Several companies raised distributions last week. The most notable raiser was fast food chain McDonald’s (MCD), which surprised investors with a 10% dividend increase. This marked the 33rd consecutive annual dividend increase for this Oak Brook, Illinois based dividend aristocrat.
McDonald's Chief Executive Officer Jim Skinner said, "So far in 2009 we've returned nearly $4.0 billion to shareholders through dividends and share repurchases, bringing total cash returned since the beginning of 2007 to about $15.5 billion. With today's dividend increase, we expect to end the year near the high end of our three-year, $15 billion to $17 billion total cash return target."
Skinner continued, "This achievement reflects the success of our better, not just bigger strategy, which has helped drive sales, profits and, ultimately, cash from operations. Going forward, our philosophy on our use of capital remains unchanged. Our first priority is to reinvest to grow our business and enhance shareholder value. After these investment opportunities, we expect to return all of our free cash flow over the long term through dividends and share repurchases -- while maintaining a strong financial foundation. Today's dividend increase underscores our confidence in the long-term strength of our business and ongoing commitment to returning cash to shareholders."
The golden arches have definitely weathered the economic storm relatively unscattered, with monthly sales consistently marking comparable gains. I recently added to my position in McDonald’s (MCD), as I believe that the company posseses strong dividend growth characteristics. The company has more than doubled its dividends since 2006. [more]
Toronto-Dominion Bank, through its subsidiaries, engages in the provision of retail and commercial banking, wealth management, and wholesale banking products and services in North America and internationally. It operates through four segments: Canadian Personal and Commercial Banking, Wealth Management, U.S. Personal and Commercial Banking, and Wholesale Banking. This international dividend achiever and Canadian Dividend Aristocrat has raised dividends for 15 years in a row.
Over the past decade this dividend growth stock has delivered an average total return of 13.20% annually.
The company has managed to deliver a 5.60% average annual increase in its EPS between 1999 and 2008. Analysts expect Toronto-Dominion Bank to earn $4.98 share next year, followed by a 4% increase to $5.17/share in the year after that.
The Return on Equity has recovered from its 2003 lows of 26% and is at a very impressive level at 42%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 20.50% annually since 1999, which is higher than the growth in EPS. Most of the dividend growth came from the expansion in the dividend payout ratio, which more than tripled from 15% in 1999 to 48% in 2008.
A 20 % growth in dividends translates into the dividend payment doubling every three and a half years. If we look at historical data, going as far back as 1973, Toronto-Dominion Bank has actually managed to double its dividend payment every six years on average. The company last raised its dividends in 2008.
The dividend payout ratio has more than tripled from 15% in 1999 to 48% in 2008. In 2002 the company lost money, which is why it is at zero for the year. 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 the Toronto-Dominion Bank is attractively valued at 17 times earnings, yields 3.50% and has an adequately covered distribution. The main issue with this dividend investment is that it has failed to increase its distributions for five quarters in a row. The company has until the last quarter of 2010 to raise its dividend, or otherwise it would lose its dividend achiever status. In the meantime it is a solid hold for me. That is unless you are looking for some exposure to the financial sector for your dividend portfolio. As such TD could be a nice small starter position to consider.
Full Disclosure: Long TD
- Financial Stocks for Dividend Investors
- Aflac (AFL) Dividend Stock Analysis
- Best International Dividend Stocks
- International Dividend Achievers for diversification [more]
Many retirees who are seeking current income from their assets invest in fixed income securities, most of which provide a stable stream of income. Fixed income investments do have some disadvantages relative to stocks that pay dividends, and thus retirees which fail to account for these, could end up with no income at the worst time possible .
