As I explained in my article on my dividend retirement plan, I invest in blue chip dividend stocks which can afford increase dividends for decades. Once the dividend income from my portfolio exceeds my expenses I would consider myself financially independent. However, I realize that there are many risks I need to minimize, in order to be able to enjoy the continued stream of rising dividend payments.
The types of stocks I purchase tend to be companies with wide moats or strong competitive advantages which have pricing power and customer loyalty. These companies have been able to expand sales and profits and managed to pay a higher dividend in the process every year. These companies are attractively priced at the time of purchase and have sustainable dividend payments. The fact that these companies have paid rising distributions for years if not decades and the fact that they offer above average yields is just icing on the cake. The types of companies I invest in include Johnson & Johnson (JNJ), Wal Mart Stores (WMT), Chevron (CVX), Enterprise Product Partners (EPD). There are several risks however, which would be dividend retirees need to consider.
One risk which is seldom addressed by most financial advisors is broker failure. Most clients at SIPC insured brokers will be able to get back up to $500,000 in assets or $250,000 in cash in case their broker fails. If this broker had no internal controls to keep customer funds segregated, investors which hold more than the SIPC insured level risk receiving pennies on the dollar in assets that were rightfully theirs. As a dividend investor, I would hate to lose even a portion of my income stream just because my broker fails. As a result, my dividend growth plan made certain that I spread my assets across several brokerages and that I do not commit more than $100,000 per brokerage. I plan on putting a smaller amount in comparison to the SIPC limit because I expect my stocks to deliver solid capital appreciation over the next few decades. In addition, it is much easier to spread my funds across brokerages $100,000 at a time, than $500,000 at a time. [more]
As a dividend investor, I get rewarded any time that a stock I own pays me a dividend. I get particularly excited, when a stock I also regularly raises distributions. That being said, I thoroughly analyze financial statements, earnings estimates, major press releases, and try to gain a general feel of how a particular business is doing. In general, the story that makes me happy and willing to hold to my position, is when a company has managed to boost profitability over the past ten years and also has the potential to grow earnings into the next decade. For dividend investors, another important thing to look for is if the company has a culture where it shares higher profitability with investors in the form of higher dividends. If all of these are present, and the company also is attractively valued at the moment, I tend to analyze it and if I like the story, I might even initiate or add to my position in it.
Over the past week, several companies announced that they are increasing distributions for shareholders. The other common characteristic behind these companies is the fact that each one has raised distributions for over five consecutive years. I reviewed the list of consistent dividend raisers for the week, and included my brief commentary behind each stock or group of stocks. The companies included:
Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This REIT raised its quarterly dividends by 3.40% to 15.11 cents/share. This dividend achiever has raised distributions for 18 years in a row. Yield: 4.20% (analysis)
The company has been one of the few Real Estate Investment Trusts which managed to maintain distributions during the financial crisis, and even to increase them slightly. Over the past 5 years, dividend increases have been rather slow. This current dividend increase is pretty high, and hopefully signals management’s bullish outlook on future Funds from Operations (FFO) growth. I consider the current yield to be low, however I like the fact that management has continued diversifying operations and taking advantage of low interest rates to acquire income generating properties. That being said, I would like a current yield of at least 5%, before I add to my position in the company.
Cincinnati Financial Corporation (CINF) engages in the property casualty insurance business in the United States. The company raised its quarterly dividends by 1.20% to 40.75 cents/share. This dividend championhas raised distributions for 52 years in a row. Yield: 4.10%
While I admire the company’s long streak of consecutive dividend increases, I am not so sure about the future. In the past year, Cincinnati Financial has barely been able to cover its dividend payments. In addition, over the past four years, its distributions growth has been very low. As a result, I am still holding on to my position in the stock, but would consider selling if yields drop below 4%.
Community Bank System, Inc. (CBU) operates as the bank holding company for Community Bank, N.A. that provides various banking and financial services to retail, commercial, and municipal customers. The company raised its quarterly dividends by 3.80% to 27 cents/share. This dividend champion has raised distributions for 20 years in a row. Yield: 3.90%
While I like the long history of dividend increases, as well as the above average yield, I am a little hesitant about the latest slow rate of dividend increases. Low dividend increases typically signal that management does not have a very bullish outlook on near term business prospects. That being said, I do like the ten year dividend growth rate of 6.40%/year, as well as the fact that dividend is adequately covered from earnings. I would add the company to my list for further research.
