Every article on long term investing stresses the importance of the power of compounding. Basically, investing a certain amount of initial capital at a particular annual return for a given time period would lead to a much higher amount at the end of the investment period.
While this concept is valid, investors should not rush in blindly and purchase any type of asset for long-term compounding of their wealth. In order to stack the odds in their favor, dividend investors should develop a focused strategy. This would allow them to compound their money for as long as possible, while increasing their wealth. [more]
McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. It franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, desserts, snacks, and other beverages, as well as full or limited breakfast menu. As of June 30, 2011, the company operated 32,943 restaurants in 117 countries, including 26, 598 franchised restaurants; and 6,345 company operated restaurants. Check my analysis of McDonald’s (MCD).
McDonald’s beefed up its quarterly dividend by 14.80% to 70 cents/share. This most recent dividend hike marks the 35th consecutive annual dividend increase for this dividend aristocrat. The company has managed to keep growing its same store and total sales worldwide, even during the financial meltdown of 2008 - 2009 as well as the recent fears of a double dip recession. Since the start of the financial crisis in 2007, McDonald’s has managed to raise dividends per share by 86.70% and earnings per share by 137%. The stock is up 48.30% since the end of 2007. This calculation does not even include dividends. An investment at the end of 2007 would be generating a yield on cost of 4.80%.
McDonald’s has been able to achieve sales growth through innovation in its menu, introduction of different drinks as well as using its dollar menu items. Since introducing its “Plan to Win” strategy eight years ago, the golden arches has focused its strategy on internal growth through maximizing existing restaurants’ profitability. In addition, the company has focused on its stores profitability and focusing efforts on strengthening itsstrong brand name, by disposing of non-core assets such as Chipotle Mexican Grill (CMG) and Boston Market. The international segment, which accounts for over half of its sales, is a major driver of growth, which would not slow down even if the fears of a global double dip recessions do materialize. A major part of the strategy is focusing on generating cash flow, rather than focusing on growth for growth’s sake.
Analysts are expecting 13.50% increase in EPS in 2011 to $5.20/share, followed by a 10% increase to $5.72 /share in 2012. The new annual dividend rate of $2.80/share is sustainable at a conservative 54% dividend payout ratio. Currently, McDonald’s is attractively valued per my entry criteria at 16.80 times 2011 earnings. Investors will also get paid a 3.20% yield on cost, which will be growing by at least by 10% per year for the next decade. I will consider adding to my position in the stock subject to availability of funds.
Full Disclosure: Long MCD
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Over the past week the Board of Directors of tobacco giant Phillip Morris International (PM) approved a 20.30% increase in its quarterly dividend to 77 cents/share. This was the fourth consecutive annual dividend increase for the company, since it was spun off from Altria Group (MO) in 2008.
In a previous article I outlined a few reasons why I am buying Phillip Morris International (PM) now. The company is well positioned to capitalize on its strong brand in emerging economies, while having the benefit of reduced liability risk in developed countries, since its operations are diversified on a global scale. Phillip Morris International expects to generate earnings growth that will provide shareholders with a rising stream of dividend income over time. In addition, the stock also spots a higher than average dividend yield, which makes it irresistible for income investors. Check my analysis of the stock.
The current dividend increase was the largest ever. The previous three dividend increases were for 17.40%, 7.40% and 10.40% in 2008, 2009 and 2010. Analysts are expecting this tobacco giant to earn $4.78/share in 2011, followed by $5.23/share in 2012. The company’s forward dividend payout ratio is at 64%, which is sustainable.
Phillip Morris International derives 37.60% profits from the EU, 27.50% from Eastern Europe, Middle East and Africa, 26.60% from Asia and 8.30% from Latin America and Canada. It is growing through continued product innovation, cost cutting, acquisitions and through organic growth in some emerging markets in Asia and Latin America. There are some risks to investing in tobacco companies, as increased regulation will make the operating environment more difficult.
Currently, Phillip Morris International is attractively valued per my entry criteria, trading at 14.40 times earnings and yielding 4.50%. While at first pass it may seem that the company has not increased dividends for more than 10 years, there are several factors that make me ignore this criterion. The fact that the predecessor company which PMI was spun off from had raised distributions for 4 decades and the fact that PMI has raised dividends every year since the spin off provide enough evidence that this company will likely maintain the dividend growth culture of legacy Phillip Morris.
Full Disclosure: Long MO and PM
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The past few weeks have been characterized by high volatility in the stock market. At the same time prices for some of the most widely held blue chip dividend stocks have dropped less than the market. Some quality dividend stocks are even close to new 52 week highs, as investors try to put their money in safe investments. The reason why these dividend stocks are so popular is because their investors keep receiving their distributions every quarter, without interruption. In addition, these companies’ culture of consistently raising dividends for decades has created a loyal following by long-term investors. The regular dividend paymentprovides a cushion when there is a decrease in prices, as long-term investors are willing to step in and add to their positions on any weakness in the stock price. [more]
When it comes to dividend investing, many investors tend to be either yield chasers or pure dividend growth investors. The real world however is not black and white. As a result, a more nuanced strategy where at least some minimum yield is requested before one purchases a stock that regularly raises distributions should deliver solid income over the long term.
I follow a similar strategy in my income portfolio. I purchase stocks with rising distributions which can afford to pay the dividend but I also have a minimum yield requirement of 2.50%. I tend to be skeptical over stocks which have high current yields, unless my individual company analysis proves otherwise. My analysis of the two income plays listed below has identified them as companies with sound business models. The recent downturn in the stock market has made the following dividend growth stocks with high yields attractive at the moment:
Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company generates most of its revenues from outside the US, where the legislation is not as draconian. The company will be able to increase earnings by generating cost efficiencies in its cost reduction programs, acquiring companies internationally as well as innovating in growing markets in order to position itself favorably. Last but not least, tapping into the growth of emerging markets such as China and India, where it has a low presence could provide another opportunity for future growth. The company has raised distributions in every year since the spin-off from Altria Group (MO) in 2008. Phillip Morris International will be able to keep increasing dividends at the high single digit percentage points in the foreseeable future, while yielding 3.70% today. (analysis)
Kinder Morgan, Inc. (KMI) owns and operates energy infrastructure in the United States and Canada. Kinder Morgan owns the general partner and limited partner units in Kinder Morgan Partners (KMP). KMI also owns 20 percent of and operates Natural Gas Pipeline Company of America (NGPL), which serves the high-demand Chicago market. Another valuable asset behind KMI is the Incentive distribution rights behind the general partner, which entitles it to 50% of the distributions above certain thresholds. This is why any growth in KMP distributions would really accelerate growth in KMI dividends. KMI is set up as a corporation, which is why investors should receive a form 1099- DIV at the end of the year and have their dividends taxed at no more than 15%. The company will likely raise distributions at the low double digits for a few years, and currently yields 4.60% (analysis)
Owning these two high income dividend growth stocks makes sense for investors looking for high yield and a rising income stream. Investors should however always understand the risks behind each investments they purchase and try to spread it by obtaining allocation to different sectors in their diversified dividend portfolios.
Full Disclosure: Long PM, MO, KMI
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