First, while typical fixed income securities provide a dependable income stream, its purchasing power is typically eroded by inflation. Even at 3% per annum, the purchasing power of one dollar decreases by 50% in 24 years. Double that inflation rate to 6% annually and now the purchasing power of one dollar is down by 50% in 12 years and by 75% in 24 years. Stocks that pay rising dividends provide the best inflation proof source of income. Dividend based distributions can grow, interest based distributions usually don't. Unless interest income is reinvested, the interest income cannot grow over time to compensate for the eroding value of inflation.
Second, right now qualified dividend income is taxes at 15% for the highest tax bracket in the US, which is almost half the top tax for interest income in the States. In Canada dividend income also received a preferential treatment relative to fixed income.
Third, bonds typically don’t increase their interest payments if the business is doing well. Stocks, which represent partial ownership of companies, tend to share higher profits with shareholders either through dividend increases or through stock buybacks. Thus stocks tend to provide higher total returns over time as they could provide higher capital gains and higher dividend incomes.
Stocks have disadvantages as well however.
First, if a company goes under and declared bankruptcy, fixed income holders are the only ones that get at least some return of their investment. Stockholders on the other hand typically receive nothing when the company emerges from bankruptcy.
Second if a company faces financial difficulties it could easily afford to cut or eliminate its dividends, but it would have to go through huge hurdles before it could get bondholders to agree to reduce or eliminate their interest payments.
Fixed income securities guarantee a return of your investment some time in the future, whereas stocks don’t provide that.
That being said I do believe that the best strategy for long-term investors is to have an allocation to both stocks and bonds. Fixed income tends to provide dependable income even in the worst bear markets. In addition to that fixed income investments provide diversification in bear markets and are the only asset to provide returns to investors during deflationary periods.
Stocks are great vehicles to own during average and high inflationary periods, and they could provide investors with rising inflation adjusted streams of dividend income over time. There are companies which have long records of raising their distributions. The possibility of receiving rising dividends from stocks, make equities a preferred method of investment for many investors. Some early holders of stocks like Johnson & Johnson (JNJ), Exxon Mobil (XOM), and Altria (MO) are now enjoying double or even triple digit yields on cost on their original investments, even without reinvesting their dividends. Similar investments even in the safest highest yielding fixed income securities would still be generating the same incomes, provided that they have not matured.
Currently I like several dividend stocks, which have the best prospects to grow their distributions over time.
Johnson & Johnson (JNJ) has increased dividends for 47 consecutive years. Johnson & Johnson engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Check my analysis of the stock.
Mcdonald’s (MCD) has increased dividends for 32 consecutive years. McDonald’s Corporation, together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. Check my analysis of Mcdonald’s.
Chevron (CVX) has increased dividends for 22 consecutive years. Chevron Corporation operates as an integrated energy company worldwide. Check my analysis of Chevron.
Abott Labs (ABT) has increased dividends for 37 consecutive years. Abbott Laboratories manufactures and sells health care products worldwide Check my analysis of the company.
Clorox (CLX) has increased dividends for 32 consecutive years. The Clorox Company manufactures and markets a range of consumer products Check my analysis of the stock.
Full Disclosure: Long ABT, CLX, CVX, JNJ, MCD, MO
- The case for dividend investing in retirement
- High yield stocks for current income
- Dividend Cuts - the worst nightmare for dividend investors
- Determining Withdrawal Rates Using Historical Data [more]
The market continued going higher, despite all concerns about valuations, unemployment and the recession. Most analysts are divided on whether the 6 month advance is over or not. Dividend investors on the other hand however are not so concerned about the overall state of the market, as long as dividends are being paid indeed. The main problem with a rising market however is that it leaves fewer attractively valued stocks to enter or reinvest dividends. If you find the right dividend growth stocks however, which tend to raise distributions every year or so, one does not need to rely on dividend reinvestment for growth in their passive income.
Several such prominent dividend players announced that their boards of directors have approved distribution raises for stockholders.
Realty Income Corporation (O), which engages in the acquisition and ownership of commercial retail real estate properties in the United States, increased its monthly dividend to $0.1426875 per share from $0.142375 per share. Realty Income Corporation is a dividend achiever, which has increased its quarterly dividend in each of the past fifteen years. The stock currently yields 6.20%.