MGE Energy, Inc. (MGEE), through its subsidiaries, operates as a public utility holding company in Wisconsin. The company raised its quarterly dividends by 3.30% to 39.51 cents/share. This dividend champion has raised distributions for 36 years in a row. Yield: 3%
This is another company which has a long streak of consecutive dividend increases, but offers a low yield, low dividend growth that would hardly cover inflation and has a high dividend payout ratio. I would consider it to be a hold at best.
Brinker International, Inc. (EAT) owns, develops, operates, and franchises various restaurant brands primarily in the United States. The company raised its quarterly dividends by 25% to 20 cents/share. This dividend paying company has raised distributions for 8 years in a row. Yield: 2.30%
Delta Natural Gas Company, Inc. (DGAS) distributes or transports natural gas in central and southeastern Kentucky. The company raised its quarterly dividends by 2.90% to 18 cents/share. This dividend paying company has raised distributions for 8 years in a row. Yield: 3.60%
Atrion Corporation (ATRI) , together with its subsidiaries, develops and manufactures fluid delivery devices, and ophthalmic and cardiovascular products primarily for medical applications in the United States, Canada, and internationally. The company raised its quarterly dividends by 14.30% to 56 cents/share. This dividend paying company has raised distributions for 10 years in a row. Yield: 1%
HCC Insurance Holdings, Inc. (HCC) underwrites non-correlated specialty insurance products worldwide. The company raised its quarterly dividends by 6.50% to 16.50 cents/share. This dividend achiever has raised distributions for 16 years in a row. Yield: 2%
Westlake Chemical Corporation (WLK) manufactures and markets basic chemicals, vinyls, polymers, and fabricated building products. The company raised its quarterly dividends by 154.20% to 18.75 cents/share. This dividend paying company has raised distributions for 9 years in a row. Yield: 1.10%
For the above five companies, I would keep an eye but would pass for now, due to the fact that they offer low yields and do not have long histories of dividend increases. That being said, I would add Brinker International to my list for further research.
Full Disclosure: Long CINF and O
- Realty Income (O) – The Monthly Dividend Company
- Four High Yield REITs for current income
- Dividend Champions - The Best List for Dividend Investors
- Dividend Achievers Offer Income Growth and Capital Appreciation [more]
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 paid dividends since 1976 and increased distributions on its common stock for 35 years in a row.
The company’s last dividend increase was in September 2011 when the Board of Directors approved a 14.80% increase to 70 cents/share. The company’s largest competitors include Yum Brands (YUM), Starbucks (SBUX) and Burger King (BKW).
Over the past decade this dividend growth stock has delivered an annualized total return of 16.70% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 23.80% per year. Analysts expect McDonald’s to earn $5.44 per share in 2012 and $6.02 per share in 2013. In comparison McDonald’s earned $5.27/share in 2011.
The company’s international operations have fueled the strong growth in McDonald’s earnings over the past twenty years. Despite the fact that a little over half of the company’s profits are derived internationally, this segment could continue to deliver solid performance in the future. Another factor fueling the company’s growth and maintenance of its edge against competitors and other threats has been its ability to innovate in its menu and reinvent itself in order to win. Some examples of that include the addition of salads to its menu a few years ago, as well as the introductions of premium drinks for customers. The company has also been able to focus on streamlining operations and focusing on same-store sales, rather than mindlessly expanding at all costs. However, it still plans on expanding store count, while also reimaging existing locations, in order to improve the customer experience.
McDonald's growth targets include:
- Average annual sales growth of 3% to 5%
- Average annual operating income growth of 6% to 7%, and
- Return on incremental invested capital in the high teens
The company also has a strong brand name, which has also allowed it to pass on price hikes onto customers, who nevertheless are still perceiving it’s menu in the “value” category. As a result, inflationary pressures should not affect profitability by a wide margin.
The return on equity has expanded from 10% in 2002 to 30% in 2012. 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 27.40% per year over the past decade, which is much higher than to the growth in EPS.
A 27% growth in distributions translates into the dividend payment doubling every two and a half years. If we look at historical data, going as far back as 1976 we see that McDonald’s has actually managed to double its dividend every three and a half years on average.
The dividend payout ratio has increased from 31% in 2002 to 48% in 2011. The expansion in the payout ratio has enabled dividend growth to be faster than EPS 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.
Currently, McDonald’s is attractively valued at 16.80 times earnings, yields 3.10% and has an adequately covered dividend.
Full Disclosure: Long MCD and YUM
- Dividend Paying Stocks for Retirement Income
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I often speak with investors who want to retire at some point in their lives. Unfortunately, we live in a world, where companies offering traditional pensions are shrinking in number. In addition, there is little assurance about the ability of the Social Security Fund to fund the same level of benefits for Gen X and Gen Y participants as it will for Baby Boomers. Add in uncertainties about potential for hyperinflation due to FED's printing presses, low interest rates on fixed income and a decade of zero stock market returns, and it is no wonder many people are afraid about their retirement prospects.
