row. Yield: 4.90% (analysis)
Plains All American Pipeline, L.P. (PAA), through its subsidiaries, engages in the transportation, storage, terminalling, and marketing of crude oil, refined products, and liquid petroleum gas (LPG) products in the United States and Canada. The company operates in three segments: Transportation, Facilities, and Supply and Logistics. This master limited partnership raised its quarterly distributions to $1.065/unit. This is the fourth distribution increase for this dividend achiever, which has boosted distributions for limited partners for 12 years in a row. Yield: 5.10%
Genesis Energy, L.P. (GEL) operates in the midstream segment of the oil and gas industry in the Gulf Coast region of the United States. It operates through three divisions: Pipeline Transportation, Refinery Services, and Supply and Logistics. This master limited partnership raised its quarterly distributions to 46 cents/unit. This is the fourth distribution increase for this dividend achiever, which has boosted distributions for limited partners for 9 years in a row. Yield: 6%
Targa Resources Partners LP (NGLS) provides midstream natural gas and natural gas liquid (NGL) services in the United States. The company operates in two divisions, Natural Gas Gathering and Processing, and Logistics and Marketing. This master limited partnership raised its quarterly distributions to 64.25 cents/unit. This is the fourth distribution increase for this dividend achiever, which has boosted distributions for limited partners for 6 years in a row. Yield: 6.60%
Healthcare Services Group, Inc. (HCSG), together with its subsidiaries, provides housekeeping, laundry, linen, facility maintenance, and dietary services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States. It operates in two segments, Housekeeping and Dietary. The company raised its quarterly dividend to 16.375 cents/share. Healthcare Services Group has boosted distributions for ten years in a row. Yield: 3.10%
Cummins Inc. (CMI) designs, manufactures, distributes, and services diesel and natural gas engines, and engine-related component products worldwide. It operates in four segments: Engine, Components, Power Generation, and Distribution. The company raised its quarterly dividend by 25% to 50 cents/share. Cummins has boosted distributions for seven years in a row. Yield: 2.40%
A. O. Smith Corporation (AOS) engages in the manufacture and sale of water heaters and boilers to the residential and commercial markets primarily in the United States, Canada, and the People’s Republic of China. The company raised its quarterly dividend by 25% to 20 cents/share. This dividend achiever has boosted distributions for 19 years in a row. Yield: 1.70%
Fastenal Company (FAST), together with its subsidiaries, operates as a wholesaler and retailer of industrial and construction supplies in the United States and internationally. This dividend achiever raised its quarterly distributions by 11.80% to 19 cents/share. This marked the 14th consecutive annual dividend increase for this dividend achiever. Yield: 1.80%
Ryder System, Inc. (R) provides transportation and supply chain management solutions. It operates in three segments: Fleet Management Solutions, Supply Chain Solutions, and Dedicated Contract Carriage. This dividend stock raised its quarterly distributions by 6.90% to 31 cents/share. This marked the 8th consecutive annual dividend increase for this dividend achiever. Yield: 3.70%
Overall, I find the master limited partnerships like Enterprise Product Partners, Plains All American Pipeline and Genesis to be attractively priced in the current low interest environment. These partnerships manage to boost distributions regularly, and provide above average yield and distribution growth opportunities. An increase in interest rates and increased competition for acquiring new projects are the main risks that face that sector. Despite the fact I am bullish on pipeline MLPs, I would still not put more than 10% - 15% of my portfolio in it.
For the remaining companies boosting dividends, I used my entry criteria to determine their attractiveness for further research. Cummins, AO Smith and Fastenal are yielding less than the 2.50% initial yield I require. Healthcare Services Group yields 3.10%, but at this point cannot cover distributions from current earnings. This is one of the reasons why distributions have not increased by much over the past two years.
Ryder System is the only company, whose stock appears fairly priced at the moment. Unfortunately, it has only raised distributions for eight years in a row. However, I do plan on further analyzing the company in detail, in order to determine whether it will be a good fit for my income portfolio.
Full Disclosure: Long EPD
- Enterprise Products Partners L.P. (EPD) Dividend Stock Analysis
- Enterprise Products Partners (EPD): A Pipeline Cash Machine
- Master Limited Partnerships - An Island of Opportunity for Dividend Investors
- Dividend Achievers Offer Income Growth and Capital Appreciation [more]
One of the most important goals that I try to achieve in my dividend growth portfolio include stock quality, valuation and diversification. I have written extensively on diversification before, and why it is an important stepping stone in structuring your dividend portfolio. I believe that even if one has an investing edge through a strategy such as dividend growth investing, investors need to have fail safe mechanisms such as diversifying among at least 30 quality stocks, while paying a reasonable price for them. Thus, if investors end up purchasing the next Bank of America (BAC), the blow to their portfolio and dividend income would not be sizeable enough that they would have to go back to work at an old age.