Tom A. Lewis, Chief Executive Officer of Realty Income commented, "We are pleased that, despite challenging economic conditions, our operations allow us to once again increase the amount of the dividend we pay to our shareholders. With the payment of the October dividend we will have made 471 consecutive monthly dividend payments."
Philip Morris International (PM), which manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America, increased its quarterly dividend by 7.4% to 58 cents per share. Philip Morris International was spun out of Altria Group (MO) in 2008. Since then the company has raised distributions twice. The stock currently yields 4.90%.
Texas Instruments Incorporated (TXN), which engages in the design and sale of semiconductors to electronics designers and manufacturers worldwide, increased its quarterly dividend by 9% to 12 cents per share. The stock currently yields 1.80%.
W. P. Carey & Co. LLC (WPC), which provides long-term net lease financing for companies, increased its quarterly distributions by 8% to 50 cents per share. This marks the 34th consecutive distribution increase for this dividend achiever. The stock currently yields 7.00%.
The Kroger Co. (KR), which operates as a food retailer in the United States, increased its quarterly dividend by 5.6% to 9.5 cents per share. Kroger began raising dividends in 2006. The stock currently yields 1.70%.
Corporate Office Properties Trust (OFC), which is a real estate investment trust (REIT) that engages in the acquisition, development, ownership, management, and leasing of suburban office properties., increased its quarterly dividend by 5.4% to 39.25 cents per share. Corporate Office Properties Trust is a dividend achiever, which has increased its quarterly dividend in each of the past thirteen years, which it has more than doubled since 2004. The stock currently yields 4.10%.
Agree Realty Corporation (ADC), which is a real estate investment trust (REIT), that engages in the ownership, development, acquisition, and management of retail properties, which are primarily leased to national and regional retail companies in the United States, increased its quarterly dividend by 2% to 51 cents per share. Agree Realty Corporation does not have a consistent history of dividend increases, although it hasn’t cut distributions either since 1994. The stock currently yields 9.30%.
Full Disclosure: Long PM, MO and O
- Altria Group's 6% Dividend Hike
- Dividend Reinvestment is important
- Reinvest Dividends Selectively
- Philip Morris International versus Altria [more]
Paychex, Inc., together with its subsidiaries, provides payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses in the United States and Germany. This dividend achiever has raised dividends for 19 years in a row.
Over the past decade this dividend growth stock has delivered an average total return of 3.70% annually.
The company has managed to deliver a 12.60% average annual increase in its EPS between 1999 and 2008. Analysts expect Paychex to earn $1.33 share next year, followed by an 8% increase to $1.44/share in the year after that.
The Return on Equity has recovered from its 2002-2006 lows and is at a very impressive level at 42%. This is especially positive given the fact that the company remains virtually debt free. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 23.50% annually since 1999, which is higher than the growth in EPS.
A 24 % growth in dividends translates into the dividend payment doubling every three years. If we look at historical data, going as far back as 1990, Paychex has actually managed to double its dividend payment every two and a half years on average.
The dividend payout ratio has more than doubled from 35% in 1999 to 81%. The company’s dividend payment looks unsustainable, given the slow expected growth in earnings over the next few years. This could not only hinder any near term dividend growth, but also could place the dividend in danger of a cut. The solid dividend growth over the past few years did not come from EPS growth but mainly from expansion if the dividend payout ratio. In addition to that the company failed to increase dividends in July, which marked the fifth consecutive quarter of unchanged distributions.
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 Paychex is valued at 18.70 times earnings, yields 4.40% and has a dangerously high dividend payout ratio. I view its closest competitor ADP as more attractively valued of the two. ADP is larger, has a more diversified business base, its dividend still has room to grow and is adequately covered by earnings.