These investors are looking for a vehicle, that would give them the chance to overcome several risks they are facing. The risks include:
4) Outliving one's money
In other words, investors are typically looking for an asset class, that would provide them with enough income to support them for the rest of their lives. This stream of income should be able to maintain its purchasing power, and should not be volatile. In addition, this income source should lead to as little in taxes as possible. Furthermore, this income stream should last for life and even be available to pass on to future generations. This income stream should also be relatively cheap to maintain and easy to convert into cash.
Dividend growth stocks represent share ownership in companies which can afford to regularly raise distributions. This is due to the fact that they are typically characterized by having wide-moat businesses, strong competitive advantages and strong brand names. This allows these companies to maintain pricing power, that allows them to pass on cost increases to consumers who are willing to pay a premium price for these products or services. As a result, this pricing power converts in companies' abilities to generate high earnings over time, which increases the odds of maintaining purchasing power of the dividend income stream.
The fact is that most prominent dividend growth stocks sell goods or services that are used by consumers on an everyday basis. Since most of these goods and services are essentials, the demand for them does not fall off during an economic downturn. They might postpone purchasing a new car or a new computer by a few years. Even during a recession, people still eat, shower, drive and buy groceries. This ability helps dividend growth companies in earning a sufficient amount even during the most tumultuous times in order to pay a consistent and rising dividend to shareholders. The predictability of the amount and timing of dividend payments, makes these income stocks ideal for retired investors. The fact that dividend investors use distributions from their portfolios to fund their expenses, makes it real easy to live off their nest eggs. Dividend investors do not need to worry about bear markets and selling off shares at depressed prices, because they simply live off the dividends that their income portfolios generate. In addition, these investors know exactly how much income they can expect to receive from their portfolio for the week, month or year. As long as these dividends are at least maintained, investors should be able to fairly easily estimate their dividend incomes for any given timeframe.
In addition to that, dividend income is one of the most efficient taxable form of income available to investors. Currently, the top tax rate on dividends is 15%. The top tax rate on dividends is equal to the highest tax rate on capital gains. The main difference is that dividend income is fairly predictable and less volatile than capital gains. The interest on Corporate and Federal Bonds is taxed as ordinary income. Even if the tax on dividends is increased, it is unlikely that investors who make less than $100,000 in annual dividend incomes will be affected by too much.
The types of core dividend stocks for any income portfolios include companies such as:
Philip Morris International Inc.(PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This Consumer Goods company has managed to boost distributions every year since the spin-off from Altria in 2008. Emerging Markets growth, acquisitions and strong pricing power will be some of the key factors driving future profitability and dividend growth. The stock trades at a P/E of 18.60 and yields 3.40%. (analysis)
PepsiCo, Inc. (PEP) engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. I find Consumer Goods company to be a better value than arch rival Coca-Cola at the moment, while I find both to have similar growth characteristics going forward. Coca-Cola (KO) is trading at 20.90 times earnings and yields 2.60%, while PepsiCo yields 3% and trades at 19.30 times earnings. PepsiCo has managed to boost distributions for 40 years in a row, and has a ten year dividend growth of 13.30%/year. (analysis)
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. This Healthcare company is cheaper than what popular sites like Yahoo! show right now, since the earnings figures are including one-time items. I find it attractively valued at 16.50 times earnings and yielding 3.10%. Abbott has raised dividends for 40 years in a row,and has a ten year dividend growth rate of 8.70%/year. Abbott announced its intent to split in two companies in October 2011. (analysis)
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This integrated energy company has one of the best reserve replacement ratios in the industry. It is also attractively valued at 8.40 times earnings and yields 3.20%. It has raised dividends at 8.80%/year over the past decade. The company plans to spend $37 billion/year in capital spending over the next five years. The company is targeting over 22 projects, that will deliver 1 million BOE/day by 2016. The major projects that are expected to be brought online include Kashagan Phase 1 project in Kazakhstan, Kearl Oil Sands Project in Canada as well as a few in Africa. Its recent deal with Rosneft to explore in the Arctic and Black seas could generate long-term dividends for the corporation, which has tried to do business in Russia for years. (analysis)
Automatic Data Processing, Inc. (ADP) provides business outsourcing solutions. The company operates in three segments: Employer Services, Professional Employer Organization (PEO) Services, and Dealer Services. This technology company is expecting higher revenues as a result of acquisitions, improving client retention rates, and increased North American auto sales, which would boost its Dealer Services segment. The hidden growth kick behind ADP is the relatively untapped market for payroll outsourcing services for small and medium sized businesses. The company has boosted dividends for 37 years in a row and has a ten year dividend growth rate of 13.40%/year. It is attractively valued at 20 times earnings and yields 3.20%. (analysis)
Kinder Morgan Energy Partners, L.P. (KMP) operates as a pipeline transportation and energy storage company in North America. The partnership expects its acquisition of El Paso to generate significant synergies and cost savings starting from year one. It also plans on increasing distributions in 2012 to $4.98/unit. Kinder Morgan expects future distribution growth to average 5%-6% over the next several years, as it expands its network of fee generating assets. This dividend achiever has boosted distributions for 16 years in a row and has a ten year distribution growth rate of %/year. Yield: 6.10% (analysis)
Full Disclosure: Long All companies mentioned above
- Inflation Proof your income in retirement with Dividend Paying Stocks
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Successful investors buy stock in companies which are within their circle of competence. This concept has been ingrained in the minds of value investors by Ben Graham and his most famous student Warren Buffett. Investors should buy only stocks they are intimately familiar with, either because they have extensive work experience with the company in some capacity, or because they use its products and services.
