The financial crisis of 2007-2009 led to dividend cuts in many financial companies. Investors who were heavily concentrated in the financial sector suffered in the process. Other dividend investors who maintained a balanced income portfolio however saw their dividend income not only stabilize but also increase, as most prominent non-financial dividend stocks continued raising or maintaining distributions. For those investors who kept receiving dividend checks it seemed as if the financial crisis is something that did not affect them. Companies which raised distributions in the face of adversity in the overall economy show that they have sufficient liquidity to invest and grow their operations and also to share their results with stockholders. [more]
McCormick & Company, Incorporated, a specialty food company, engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. It operates in two segments, Consumer and Industrial. The company, which has raised dividends for 23 consecutive years, is a member of the Mergent’s dividend achievers index. Back in November McCormick & Company increased its quarterly dividend by 8.30% to 26 cents per share
Since 1999 this dividend growth stock has delivered an average total return of 10.70% annually.
The company has managed to deliver a 11.70% average annual increase in its EPS between 1999 and 2008. Analysts expect McCormick & Company to earn $2.33 share next year, followed by an increase to $2.51/share in the year after that. The company is in the middle of a cost restructuring program, where annual savings have reached almost 56 million in 2008. In addition to that the company is trying to grow through acquisitions, which add to its diverse portfolio of consumer and industrial brands.
Although the Return on Equity is high at 23.90%, it is below its highs in the early 2000s. 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 an average of 11.10% annually since 1999, which is commensurate with the growth in EPS.
An 11 % growth in dividends translates into the dividend payment doubling every six and a half years. If we look at historical data, going as far back as 1990, McCormick & Company has actually managed to double its dividend payment every six years on average.
The dividend payout ratio has consistently remained below 50% 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 the McCormick & Company is attractively valued at 17.8 times earnings, yields 2.90% and has an adequately covered distribution payment. I would look to enter McCormick & Company (MKC) on dips below $34.
Full Disclosure: None
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As a dividend growth investor, my strategy is picking the right stocks that provide a decent balance between dividend yield and distribution growth. Thus I have maintained a rigid requirement for a 3% initial yield before investing in a dividend growth company’s securities.
Most dividend investors look for yield when purchasing income securities. Most dividend growth investors purchase securities so that they could enjoy a rising stream of dividend payments over time. Thus, maintaining a proper balance could be a challenge that could make or break your portfolio.
I realize that using a strict yield criteria I could miss out on potential dividend growth stories such as Wal-Mart (WMT) for example. Wal-Mart has never yielded 3% since it went public in the 1970s. The 29.1% annual dividend growth since 1975 has been truly spectacular however. This means that Wal-Mart’s dividend has doubled every 2.5 years for 34 consecutive years. Wal-Mart has delivered a 23.40% dividend growth since 1985 and a 20.20% dividend growth since 1995. Check my analysis of Wal-Mart.
My rationale behind selecting a minimum yield is to provide me with an adequate margin of safety should the stock stop raising dividends and should the stock price fall or remain flat for a large period of time. In the case of Wal-Mart, the stock has been trading in a range over the past decade. Back in 1999 the stock fluctuated between $70.25 and $38.68 and closed at $69.12. The stock wasn’t yielding much back then – about 0.30%. Even if the dividend were doubling every 2.5 years, it would take a retiree almost 13 years in order to reach a yield on cost of 10%. At the current dividend rate, the stock is actually yielding 1.60% on cost, assuming that you purchased it on the last day of 1999. The actual dividend growth over the past decade comes down to 20.80% per annum, which translates into the dividend payment actually doubling every three and a half years.
Now the down side to my having a strict initial yield requirement for entry is that I would miss out on some huge gains, which could lead to early financial freedom. If one had purchased Wal-Mart stock at the end of 1984, the tenth year in a row in which it increased its dividends, their entry price would have been $1.18 (adjusted for five stock splits) and their initial yield would have been only 0.55% at the time. Fast-forward 25 years and the yield on cost comes out to almost 100%.