Full Disclosure: Long ADP
- Why do I like Dividend Achievers
- Dividend Investing Resources
- My Dividend Growth Plan - Stock Selection
- Don’t chase High Yielding Stocks Blindly [more]
As an investor in the accumulation stage, I tend to focus on companies with yields of at least 3% and expectations of future dividend growth. Most of these companies have a history of consistent annual dividend increases which exceeds ten years. I do receive constant criticism from readers however, that I profile very few stocks yielding 5%-6% or more; and then I do feature them I always express my negative opinion on the securities. I am not willing to accept an extremely high dividend payout ratio, which would have been acceptable for a utility or a Master Limited Partnership.
I do realize that most investors want to generate enough income as possible from their nest eggs, which have been accumulated over the spans of several decades’ worth of hard work and sacrifice. The problem with this approach is that investors end up focusing on the end result, without giving much thought about the sustainability and growth of the dividend payment. In other words, although it would take for a 3% yielder 7 years to double your original dividend payment and yield on cost, when the dividend growth is 10%, I believe that investors are better off in a sustainable lower yielder, than in an unsustainable high yielder. The company yielding 6% today that cuts its distributions a few months down the road could end up generating far less income than what you expected.
Some investors also disagree with me that stocks which are yielding 3% – 4% would barely produce enough income to keep up with inflation. The problem with this assumption is that in its goal of chasing the highest yielding stocks, you could end up losing from inflation. For example if you held all of your money in a group of stocks, yielding 8%-10%, and spending all the dividend income produced by your positions, you would lose purchasing power over time. Even worse – if the dividend payment is unsustainable, your yield on cost could even become lower than the current yield on S&P 500, if the company decides to cut distributions. Consider for example Bank of America (BAC), which at the beginning of 2008 would have yielded a cool 6.20%. Fast forward one year later, and the company is currently yielding 0.20%. The worst part is that the yield on your original investment in BAC is now 0.10%.
Compare this to Kimberly-Clark (KMB), which yielded about 3% at the beginning of 2008 but which has raised distributions twice, for a total dividend growth of 13.21%. Your yield on cost is almost 3.5% now, and that is without taking into effect any dividend reinvestment.
A common issue among high yielders is that they have a high dividend payout ratio. This means that the company is paying most of its earnings out as dividends, and doesn’t leave much for reinvestment in the business. If you add in stagnant earnings per share growth, and you basically have a disaster in the making. If that company all of a sudden decides that it needs cash for anything like merger or acquisition or if its earnings drop due to an economic contraction, chances are very high that the dividend payment, which was unsustainable in the first place, would be the first on the management’s chopping block.
Consider Pfizer (PFE) for example. The company spotted a very high payout ratio both in 2007 and 2008. Investors who purchased the stock hoping that this cash rich drug giant would pay a 6%-7% were terribly disappointed when on January 26th Pfizer cut its dividend. The move helped the company save billions, which were much necessary for its acquisition of Wyeth (WYE).
I do realize however that dividend growth is not guaranteed as well. But then I have a requirement of an initial minimum yield of 3% as a margin of safety in case this happens. Chances of a dividend cut are much larger for a company with a current yield of 6%, than for a company yielding 3%. The market is efficient in this section, so you have to understand what risk the high yielders represent, before leaping into the unknown.
Just for the sake of comparison, I identified the components of the dividend aristocrat’s index, which currently yield more than 4%. Of the eleven companies presented, only Kimberly-Clark (KMB) and Cincinnati Financial (CINF) had what somewhat sustainable dividend payouts. [more]
Kraft Foods Inc., together with its subsidiaries, manufactures and markets packaged food products and grocery products worldwide. The company has consistently raised dividends since it went public in 2001. It was a part of tobacco conglomerate Altria Group (MO), until Kraft was spun off in May 2007.