Some of the dividend paying companies in my portfolio are corporations, whose products I and millions of other consumers worldwide use on a daily basis. Here is a summary of how my daily routine provides me with dividend stock ideas for further research. The narrative is rather simplistic, but the point is that we are surrounded by investment ideas everywhere. Only after training ourselves to spot these opportunities, will investors be able to capitalize on them.
First thing I do after I wake up is take a shower using a body wash and a shampoo. The body wash I use is made by Procter & Gamble (PG), whereas the shampoo is produced by Unilever (UL). I have been using the same brands of shampoo and body wash for years, and have not really thought about switching. This is a repeat purchase that I perform every few months or so. My dividend income derived from investment in Procter & Gamble and Unilever is currently paying for this expense.
I also brush my teeth using Colgate Palmolive (CL) toothpaste and shave using Gillette products. Gillette was acquired in 2005 by Procter & Gamble (PG). I use Kleenex products made by Kimberly-Clark (KMB) throughout the day, especially if it is allergy season. I use cotton swabs and Tylenol made by Johnson & Johnson (JNJ) as well.
Next step is breakfast -time for coffee and grabbing a quick bite to eat. It could be anything made by Kellogg (K), J.M. Smuckers (SJM) or Kraft Foods (KFT). Sometimes, a quick bite to eat could be getting a breakfast meal at McDonald’s (MCD), although it also sounds like a good idea for lunch as well.
I use water that my local utility is providing, and it is heated by gas that my local utility has provided as well. My electric utility powers the lights and the central air in my house. My usage of water, gas and electricity varies every month. However, the utilities are monopolists who earn a fair and steady rate of return. These could vary based off the area you live in. Some utilities include Con Edison (ED), Dominion Resources (D), ONEOK (OKE) and Piedmont Natural Gas (PNY).
After eating breakfast it is time to drive to work. Millions of people spend up to an hour in each direction commuting. You depreciate your car, your nerves and you use gasoline for that. Gasoline, which is an oil byproduct that is explored for, refined and sometimes even distributed by one of the major integrated oil companies such as Exxon Mobil (XOM) or Chevron (CVX).
Millions of people also use computers powered by Intel (INTC) processors and software created by Microsoft (MSFT). The TPS reports need to get done, and get done by the deadline as well. After the deadline is met, it is time for a company sponsored happy hour. Johnnie Walker Whiskeys, Smirnoff Vodka and Jose Cuervo are some brands made by Diageo (DEO), whereas Jack Daniels is a brand owned by Brown-Forman (BF.B). It used to be that all smokers would cause patrons to smell like cigarettes in bars with poor ventilation. Smoking indoors has been banned in many states, however it is a difficult habit to kick. I see people outside in any weather condition, still getting their Marlborough fix. Marlborough is a cigarette brand owned by Altria Group (MO) in the US and Phillip Morris International (PM) outside the US.
I would try to stop by the store at least once per week. Wal-Mart (WMT) is my one stop shop destination because of its everyday low prices. Apparently it is also a one stop shop destination for the 100 million people who walk in the stores every week. Some investors like business models that could easily be replicable, like Wal-Mart (WMT), McDonald’s (MCD) or Family Dollar (FDO).