In each of my articles on diversification however, there are always readers who express concerns about the amount of time it would take to keep current on all events in a 30+ stock portfolio. This is a valid concern, since it could potentially take more effort to act on a news of a dividend cut in a 30 stock portfolio than a 10 stock portfolio. I do believe however, that the added safety of spreading your risk between 30 or more income stocks is well worth the effort it would take to disseminate new information regarding one of your holdings. So how can dividend investors achieve adequate portfolio diversification, while also having a life?
In my stock picking, I use quantitative and qualitative screening criteria. In general, it takes 15- 20 hours on average to thoroughly analyze a dividend growth stock that fits my entry criteria. This could include reading annual reports, analyst reports, any notable news articles, looking at trends in dividends, earnings, stock prices, sales and familiarizing yourself with the company in general. In a portfolio of 30 stocks, this translates to several hundred hours of research and analysis. The good part about this is that once an understanding of a company’s business is done, there is typically very little work involved in learning new information about it. Typically, a company like McDonald’s (MCD) or Wal-Mart (WMT) is not going to change their business model every year. As a result, an investor who understands the business of each of these corporations today, will likely still have a good understanding of these businesses 10 years from now.
In addition, some investors already have a circle of competence in certain income stocks. This could be due to work they might have already done in researching these companies due to their occupation, through previous interactions or due to their accumulated level of knowledge in general. As a result, it might take them much less than 15 hours to analyze a stock, given the level of experience they have accumulated. For example, I have experience in the telecom industry, which lets me analyze a company like AT&T (T) much faster than analyzing a stock in the apparel industry such as V.F. Corp (VFC).
After the initial analysis has been achieved, investors who focus only on the important events surrounding the companies on their list, will not spend too much time on each individual investment. It is important however to spend approximately ten hours each week in researching new candidates for your income portfolio, screening the market for attractive opportunities and looking for important developments in the companies you own. Chances are that there is less than one important development per year per each stock on your list. In addition, certain events outside of your analysis framework could provide you with additional information. For example, everyone who paid any attention to news in 2007 – 2008 heard about the financial crisis affecting the banks. Thus, any bank stock investor should have known to look after their financial stocks with a more detailed lense.
Another positive of analyzing companies with strong competitive advantages is that there are few major developments that happen. I choose to ignore the daily market noise, and try to focus on important things such as acquisitions, dividend announcements and earnings releases. Because of this, once the investor has accumulated a comfortable level of knowledge about a company, it can mostly still be relevant 5 – 10 years from now. It could allow the investor to accumulate a good amount of knowledge on the 100 or so dividend champions or on most of the 300 dividend achievers out there, during the span of their investing career. Remember that a portfolio of 30 individual stocks takes a few years to build. Similarly, your knowledge of the dividend growth stocks of our day will take time to accumulate. As you gain experience, you will be more efficient in analyzing companies from different industries much faster.
My weekly routine includes compiling a list of dividend increases for the week, which I typically post on my site on Mondays. I also screen the market for companies which are attractively priced, given the fact that I still add money to my portfolio every month. In addition, I also try to update my knowledge of companies I have already analyzed thoroughly by compiling a weekly analysis or two. In the meantime, I have set up a portfolio at Yahoo! Finance, which allows me to scan the market for headlines related to the companies I am interested in. Most companies would typically post their annual reports in February or March, which is when they would be sending those documents to me. All of this takes me 10 - 15 hours per week.
Of course, by intimately understanding the investments I am making, I feel in charge of my own retirement destiny. I would much rather spend the time I spend on my investments, than pay 0.5% annually of my net worth to an investment adviser, while I feel clueless about my financial situation. I also enjoy expanding my knowledge on investment related subjects, which is the same reason that you are reading this website.
Full Disclosure: Long MCD and WMT
- Dividend Growth Investing Gets No Respect
- The Future for Dividend Investors
- How to select dividend stocks?
- Dividend Investors – Do not forget about total returns [more]
The story of the golden goose describes very well the world of dividend investing. On the outside, dividend stocks act like normal stocks as they go up in bull markets and go down in bear markets. On the inside however, these cash machines generate so much in excess cash flow that they are able to successfully reinvest in their business, while also paying higher dividends every year. Investors who hold onto their dividend growth stocks get a dividend check every quarter. Selling those dividend stocks and investing in the next hot tech stock would mean that investors would not be getting their golden eggs in a timely manner anymore, and would be at the mercy of the markets for their returns.