As a company whose management shared the values of Altria group (MO) to consistently reward shareholders with dividend increases and share buybacks, Kraft (KFT) has attracted the interests of many dividend investors. While it has raised distributions for only seven consecutive years, many investors didn’t see this as a problem, but believed that the company would soon join the ranks of the elite dividend achievers.
Just last week the company announced that it has would leave its current dividend payment of $0.29/share unchanged for the fifth consecutive quarter. In addition to that there were no share repurchases in first quarter 2009, and the company's authorization to repurchase shares expired on March 30, 2009.
The major news about Kraft has been its attempted takeover of Cadbury (CBY). The board of directors of Cadbury has rejected the offer so far, citing the fact that it undervalues the company. Other issues related to this takeover would include competing bidding from rivals Nestle or Hershey (HSY). This could make the acquisition of Cadbury (CBY) pricier than initially expected, and Kraft might have to pay top dollar if it really wanted to own the British based confectionery company.
Prominent dividend companies which are typically engaged in mergers and takeovers of a large proportion and which end up overpaying might need a lot of cash fast. Thus freezing or cutting the dividend payment should not be an uncommon factor in such situations.
The deal would definitely be accretive to Kraft and its owners in the long run. If the merger with Cadbury were completed, Kraft Foods would expect to revise its long-term growth targets to 5+% for revenue and 9-11% for earnings per share, from its previously announced 4+% and 7-9% respectively. If it overpays however, those estimates not only might have to be revised downwards, but it would be Kraft’s shareholders that would ultimately pay the price in terms of dividend cuts or freezes.
I was planning on initiating a position in Kraft before the announcement on September 8, but I would wait for the acquisition to unfold before I take any action. The company has four more quarters where it can afford to keep the distributions unchanged. Should it increase them within that time frame and also should it manage to earn approximately $1.95-$2.00/share in 2009, I would consider initiating a small position there. Without any dividend growth, even the best yielding stock would eventually erode your purchasing power due to inflation.
Full Disclosure: None
- Dividends versus Share Buybacks/Stock repurchases
- Altria Group's 6% Dividend Hike
- Should you sell after a dividend freeze?
- Why do I like Dividend Achievers [more]
Automatic Data Processing, Inc. provides technology-based outsourcing solutions to employers, vehicle retailers, and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. This dividend aristocrat has raised dividends for 34 consecutive years. Back in November 2008 Automatic Data Processing announced a 13% dividend increase.
Over the past decade this dividend growth stock has delivered an average total return of 0.50% annually. In 2007 ADP spun off its Brokerage Services business, distributing one share of Broadridge Financial (BR) common stock for every four shares of ADP common stock held by shareholders. The total returns calculation for ADP over the past decade includes this transaction.
The company has managed to deliver an 8.00% average annual increase in its EPS between 1999 and 2008. Analysts expect Automatic Data Processing to earn $2.38 share in FY 2009, followed by a small decline to $2.36/share in FY 2010. ADP’s earnings have been constrained by decrease in overall employment levels, closings at small and midsize businesses it services and a general decrease in interest income from funds held for clients. Never the less the company could achieve strong revenue growth of 5%-6% annually, as its markets such as HR management services and Business Process Outsourcing are expected to grow annually in the 5%-6% range over the next five years. The company is a leader in the processing space, and could achieve growth through acquisitions and expansion abroad. There is a high barrier to entry in order to compete in ADP’s business segments. I like the recurring revenue and long term deals structure that ADP’s business enjoys. This leads to stability in cash flow generation, which provides for a good foundation for solid dividend growth over time.
The Return on Equity has remained in a tight range between 17% and 23%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 15.50% annually since 1999, which is higher than the growth in EPS. The company has also managed to decrease the number of dillluted shares outstanding from 636 million in 1999 to 527 million in 2008 through share repurchases.
A 15 % growth in dividends translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1979, Automatic Data Processing has really managed to double its dividend payment every five years.