This is just an example of everyday products or services that investors are surrounded by and could use for investment ideas. Careful research is important however, in order to determine if the company is attractively valued, and whether it could afford to grow earnings and dividends over the next decades. [more]
Like a fisherman, each week I cast my screening criteria net over the list of companies which have announced increases in distributions to shareholders. I then list out all companies which have managed to boost distributions for over five years in a row, and do a quick follow up in order to determine whether I want to dig a little further if a particular security piques my interest. This list also provides me with a measure of pockets of strength in certain sectors or individual stocks. After all, even if the overall economy is not doing fantastically well, there are always stocks or sectors which can grow for years before reaching a market saturation point. This would translate into higher earnings, dividends and stock prices over time, a trifecta that generally benefits investor’s returns.
Included below are five consistent dividend increasers, along with my commentary about each one of them:
Badger Meter Inc. (BMI) manufacturers and marketers flow measurement and control products to water and gas utilities, municipalities, and industrial customers worldwide. This dividend achiever raised quarterly distributions by 6.25% to 17 cents/share. This marked the 20 consecutive annual dividend increase for the company. Yield: 2%
Nordson Corporation (NDSN) engineers, manufactures, and markets products and systems for precision dispensing, testing and inspection, fluid management, surface treatment, and curing. This dividend champion raised quarterly distributions by 20% to 15 cents/share. This marked the 49th consecutive annual dividend increase for the company. Yield: 1.10%
While both Badger Meter and Nordson have been able to raise distributions for over 10 years in a row, they are overvalued at the moment and yield less than my 2.50% entry criteria. If they get closer to that yield either by falling in price or increasing distributions, I would add the stocks to my list for further research.
Connecticut Water Service, Inc. (CTWS), through its subsidiaries, operates as a regulated water company in Connecticut. It operates through three segments: Water Activities, Real Estate Transactions, and Services and Rentals. This dividend champion raised quarterly distributions by 2.10% to 24.25 cents/share. This marked the 43th consecutive annual dividend increase for the company. Yield: 3.10%
I like the fact that this utility has a long streak of distribution raises to its loyal investors. However, the dividend increase of 2.10% and the anemic ten year dividend growth rate of 1.60%/year are enough to make me want to look elsewhere. Utilities have historically been decent producers of current high income. The plight to chase dividends by yield hungry investors has led to poor risk reward opportunities for income investors in general.
Bob Evans Farms, Inc. (BOBE) owns and operates full-service restaurants under the Bob Evans and Mimi’s Café brand names in the United States. This dividend paying company raised quarterly distributions by 10% to 27.50 cents/share. This marked the 7th consecutive annual dividend increase for the company. Yield: 2.80%
While Bob Evans Farms looks attractively valued at the moment, it has not yet reached ten years of consecutive dividend increases. In addition, earnings have only increased from $2.13 in 2003 to $2.46 in 2012, which does not promise much in future distributions growth.
ITC Holdings Corp. (ITC), together with its subsidiaries, engages in the transmission of electricity in the United States. This dividend paying company raised quarterly distributions by 7.10% to 37.75 cents/share. This marked the 8th consecutive annual dividend increase for the company. Yield: 2.10%
Unfortunately, ITC is overvalued at the moment, as it trades at 21.80 times earnings and yields only 2.10%. I would add the stock to my list for future research and would consider initiating a position on dips below $60.
Full Disclosure: None
- My Entry Criteria for Dividend Stocks
- Dividend Achievers Offer Income Growth and Capital Appreciation
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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. Thisdividend champion has paid dividends since 1912 and increased distributions on its common stock for 25 years in a row.
The company’s last dividend increase was in April 2012 when the Board of Directors approved an 11.10% increase to 90 cents/share. This was the second increase in one year. The company’s largest competitors include Exxon Mobil (XOM), British Petroleum (BP) and Royal Dutch (RDS.B).
Over the past decade this dividend growth stock has delivered an annualized total return of 15.10% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen from 0.54/share in 2004 to $13.44 in 2011. Analysts expect Chevron Corporation to earn $12.71 per share in 2012 and $12.91 per share in 2013. In comparison Chevron Corporation earned $13.44/share in 2011.
New field developments are expected to generate 1% annual production growth through 2014 and then 4%- 5% for the next four years. Most of the capital spending on exploration and production would go into the Australia LNG, Gulf of Mexico and deepwater projects. Higher oil prices would also result in high earnings per share. Natural gas prices overseas have been more competitive overseas, in comparison to the US, which is a positive. While oil is easier to transport, natural gas is not. The company is working on acquiring and developing assets which would provide strong results in the future and also add to its reserves. Chevron is better positioned than peers, since it has a larger exposure to more lucrative oil fields, versus natural gas fields. Chevron’s recent acquisition of Atlas Energy is just one example of this strategy. The acquisition has provided Chevron with access to the Marcelus Shale. The company is also disposing of assets which generate lower margins. Chevron is working on disposing of its lower margin refining business.
