I know very little about hockey, but I have always loved this quote. It can be applied to so many things in life, including investing. Just as Gretzky has a vision as to where the puck is going, investors need to have a similar vision, and not get caught up on short-sighted distractions. Investing in dividend growth stocks requires a long-term vision. It is easy to run a screen and find stocks that are paying a 15% yield today; but how long will they be able to sustain it? Instead  you may want to skate to where the future 15% yielders are going to be. To do that, here are some things you need to know…

Tracking Yield On Cost

Yield-on-cost (YOC) is simply Current Annual Dividend dividend by Original Cost Per Share. YOC not a substitute for calculating an internal rate of return (IRR). The IRR calculation takes into account both capital appreciation and the timing of cash flows (purchases, sells and dividends). However, as a dividend growth investor, my primary focus is on dividend growth and since my desired holding period is forever, capital appreciation is little more than an interesting side note. YOC is much better suited for tracking dividend growth since it is individually tied to a stock and takes into account all the variations of growth rates over time, along with the timing of purchases. Also, it is useful when trying to explain to our income investor brethren why we chose the stock yielding 3% over ‘Amalgamated Risk’ at 8%.

My D4L-Data model includes projections of YOC after 5, 10, 15 and 20 years. These projections are derived by growing the current yield using the dividend growth rate. As for the dividend growth rate, I use the minimum of the 1, 3, 5, 7 or 10 year compound annual growth rates; or 15% if in every consecutive 4-year period dividends grew on average in excess of 15%.

15 Dividend Stocks With A 15% Yield In 15 Years

Sorting the stocks in my D4L-Data model by their 15 Year YOC and throwing out some bad apples, we are left with these 15 stocks that are projected to have a 15% YOC in 15 years:

T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund complexes in the United States.
Yield: 1.8% | Growth: 15.0% | 15 Year YOC: 15.0%

Cardinal Health Inc. (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.
Yield: 1.8% | Growth: 15.0% | 15 Year YOC: 15.0%

Owens & Minor Inc. (OMI) is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.
Yield: 2.4% | Growth: 13.2% | 15 Year YOC: 15.6%

Praxair Inc. (PX) is the largest producer of industrial gases in North and South America, and the second largest worldwide. It also provides ceramic and metallic coatings.
Yield: 2.0% | Growth: 15.0% | 15 Year YOC: 15.9%

Aflac Incorporated (AFL) provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at worksites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.
Yield: 2.3% | Growth: 15.0% | 15 Year YOC: 18.2%

Stryker Corp. (SYK) makes specialty surgical and medical products such as orthopedic implants, endoscopic items, and hospital beds.
Yield: 1.2% | Growth: 20.0% | 15 Year YOC: 18.6%

Casey’s General Stores Inc. (CASY) has over 1,500 convenience stores in the Midwest, selling food, beverage, health and automotive products.
Yield: 1.3% | Growth: 19.8% | 15 Year YOC: 19.4%

Weyco Group, Inc. (WEYS) distributes, wholesale & retail, men’s branded footwear in the U.S., Canada, Europe; it offers casual footwear, dress shoes and accessories under Florsheim, other brands.
Yield: 2.6% | Growth: 15.0% | 15 Year YOC: 21.0%

Walgreen Co. (WAG) is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico.
Yield: 1.7% | Growth: 18.5% | 15 Year YOC: 21.7%

Nucor Corporation (NUE) is the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.
Yield: 3.1% | Growth: 15.0% | 15 Year YOC: 25.5%

McDonald’s Corporation (MCD) is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries.
Yield: 3.2% | Growth: 15.0% | 15 Year YOC: 26.1%

ConocoPhillips Co. (COP) is the fourth largest integrated oil company in the world, and the second largest in the U.S.
Yield: 3.3% | Growth: 15.0% | 15 Year YOC: 26.6%