The dividend payout ratio has doubled to 50%. As the company matures, it has returned most of its earnings back to stockholders in the form of increased distributions and share buybacks. 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 Automatic Data Processing is attractively valued at 16.00 times earnings, yields 3.40% and has an adequately covered dividend payment. In comparison to its closest competitor Paychex (PAYX), which trades at a P/E of 19 and yields 4.4% with a dividend payout ratio of 80%, I view ADP as more attractively valued. I would be looking forward to adding to my position in Automatic Data Processing (ADP) on dips.
Full Disclosure: Long ADP
- Dividend Portfolio Investing for monthly income
- Dividend Stocks in the news
- Reinvest Dividends Selectively- Dividend Aristocrats List for 2009 [more]
While the market has enjoyed impressive gains ever since it hit a multi year low in March 2009, investors are beginning to get nervous about valuation. If valuation is too high, chances are that investors are overpaying for stocks purchased, which could lead to lower performance over time. [more]
When companies decide to share a portion of their earnings with their shareholders, it is a sign of prudent fiscal discipline. Shareholders who are rewarded on a timely basis in the form of dividend payments are less likely to sell their holdings, even during a steep market correction. However, when companies decide to raise their distributions they exert strong confidence in their near-term performance. This dividend increase is a strong bullish signal especially if it comes after a long string of consecutive dividend increases.
Several companies announced that their boards of directors have approved dividend increases. The companies include:
Altria Group, Inc. (MO), which engages in the manufacture and sale of cigarettes and other tobacco products in the United States, increased its quarterly dividend by 6.3% to 34 cents per share. The stock currently yields 7.50%. Check my analysis of the stock.
MGE Energy, Inc. (MGEE), which engages in generating, purchasing, transmitting, and distributing electricity, increased its quarterly dividend by 8% to 14 cents per share. MGE Energy, Inc. is a dividend achiever, which has increased its quarterly dividend for 34 consecutive years. The stock currently yields 3.90%.
HCC Insurance Holdings, Inc. (HCC), which provides property and casualty, surety, group life, accident, and health insurance coverage, as well as related agency and reinsurance brokerage services to commercial customers and individuals., increased its quarterly dividend by 8% to 13.50 cents per share. HCC Insurance Holdings, Inc. is a dividend achiever, which has increased its quarterly dividend in each of the past thirteen years. The stock currently yields 1.90%.
Delta Natural Gas Company, Inc. (DGAS), which sells and distributes or transports natural gas to customers in central and southeastern Kentucky., increased its quarterly dividend by 1.6% to 32.50 cents per share. The company has raised dividends consistently since 2005. The stock currently yields 5.20%.
G&K Services, Inc. (GKSR), which provides branded identity apparel and facility services programs in North America., increased its quarterly dividend by 7% to 7.5 cents per share The stock currently yields only 1.30%.
Alliance Financial Corporation (ALNC), which which provides various banking products and services to commercial, retail, government, and investment management customers, increased its quarterly dividend by 7.7% to 28 cents per share. The stock currently yields 4.00%.
Guess?, Inc. (GES), which designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children., increased its quarterly dividend by 25% to 12.5 cents per share. The stock currently yields 1.40%.
ESSA Bancorp, Inc. (ESSA), which provides financial services to individuals, families, and businesses in Pennsylvania, increased its quarterly dividend by 25% to 5 cents per share. The stock currently yields only 1.20%.
Harris Corporation (HRS), which operates as a communications and information technology company that serves government and commercial markets worldwide, increased its quarterly dividend by 10% to 22 cents per share. The stock currently yields 1.90%.
In summary I view Altria's dividend increase as a bullish sign for the company stock. The company seems to be following its policy of consistent dividend increases that it used to follow before the spin-offs of Philip Morris International (PM) and Kraft Foods (KFT) I do however also own some Philip Morris International in order to benefit from international exposure to the tobacco sector.
Full Disclosure: Long PM and MO
Relevant Articles: [more]