On the negative side, there is a court ruling in Ecuador against Chevron for a potential $18 billion. The likelihood of CVX having to pay this entire amount however is pretty slim to none however. Another potential dispute could occur in Brazil, related to Frade Field leak there.
The return on equity has closely followed the rise and fall in oil and natural gas prices. It rose between 2002 and 2007, then dipped in 2009, before rebounding strongly. 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 9.20% per year over the past decade, which is lower than to the growth in EPS.
A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1983 we see that Chevron Corporation has actually managed to double its dividend every ten years on average.
The dividend payout ratio has remained below % 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, Chevron Corporation is attractively valued at 8 times earnings, yields 3.30% and has an adequately covered dividend.
Full Disclosure: Long CVX, XOM and RDS.B
- 25 Companies raising distribution in 2012’s busiest week for dividend increases
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Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. Its portfolio of international and local brands include Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company was created after the spin-off of Altria Group’s (MO) international operations in 2008.
The spin-off was orchestrated in an effort to separate international operations from regulation and litigation risk in the US.
Philip Morris International has managed to boost distributions in each year since the spin-off. Quarterly distributions have increased from 46 cents/share in 2008 to 77 cents/share in 2011. I expect low double digit growth in distributions over the next five – ten years. This will be driven by strong performance by company’s brand name products globally, which will drive profitability higher.
The growth in earnings per share will be driven by several factors. The company expects to generate 10%- 12% annual growth in earnings through its cost reduction programs, acquiring companies internationally as well as innovating in growing markets in order to position itself favorably.
This company has strong pricing power for this addictive product. Taxes represent a high proportion of the sales price for every pack of cigarette and they are increased every year. As a result, it is very easy for companies like PMI to increase amounts of revenues it generates from each pack sold and still manage to offset the effect of lower consumption over time. PMI's pricing is strong, as consumers tend to stick to cigarettes they are used to. Another way that the company will be able to generate increases in earnings is through cost containment and efficiency measures.
Internal growth could be aided by redesign of packaging, introductions of new products as well as expansion in new markets. Phillip Morris International does not have significant exposure to China and India, which account for over a third of world population. The number of smokers is likely to increase in emerging markets, while in mature markets such as Europe it will likely decline over time.
In addition, the company plans to grow through acquisitions. In recent years it has managed to create joint ventures in the Philippines and Sweden. It has also been active in acquiring Rothmans in 2008 and Swedish Match South Africa and Petteroes in 2009.
Phillip Morris International generates a healthy amount of cash flows each year. A portion of this cash flow is used in stock buybacks. The number of shares outstanding has declined from 2.076 billion in 2008 to 1.762 billion in 2011.
There are many challenged facing the cigarette manufacturers. Smoking is associated with health issues, consumption is declining, there is increased government regulation and there is also the risk of litigation. Because of all these risks, tobacco stocks have historically traded at low P/E ratios and paid above average dividend yields. While tobacco companies could lose everything if the product is banned, the likelihood of that happening is remote. The reason behind it is the fact that cash strapped governments worldwide generate vast amounts of revenues by heavy taxation of tobacco products. Thus, governments would be unlikely to sacrifice this cash cow, since they would have to find other ways to increase taxation. Taxing cigarette consumption is a popular tax, whereas taxing income or reducing health benefits would be hugely unpopular measures.
The heavy regulation, high excise taxes, inability to advertise in most markets, and risk of litigation create barriers for entry that prevents new competitors from entering the market. As a result, large and established conglomerates such as Phillip Morris International can enjoy a strong pricing power, and a wide moat.
Currently, PMI is trading at 17.90 times earnings, yields 3.40% and has a sustainable dividend payment. I like the company’s high current yield as well as the potential for strong dividend growth. Phillip Morris International is already my largest position due to my bullishness for the stock as well as its strong performance. Nevertheless, I would consider adding to my position subject to availability of funds.
Full Disclosure: Long PM and MO
- Altria Group (MO): High Dividend Growth Stock
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- Phillip Morris International Delivers Another Smoking Hot Dividend Increase [more]
Over the past week, income stocks announced plans to boost distributions to shareholders. Of the lengthy list of dividend increases, I have only included companies which have managed to raise distributions for more than five years in a row. In addition, I have separated the stocks by group, while also providing my commentary on each group.