Many dividend growth investors tend to project past dividend growth rates into infinity, which seems unsustainable to me. If a company with $1 billion in profits enjoyed a 15% annual growth forever, it would double its net income almost every five years. In reality, as the companies grow larger they would find less opportunities that could sustainably earn them higher incremental returns on investment. For example, with a company like McDonald’s (MCD) people could only eat so much burgers and fries. After a company hits a plateau, EPS growth could largely be sustained by increasing efficiencies, raising prices, repurchasing shares or buying other competitors.
This analysis is not meant to be used as a weapon against Wal-Mart or McDonald’s, which are fine companies. It just goes to show that once shouldn’t solely rely on past data in their investment decisions. Furthermore, projecting past data into the future, without adding a what if analysis of your common sense could prove costly in the long run. In addition, purchasing stocks solely for the dividend growth is as dangerous as chasing high yielding stocks blindly.
As far as my strategy is concerned, I am considering lowering the entry yield criteria to 2% for stocks, which appear to have a sustainable above average dividend growth ahead of them. My target allocation for such stocks would be half of what I would normally allocate to such dividend growth champions such as Johnson & Johnson (JNJ) or Procter & Gamble (PG) however.
Full Disclosure: Long JNJ, MCD, PG and WMT
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It was only a few months ago that many experts declared dividend investing dead, after almost all financial companies in the US cut or eliminated their distributions to shareholders. In recent months there has been a slow but steady trend of many companies showing their confidence in the economic rebound by raising distributions. Over the past week several dividend payers announced that their boards of directors have approved increases in cash dividends they send out to their stockholders quarterly. Especially bullish was the fact that most of the companies were established dividend payers with long histories of consistent dividend increases.
The companies which raised distributions are listed below:
Nucor Corporation (NUE), engages in the manufacture and sale of steel and steel products in North America, increased its quarterly dividend by 2.9% to 36 cents per share. Nucor Corporation is a dividend achiever, which has increased its quarterly dividend for thirty-six years in a row. The stock currently yields 3.20%. (analysis)
Kinder Morgan Energy Partners, L.P. (KMP) announced its preliminary projections for next year, stating that it expects KMP to declare cash distributions of $4.40 per unit for 2010, a 4.8 percent increase over its 2009 budget target of $4.20 per unit. Kinder Morgan Energy Partners, L.P. (NYSE: KMP) is a leading pipeline transportation and energy storage company in North America. KMP owns an interest in or operates more than 28,000 miles of pipelines and 170 terminals. The company is a dividend achiever, which has increased its quarterly dividend for thirteen years in a row. The stock currently yields 7.40%. (analysis)
Enbridge Inc. (ENB), which engages in the transportation and distribution of crude oil and natural gas primarily in Canada and the United States, increased its quarterly dividend by 15% to 42.5 cents per share. Enbridge Inc. is an international dividend achiever, which has increased its quarterly dividend in each of the past fifteen years. The stock currently yields 3.20%.
New Jersey Resources (NJR), which provides retail and wholesale energy services in two segments, Natural Gas Distribution and Energy Services, increased its quarterly dividend by 9.7% to 34 cents per share. New Jersey Resources is a dividend achiever, which has increased its dividend in each of the last twelve years and has paid quarterly dividends since 1952. The stock currently yields 3.40%.
Universal Health Realty Income Trust (UHT), which is a real-estate investment trust which invests in health care and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings, increased its quarterly dividend from 59.5 cents to 60 cents per share. Universal Health Realty Income Trust is a dividend achiever, which has increased its quarterly dividend for twenty-two consecutive years. The stock currently yields 7.90%.
Lincoln Electric Holdings, Inc. (LECO), which manufactures and resells welding and cutting products worldwide, increased its quarterly dividend by 3.7% to 28 cents per share. Lincoln Electric Holdings, Inc. is a dividend achiever, which has increased its quarterly dividend for over fourteen years. The stock currently yields 2.00%.
Graco Inc. (GGG), which supplies technology and expertise for the management of fluids in both industrial and commercial applications, increased its quarterly dividend by 5% to 20 cents per share. Graco Inc. is a potential addition for the dividend achiever’s list, as it has increased its quarterly dividend in each of the past nine years. The stock currently yields 2.60%.