Several golden geese, announced plans to deliver higher dividends ( larger golden eggs) to their shareholders:
Hingham Institution for Savings (HIFS) provides various financial services to individuals and small businesses in Massachusetts. The company raised quarterly distributions by 4% to 26 cents/share. The bank typically pays a special dividend equivalent to the amount of regular quarterly distribution plus one penny. As a result, it essentially pays 5 quarterly dividends in a year. This marked the 18th consecutive annual dividend increase for this dividend achiever. Yield: 2.10% (analysis)
General Mills, Inc. (GIS) manufactures and markets branded consumer foods worldwide. It also supplies branded and unbranded food products to the foodservice and commercial baking industries. The company raised quarterly distributions by 8.20% to 33 cents/share. This marked the ninth consecutive annual dividend increase for General Mills. Yield: 3.50%
Duke Energy Corporation (DUK), together with its subsidiaries, operates as an energy company in the United States and Latin America. The company raised quarterly distributions by 2% to 25.50 cents/share. This marked the eighth consecutive annual dividend increase for Duke Energy Corporation. Yield: 4.40%
Darden Restaurants, Inc. (DRI) operates full service restaurants in the United States and Canada. It operates restaurants under the Red Lobster, Olive Garden, LongHorn Steakhouse. The company raised quarterly distributions by 16.30% to 50 cents/share. This marked the eighth consecutive annual dividend increase for Darden Restaurants. Yield: 4%
W. P. Carey & Co. LLC (WPC), together with its subsidiaries, provides long-term sale-leaseback and build-to-suit transactions for companies worldwide and manages a global investment portfolio. The company raised quarterly distributions to 56.70 cents/share. W. P. Carey & Co has raised dividends for 15 years in a row. Yield: 4.90%
Full Disclosure: Long HIFS
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Back at the end of 2011, I selected four dividend stocks for 2012 and beyond as part of a stock picking competition. The reasons behind the selections were listed in the original article. The companies included are characteristic of the many stocks in own in my income portfolio. They represent companies with diverse products, that have strong brand names for which consumers are willing to pay a premium. These strong brand names make it easier to pass on cost increases to customers. Future growth in these four companies will be driven by several factors. These companies sell everyday products which customers purchase repeatedly on a regular basis, thus creating sustainable diversified income streams for the companies that sell these products. In addition to that, these consumer giants tend to sell the number one or two brand in the specific market niches they are serving.
The first factor includes population growth worldwide and the growth in the number of people joining the middle class in emerging markets such as China, India, Russia and Brazil. Another factor includes continued product innovation, which leads to new products to address different needs in specific market segments. Further growth could be generated not only organically, but also through acquisitions and by squeezing money out of the value chains by streamlining operations and making them more efficient.
The companies selected included the following:
The Procter & Gamble Company (PG), together with its subsidiaries, provides consumer packaged goods and improves the lives of consumers worldwide. The company operates through six segments: Beauty, Grooming, Health Care, Pet Care, Fabric Care and Home Care, and Baby Care and Family Care. Procter & Gamble is a dividend king, which has managed to boost dividends for 56 years in a row. Despite short – term weakness over the past few quarters, the current price presents an attractive entry opportunity for long-term dividend investors. The company boosted distributions by 7% to 56.20 cents/share in 2012. Yield: 3.70% (analysis)
Johnson & Johnson (JNJ) engages in the research, development, manufacture, and sale of various products in the health care field worldwide. Johnson & Johnson is a dividend king which has raised distributions for 50 years in a row. The company boosted distributions by 7% to 61cents/share in 2012. Yield: 3.60% (analysis)
Philip Morris International Inc., through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has consistently boosted distributions since it was spin off from Altria Group in 2008. The company last boosted distributions by 20% to 77 cents/share. Yield: 3.50% (analysis)
PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. It operates in four divisions: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe, PepsiCo Asia, Middle East, and Africa. PepsiCo is a dividend aristocrat which has raised distributions for 40 years in a row. The company boosted distributions by 4.40% to 53.75 cents/share in 2012. This has been one of the lowest rates of dividend increase for several years. However, dividend growth rates do fluctuate over time, so this is something to be expected. I still find PepsiCo to be a better value than Coca – Cola (KO) at current prices. Yield: 3% (analysis)
So far this year, this selection of four stocks delivered 4.91% versus 9.48% for S&P 500. In general, in order to ensure long-term success in dividend investing, investors need to hold a diversified list of at least 30 individual income stocks representative of as many industries that make sense. Furthermore, a portfolio of attractively valued income stocks would take a period of time to build.
The year-to-date performance of the other bloggers is listed below:
Where Does My Money Go +13.34%
Intelligent Speculator +12.25%
Dividend Mantra +6.78%
Dividend Growth Investor +4.91%
Million Dollar Journey +0.69%
My Traders Journal -1.37%
The Passive Income Earner -5.65%
Wild Investor -7.73%
The Financial Blogger -13.15%
Beating the Index -26.55%
Full Disclosure: Long all stocks listed above
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