Master Limited Partnerships
Master limited partnerships are typically pass-through entities, which distribute a large portion of their cash flows to investors. Most MLPs are pipelines, which transport oil and gas, although there are others like Alliance which mines for coal. For MLPs, I typically try to focus on pipelines, since the volume of carbons transported is typically very stable, which bodes well for cash flows and therefore results in dependable distributions to unitholders. In addition, I also focus on coverage of distributions and prefer it to be either trending lower or at least flat for a long period of time.
Enbridge Energy Partners, L.P. (EEP) owns and operates crude oil and liquid petroleum transportation and storage assets, as well as natural gas gathering, treating, processing, transmission, and marketing assets in the United States. This master limited partnership boosted quarterly distributions to 54.35 cents/unit. Enbridge Energy Partners has boosted distributions for 6 years in a row. I own the i-shares of Enbridge Energy Partners, which trade under ticker EEQ, and which distribute shares instead of cash to me every quarter. EEQ and KMR are examples of i-shares for Enbridge Energy Partners and Kinder Morgan Partners, which make them ideal for tax-deferred accounts.Yield: 7.30%
Alliance Holdings GP, L.P (AHGP), through its subsidiaries, produces and markets coal primarily to utilities and industrial users in the United States. The general partner of Alliance Resources boosted quarterly distributions to 69.75 cents/unit. Alliance Holdings has boosted distributions for 7 years in a row. Yield: 6%
Alliance Resource Partners, L.P. (ARLP) engages in the production and marketing of coal primarily to utilities and industrial users in the United States. This master limited partnership boosted quarterly distributions to $1.0625/unit. Alliance Resource Partners has boosted distributions for 10 years in a row. Yield: 7.10%
Exterran Partners, L.P. (EXLP) provides natural gas contract operations services to customers in the United States. This master limited partnership boosted quarterly distributions to 50.25 cents/unit. Exterran Partners has boosted distributions for 6 years in a row. Yield: 9%
Dividend champions are companies which have managed to boost distributions for at least 25 years in a row. Four such companies include American States Water, Dover Corporation, Federal Realty Investment Trust and Carlisle. I currently find Dover to be attractively valued, and would add it to my list for future research. I find Federal Realty Trust and Carlisle to be trading at higher valuations than what I would like to pay for them. American States Water seems like a dependable utility, which unfortunately doesn’t yield as much as one would expect a slow growth business to yield. The hunger for yield has pushed investors to bid up assets like Utilities and REITs close to bubble territory.
American States Water Company (AWR), together with its subsidiaries, provides water, electric, and contracted services in the United States. This dividend king raised its quarterly distributions by 26.80% to cents/share. American States Water has boosted distributions for 58 years in a row. Yield: 3.50%
Dover Corporation (DOV) manufactures and sells a range of specialized products and components, and provides related services and consumables. The company operates in four segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. This dividend king raised its quarterly distributions by 11.10% to 35 cents/share. American States Water has boosted distributions for 58 years in a row. Yield: 2.60%
Federal Realty Investment Trust (FRT) operates as a real estate investment trust, which engages in the ownership, management, development, and redevelopment of retail and mixed-use properties. This dividend champion raised its quarterly distributions by 5.80% to 73 cents/share. Federal Realty Investment Trust has boosted distributions for 45 years in a row. Yield: 2.70%
Carlisle Companies Incorporated (CSL) operates as a diversified manufacturing company in the United States and internationally. This dividend champion raised its quarterly distributions by 11.10% to 20 cents/share. Carlisle Companies has boosted distributions for 36 years in a row. Yield: 1.60%
Current Dividend Achievers and Future Dividend Achievers
The dividend achievers index includes companies which have raised distributions for at least ten consecutive years in a row. I typically prefer to invest in companies that have a proven track record of 10 years in consistent dividend increases, in order to avoid purchasing companies whose streak is a result of a pure luck of being at the right time at the right place in an economic cycle. Of the companies listed above, Norfolk Southern looks like a promising candidate for further research, since it meets all of my entry criteria at the moment. Buffett finds railroards to be a long-term bet on the US, and I agree with him that the volume of goods transported over the next century is going to increase.