People’s United Financial Inc. (PBCT) provides a full range of banking and financial service products to individuals, corporations and municipal customers in the U.S. Northeast.
Yield: 6.0% | Growth: 11.3% | 15 Year YOC: 30.0%

Southside Bancshares Inc. (SBSI) primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations.
Yield: 3.7% | Growth: 16.6% | 15 Year YOC: 36.9%

Old Republic Intl (ORI) writes property and liability, mortgage guaranty, title and life, and disability insurance.
Yield: 5.4% | Growth: 15.0% | 15 Year YOC: 43.6%

One key component of current yield is risk. If Treasuries (risk free) were paying 7%, 8% or 9%, many income investors and a significant number of dividend growth investors would divert a portion of their portfolios to them.

You will note that most of the above stocks are yielding under 4%. It is also important to note that I do not believe that all the above stocks will achieve their 15 year YOC. In much the same way high-yielding stocks often end up cutting their dividends, many of the above stocks will end up cutting their dividend growth rate. Put another way, there is risk associated low-yield high-dividend-growth stocks. However, for the high dividend growth stocks that perform well over the next 15 years, the rewards are potentially much higher than those of a high-yield, low growth stock.

Full Disclosure: Long OMI, NUE, MCD, COP. See a list of all my income holdings here.

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(Photo Credit)

If you practice asset allocation and dollar cost averaging, as I do, having cash set aside to purchase stocks with no clear buy from an allocation standpoint certainly presents a quandary. When I am faced with this situation, I evaluate what is most important to me and continue to look for that.

In evaluating a dividend stock there are some items that I will not compromise on, such as:

1. NPV MMA Differential: It must be positive and greater than $500.
2. Free Cash Flow Payout + Debt To Total Capital < 100%: Cash is the life blood of dividend increases. If a company, is paying out most of its cash as dividends and/or is carrying high levels of debt, a dividend cut is very likely.
3. Dividend Yield: Too high or too low of a dividend is risky. Too high and the company has a hard time maintaining it; too low and the company will have a hard time growing it at high enough rate to make the numbers work.

That leaves price available for compromise. As a dividend and value investor I want to have it all, but sometime that is not an option. I take heart that even the best investor in America has been where I am at. Consider his quote:

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. — Warren Buffett

With that in mind I currently categorize stocks that are potential purchases into two tiers:

Tier I: Four and five Star stocks that are trading below my calculated fair value with a yield above my preset minimum. These are the stocks I categorize as “buy” stocks.

Tier II: Four Star stocks that are trading less than 5% above my calculated fair value with a yield above my preset minimum. These are my “wonderful stocks at a fair price.”

Sure I would like to buy them below fair value, but that is not always possible. If your holding period is forever, will an extra 5% make a lot of difference in 20 years? Consider these stocks I currently categorize as Tier II stocks:

Genuine Parts Co. (GPC) – Analysis
Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
- Calculated Fair Value: $34.27
- Recent Price: $35.59

Emerson Electric Co. (EMR) – Analysis
Emerson Electric Co. primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.
- Calculated Fair Value: $38.39
-  Recent Price: $39.38

Procter & Gamble Co. (PG) – Analysis
The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
- Calculated Fair Value: $55.27
- Recent Price: $55.64

It is important to remember that just a few short months ago everyone was looking for a bottom.  There will be other opportunities to buy great companies at a large discount.

Full Disclosure: Long GPC, EMR, PG. See a list of all my income holdings here.

(Photo: Steve Woods)

If you have followed the U.S. Social Security saga over the last several years, you know it is projected to run out of money soon. As it turns out “soon” just may be much sooner than previously expected. To make matters worse, it has been “broke” for some time, but through creative accounting that would land a private-sector CFO in jail, the government has been able to keep the appearance of solvency.