Ecolab Inc. (ECL), which develops and markets products and services for the hospitality, foodservice, healthcare, and light industrial markets in the United States and internationally, increased its quarterly dividend by 11% to 15.5 cents per share. Ecolab Inc. is a dividend achiever, which has increased its quarterly dividend in each of the past eighteen years. The stock currently yields 1.20%.
Comcast Corporation (CMCSA), which provides cable services in the United States, increased its quarterly dividend by 40% to 9.45 cents per share. Additionally, Comcast announced its intent to complete its $3.6 billion share repurchase authorization over the next 36 months. This is the second dividend increase for the cable giant, since it started paying dividends in 2008. The stock currently yields 2.30%.
OGE Energy Corp. (OGE), which operates as an energy and energy services provider offering physical delivery and related services for electricity and natural gas primarily in the south central United States, increased its quarterly dividend by 8% to 14 cents per share. This is the fourth annual dividend increase OGE Energy Corp since 2007. The stock currently yields 4.00%.
Cameco Corporation (CCJ), which operates as a nuclear energy company, increased its annual dividend by 17% to 28 cents per share. The stock currently yields 0.70%.
Hillenbrand, Inc. (HI), which manufactures, distributes, and sells funeral service products to licensed funeral directors operating licensed funeral homes, increased its quarterly dividend by 1.35% to 18.75 cents per share. This is the second consecutive dividend increase for Hillenbrand, Inc.. The stock currently yields 3.90%.
The Toro Company (TTC), which designs, manufactures, and markets turf maintenance equipment and precision irrigation systems to help customers worldwide care for golf courses, sports fields, public green spaces, commercial and residential properties, and agricultural fields, increased its quarterly dividend by 8% to 14 cents per share. The stock currently yields 1.50%.
An important prerequisite of dividend investing is selecting only the stocks which have solid underlying fundamentals which could support a growing distribution over time. In addition to that investors should try not to overpay for equities and should also diversify their holdings in order to protect their dividend income in the event of dividend cuts. That’s why further research of a promising dividend stock is a must, before adding it to your income portfolio.
Full disclosure: Long KMR and NUE
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The stock market has been on a consistent bull run since it hit a low in March 2009. As stocks keep hitting new highs for the year however, buyout by the prospect of economic recovery, many value investors are getting nervous about valuations. The P/E ratio on the S&P 500 for example has risen to its highest levels in several years. In addition to that, many dividend stocks, which were once selling at very attractive valuations just a few months ago, are becoming expensive.
There are several ways that the market could correct itself. First, since the market is typically a strong indicator that predicts contractions and expansions in the economic cycle much better than most economists, the current upturn could be a forecaster of economic growth. This would lift earnings, decrease unemployment and bring valuations down to more reasonable levels, without causing any depression in stock market prices overall. If the market is ahead of itself however, it could stay flat for a period of time.
The second option is for the market to collapse and bring valuations to more reasonable levels. It seems that most investors and pundits believe that a severe decline in stock prices is in the cards over the next few months. Since few people seem to believe in the market rally however I strongly believe that it could easily continue.
The third option could be that the market doesn’t correct itself but keeps roaring higher, propelled by expectations of strong corporate earnings. When earnings rebound, stocks won’t look as expensive as they do today.
As a dividend investor I try to allocate some funds into purchasing several stocks every month. The main problem I have been having since July is that the same stocks are appearing on my buy screen for several months now. While it is always good to be able to purchase what you might consider the best dividend stocks in the world, history has definitely showed us that even the bluest of blue chips might not be bulletproof in the long run. It is concerning to add money to the same stocks each and every month, which could make a portfolio more concentrated and less diversified. Valuations are an important factor, which every dividend investor should implement as part of their entry criteria, in order to make sure that they don’t overpay for stocks. Overpaying for stocks could lead to substandard returns over time.
I screened the list of dividend aristocrats for dividend payout ratio of less than 50%, dividend yield of 3% and P/E of less than 20. I did relax the criteria a little bit to include stocks with ucrrent yields of 2.80% as well as those with payout ratios of up to 55%. The stocks which look promising right now include: [more]