Norfolk Southern Corporation (NSC), through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. This dividend achiever raised its quarterly distributions by 6.40% to 50 cents/share. Norfolk Southern Corporation has boosted distributions for 12 years in a row. Yield: 2.70% (analysis)
Microchip Technology Incorporated (MCHP) engages in the development, manufacture, and sale of semiconductor products for embedded control applications. This dividend achiever raised its quarterly distributions to 35.10 cents/share Microchip Technology has boosted distributions for 11 years in a row. Unfortunately, the company has a very high dividend payout ratio, which has caused it to boost distributions only by a nominal amount each quarter. Yield: 4.10%
Murphy Oil Corporation (MUR), through its subsidiaries, engages in the exploration and production of oil and gas properties worldwide. This dividend achiever raised its quarterly distributions by 13.60% to 31.25 cents/share. Murphy Oil Corporation has boosted distributions for 16 years in a row. Yield: 2.30%
Hawkins, Inc. (HWKN) distributes bulk chemicals, as well as blends, manufactures, and distributes specialty chemicals. The company operates through two segments, Industrial and Water Treatment. This dividend stock raised its quarterly distributions by 6.30% to 34 cents/share. Hawkins has boosted distributions for 8 years in a row. Yield: 1.70%
STERIS Corporation (STE), together with its subsidiaries, develops, manufactures, and markets infection prevention, contamination control, microbial reduction, and surgical support products and services for healthcare, pharmaceutical, scientific, research, industrial, and governmental customers worldwide. This dividend stock raised its quarterly distributions by 11.80% to 19 cents/share. STERIS has boosted distributions for 8 years in a row. I would consider researching the company for future. Yield: 2.40%
Full Disclosure: Long EEQ
- Norfolk Southern Corporation (NSC) Dividend Stock Analysis
- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
- Dividend Champions - The Best List for Dividend Investors
- MLPs for tax-deferred accounts [more]
Between 1972 and 2010, S&P 500 has increased from 102.09 to 1257 points. If you add in the reinvested dividends received each year, the index should have been sitting at 2,752. Given this simple calculation, it is no wonder that investors, who focus on stocks paying a dividend, have an apparent edge in the markets. The edge consists of the fact that their stocks will increase in price over time, while also receiving another form of return in the form of dividends. The dividend return is not dependent on the stock market and is typically less volatile than the return on capital gains. The dividend return can never be negative.Companies that pay dividends are typically mature enterprises, with a proven business model that generates enormous amounts of free cash flow. These companies do not need to reinvest all of their profits in order to maintain and grow their business. In essence they “spend” less than what they earn, and share the excess with shareholders in the form of dividend payments. On aggregate, such companies are the proven winners in the constant battle to win their customer’s hard earned dollars. Shareholders of these companies can generate price returns when the stock prices increase, and dividend return when they receive their distributions. Thus, during prolonged bear markets, investors will receive at least some return on their investment in the form of dividends, until the stock prices recover.
Companies that manage to grow while paying dividends are akin to individuals who spend less than what they earn. In comparison, most companies that invest all of their earnings back in the business all the time are typically riskier propositions. Chances are that companies that invest everything back into the business are doing so because of unfavorable economics or simply because their products or services would be rendered obsolete in a short period of time. While one could cherry pick successful non dividend paying companies like Berkshire Hathaway (BRK.B), on aggregate, investors in non-dividend stocks are likely to earn miniscule total returns over time. Reinvesting all profits into the business is akin to an individual living paycheck to paycheck. After all, investors in such companies will only realize a return on investment if they dispose of their stock, only when someone else is willing to purchase the stock at a higher price.
According to research from Ned Davis Research, dividend paying stocks in the S&P 500 outperformed non-dividend paying stocks in the index. A $1000 investment in income stocks in 1972 resulted in $27,110 by January 2011, versus $1940 for non-dividend paying stocks. This equates to a 8.80% annual return for dividend stocks, which is significantly higher than the 1.70% annual return of non dividend stocks. In comparison, S&P 500 delivered a 7.30% annual return over the same period. In other words, a $1000 investment in the index in 1972 increased to $16,100 by early 2011.
Past Performance is not a guarantee for future results. On the other hand, the significant outperformance of dividend paying stocks, and especially dividend growth stocks is hard to ignore. In a world where stocks are being held for seconds, buy and hold investing seems obsolete. The long term wealth potential for patient dividend investors who reinvest their distributions year in and year out is out there.
In order to capitalize on their dividend edge, investors should focus on companies which can afford to consistently increase dividends, have sustainable dividend payouts, are attractively valued and have strong competitive advantages. In addition, investors should also try to maintain a diversified dividend portfolio, consisting of at least 30 individual stocks, spread out across as many sectors as possible.
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- The Dividend Edge
- Is Buy and Hold Dividend Investing dead?
- Investors Get Paid for Holding Dividend Stocks [more]