Bill Fleckenstein in a recent MSN Money article, discussed several issues facing Social Security. Here are some of the key points from his article:

• The Social Security problem is especially important because it likely will put additional pressure on the dollar and on bonds, and exacerbate the funding crisis down the road.
• At $680 billion Social Security is the nation’s biggest social program.
• As early as this year, Social Security will be transformed from an operation that’s helped finance the rest of the government for 25 years into a cash drain that will need money.
• There is no money in the Social Security Trust Fund — just IOUs from the government to itself.
• The trust fund could start running deficits in the next year. Social Security wasn’t supposed to go into the red until around 2015.
• Since 1983, when it suffered a cash crisis, Social Security has been collecting more in taxes each year than it has paid out in benefits. It has used the excess to buy the Treasury securities that go into the trust fund, reducing the Treasury’s need to raise money from investors.
• In the 1980s and 1990s, when folks worried about the budget deficit, it was reported to be lower than it would have been had the Social Security Trust Fund’s money not been going into government coffers

Do you really want to bet your retirement on a system like this? I certainly won’t. When planning for retirement, my underlying assumption is that Social Security will go broke before I ever receive a dime. Like everyone, I will need an income during my retirement years. I am currently planting the seeds for that income with high-quality dividend stocks that have a long track record of increasing their dividends each year. Below are some blue chip dividend stocks that eventually end up in most income investors’ portfolio:

Wal-Mart Stores, Inc. (WMT) – Yield: 2.11% – Analysis
The largest retailer in North America knows how to treat customers and shareholders. WMT has rewarded investors with 35 years of consecutive dividend increases.

Abbott Laboratories (ABT) – Yield: 3.47% – Analysis
This drug manufacturer knows the best medicine for a sick portfolio is increased dividends. ABT has been dispensing higher dividends for 37 consecutive years.

Johnson & Johnson (JNJ) – Yield: 3.23% – Analysis
For 47 consecutive years this manufacturer of health care has delighted investors with increased dividends.

Procter & Gamble Co. (PG) – Yield: 3.14% – Analysis
This provider of branded consumer goods products and Dividend Aristocrat has made investors smile for 53 consecutive years with increased dividends.

As for Social Security running out of money, I think people will be paid what was promised since the government can print all the money it needs. However, what was promised may not be enough after inflation, particularly if a lot of money is printed.

Full Disclosure: Long ABT, JNJ, PG, WMT. See a list of all my income holdings here.

• A public-opinion poll is no substitute for thought.
• We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

True success does not come from copying what everyone else is doing. You Can’t Beat the Herd by Following the Herd.

• Time is the friend of the wonderful company, the enemy of the mediocre.
• Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.
• Chains of habit are too light to be felt until they are too heavy to be broken.
• If a business does well, the stock eventually follows.
• Our favorite holding period is forever.

When buying a dividend stock, the quality of the company is the number one consideration. Given enough time, a quality company will always rise above lesser competition.  When your holding period is forever, it is inevitable that a superior stock will eventually out-perform second tier players. Buffett has used the quality + time formula for decades.

• If past history was all there was to the game, the richest people would be librarians.
• In the business world, the rearview mirror is always clearer than the windshield.

With the internet, everyone has access to massive amounts of financial data on public companies. Never confuse data with information – the former takes up space while the latter is useful.  Your stock evaluation process should include quantitative and qualitative analysis. While it is important to understand how a company has performed using a quantitative analysis, it is more important to determine how the company will perform in the future using a qualitative analysis. This is much more difficult since no internet site provides an instant glimpse into the future.

• You only have to do a very few things right in your life so long as you don’t do too many things wrong.
• Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
• Wide diversification is only required when investors do not understand what they are doing.
• Risk comes from not knowing what you’re doing.

Have a plan for managing risk.  Buffett has spent a lifetime perfecting his process and abilities. Though he shuns diversification, we would be wise not to do so until our abilities are on par with his.

• It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
• It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.

Life is much more than just making money. The above rings true in so many aspects of our lives. Success is measured in many different ways.

• There seems to be some perverse human characteristic that likes to make easy things difficult.
• Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
• I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
• Price is what you pay. Value is what you get.

