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Wed. Jan. 28, 2009

Dividend Stocks: The Good, The Bad and The Ugly *

Like virtually everything else in this world Dividend Stocks can be placed into a few categories based on their historic performance and expectations for the future. Here are three broad categories and some representative selections from each:

The Good

As you might guess, these dividend stocks that are doing exactly what they should do – consistently raising their dividends each year in spite of troubled economic times. Some of these companies are in sectors that are less affected by the economic downturn, but they have one thing in common, they are well-managed by executives that understand the importance of growing the companies dividends. Here are some examples of these companies:

  • Johnson & Johnson (JNJ) in May 2008 increased its quarterly dividend 10.8% to $0.46/share
  • Kimberly-Clark Corporation (KMB) in March 2008 increased its quarterly dividend 9.4% to $0.58/share
  • McDonald’s Corp. (MCD) in November 2008 increased its quarterly dividend 35.1% to $0.50/share
  • Pepsico, Inc. (PEP) in June 2008 increased its quarterly dividend 13.3% to $0.425/share
  • Procter & Gamble Co. (PG) in April 2008 increased its quarterly dividend 14.3% to $0.40/share
  • Wal-Mart Stores Inc. (WMT) in April 2008 increased its quarterly dividend 8.2% to $0.238/share

The Bad

Companies that held their dividends flat. Dividend investors are keying on companies that can consistently raise their dividends year after year. Sometimes a company can’t do this this. Instead of cutting the dividend, they hold it flat and try to weather the economic storm. This may not always be a bad thing, because it shows that management understands the importance of maintaining its dividend. Many dividend investors, myself include, may overlook a single flat year. Here are several companies that missed their last dividend increase:

  • General Electric Co. (GE) last raised its dividend December 2007
  • The Home Depot, Inc (HD) last raised its dividend November 2006
  • Pfizer Inc. (PFE) last raised its dividend November 2007
  • US Bancorp (USB) last raised its dividend December 2007

Each of the above stocks has been classified as On The Shelf. That means they will be set aside within my income portfolio with no additional purchases made until its outlook improves or deteriorates to the point it should be sold. As I was writing this article, PFE announced Monday that it was going to slash its second quarter dividend 50%. I immediately sold the stock after its dividend cut.

The Ugly

Companies that cut their dividends. Fourth quarter 2008 was the worst period for dividend cuts since 1956 when Standard & Poor’s started keeping records. Unfortunately, the carnage may not be over. UBS Securities strategist Thomas Doerflinger estimates that S&P 500 dividends per share will drop an additional 8% in 2009. That would be the largest decline since the Great Depression and only the eighth time since 1942 that dividends fell in consecutive years. Here are several companies that contributed to the 2008 decline:

  • Bank of America Corporation (BAC) first dropped its dividend in December 2008
  • Fifth Third Bancorp (FITB) first dropped its dividend in June 2008
  • KeyCorp (KEY) first dropped its dividend in August 2008
  • Regions Financial Corp. (RF) first dropped its dividend in September 2008

Long-term, the best companies to add to our dividend portfolios are those that will continue raising their dividends even during economic downturns. These stocks tend to have conservative payouts less than 50%, which allows them to maintain their dividends during the tough times. They also have growing sales and earnings – you can’t continue to pay higher dividends unless you have the earnings to back it up.

Full Disclosure: Long JNJ, KMB, MCD, PEP, PG, WMT, GE, HD, USB


10 Responses to “Dividend Stocks: The Good, The Bad and The Ugly *”

  1. I own some good and some bad dividend stocks. I tend to sell the ugly ones immediately :-)

  2. mikel says:

    I own in a mutual fund
    PBR/PVX/PWE/DD/FRO/PFE/MO/GGB/UNTD/XOM/MRK/TE/SNE/KFT…
    WHAT IS THE CONSENSUS?
    ARE THESE UGLY DUCKLINGS OR SWANS…

  3. mikel: I am not familiar with all the stocks you listed, but of the ones I am: Just sold PFE because of a dividend cut, KFT rated low in my analysis, XOM rated low, FRO is a shipping company that just cut its dividend, the others I have not looked at.

    Best Wishes,
    D4L

  4. Chuck says:

    He’s got some Canadian trusts….

  5. Chuck says:

    Why don’t you buy some corporate paper? You can buy them in increments as low as $1000 and either they keep paying (unlike the uncertainty of your picks) or they go out of business and the entire world blows up. You can get Morgan Stanley, Goldman Sachs, Chase…All paying you better than what you are telling these website viewers.

    Yes, they have to hold them to maturity, but so what? You get a 3-5 year piece of paper paying you over 6% in an A rated bank. These banks are not going out of business folks!

    Never pay over par! Stick to the banks who’s stocks have weathered this storm over the past year..There are a few…Bank of NY, JP Morgan, Morgan Stanley, Goldman Sachs…You can also get Georgia Power notes paying over 6% at well udner par..As good as what is being recommended here in common with huge dividend cut risks.

    With all due respect to this author, ever heard of Robert Conrad? He is also a utilities expert….It doesn’t work! By time they have trouble (common) and you find out, you are screwed!

  6. Chuck: The power in dividends is not what they are paying today, the dividend growth. Utilities and fixed income should be a small percentage of a dividend growth portfolio.

    Best Wishes,
    D4L

  7. Chuck says:

    D4L – When is the dividend growth in any of the dividend stocks you reserach going to exceed the 6-7% you are getting in a corporate note, with a final redemption date, that would only be suspended after all common and preferred are cut or suspended?

    If you look over the past 10 years, bonds have consistantly outperformed dividend stocks…by a lot. In today’s environment, the chances of your common stock picks’ dividends being cut have never been higher since the Depression.

    Of course, this fact would significantly discount the importance of your site, but those are the facts. You are leading your clients down the wrong path…in my opinion. The next 2-3 years…it’s all about the safety and yield and that means good quality corporate paper…Yes, there is plenty of risk in them too, if you are not staying the course to their maturity, too.

  8. Chuck: First of all, I have no clients. My site is a blog chronicling MY personal journal to financial freedom.

    Without doing the analysis, I suspect much of the bonds/notes return is is based on its appreciation resulting from interest rate cuts. This works the other way too. Many have speculated that the bond market is the next bubble that will burst as inflation returns from Obama printing money to fund his initiatives.

    As what dividend stock can out perform a 6.5% bond, obviously any stock that is currently yielding more than that and maintains it dividend could. Possible examples here would include: PGN 6.61%, AFL 6.73%, BP 8.39%, O 9.12%.

    From a more traditional way of looking at dividend investing (lower current yield, but strong dividend growth, you would have to consider these companies (yield/growth)[NPV of bond difference @6.5%/Yield on Cost after 20 years]:

    PG (3.22%/10.7%) [$892/24.6%]
    JNJ (3.37%/10.8%) [$1,136/26.2%]
    KMB (4.82%/8.8%) [$1,999/26.0%]
    PEP (3.29%/13.0%) [$2,545/38.2%]
    UTX (3.58%/15.0%) [$6,956/58.6%]

    I could go on, but you get the idea. These aren’t scary dangerous companies. The NPV number is square brackets is how much per $1,000 invested you would earn if the assumptions hold true.

    You can model this for yourself using my DF4-PreScreen.xls model.

    In addition, after 20 years most stocks will have appreciated, while bonds will not have. I have never seen a study showing bonds out performing stocks over the long-term.

    Best Wishes,
    D4L

  9. Chuck says:

    “And maintains it’s dividend”..Exactly my point. Ok, We agree to disagree.

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