Over time we make all things overly difficult and complex. Sometimes it is good to step back, focus on the basics and avoid the needless mistakes.

• I always knew I was going to be rich. I don’t think I ever doubted it for a minute
• We enjoy the process far more than the proceeds.

Life is a journey. Find something you love and enjoy the trip! We can all learn something from like-minded individuals who have been successful in their field. Still wanting more Buffett quotes?

(Photo Credit)

“It’s not the will to win that matters – everyone has that. It’s the will to prepare to win that matters.”
– Legendary Alabama Coach Paul “Bear” Bryant

We all want to succeed in one way or another. Some want to be great athletes, some want to excel in business, while others want to dominate the stock market.

A great number of people in our society jump from “desire to succeed” to “living like they have”. Kids out of college, often will buy an expensive car with their first paycheck. A small bonus at work will often lead to an extravagant vacation. It is no wonder that there are so many people in financial trouble today. They are missing something in the middle.

“Desiring to succeed” and “living the good life” are two like bookends – they are somewhat meaningless without any books in the middle. Those books represent preparation, hard work, long hours, self sacrifice, discipline, and everything else necessary to achieve true success. A lot of times the bookends are more ornate than the books they hold up, which makes them more desirable to the uninitiated.

I must admit I have an insatiable desire to win and my human nature sometimes wants to skip all that hard work sandwiched between my desire and the fruits of victory. Each time I try to short-cut the process it ends in disaster. “I don’t need to research that stock, I have friends making a killing off of it.” I bought it, and I got killed.

In my own life I have found that the good life only comes after a great deal of preparation and toil. I’ll let you in on a secret – after a while you learn to like preparation and journey more than the destination.

Life is a journey, we all need to learn to enjoy it.

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Where there is no vision, the people perish.
– Proverbs 29:18

Let’s look at a couple of definitions from dictionary.com:

vi·sion [vizh-uhn] : the act or power of anticipating that which will or may come to be
plan [plan] : a scheme or method of acting, doing, proceeding, making, etc., developed in advance

A vision is taking the time to think of (anticipate) in detail what the future will bring. You would need to consider future earnings, savings and economic issues such as inflation. Then based on what you foresee in the future, you would formulate an action plan to ensure the best possible outcome given your unique circumstances. You can’t have a retirement plan until you have a retirement vision. It would seem to me that there are a lot or retirement plans out there but very few retirement visions.

Many people are putting money into various retirement vehicles, but they haven’t taken the time to envision how it is all going to come together and ultimately if it will be enough. Unfortunately, a significant number of people are not even taking advantage of tools at their disposal. It was noted in a March 2006 CNNmoney article “Retirement: Ready or not? Not, apparently” that

only about 60 percent of workers over 40 who are eligible to participate in their 401(k)s do, and the number of workers covered by a defined-benefit pension has steadily declined. Meanwhile, young workers have the lowest 401(k) participation rates of all workers under 65.

A portion of my retirement planning includes dividend investing. One of the beauties of dividend investing is it provides you continuous feedback. As the years and decades go by you can see your earnings steadily grow as you invest your money in dividend stocks. When you hit retirement it is not that drastic change that many people fear. You have spent a lifetime preparing for it.

Time is only your friend, if you enlist him early. Wait too long and he can be formidable adversary.

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“If a man is a quitter, I’d rather find out in practice than in a game. I ask for all a player has so I’ll know later what I can expect.”
– Legendary Alabama Coach Paul “Bear” Bryant

Coach Bryant would push players to the very edge of their physical tolerance and dare them to quit. Many did, but those that remained were battle-tested warriors for which failure was not an option. Adversity will either bring out the good or bad in us.

Players in my portfolio often face difficult times, much of it is often brought on by themselves. Wachovia Corp. (WB), the nation’s fourth-largest bank, is the latest example of a financial institution facing adversity. WB on April 14th reported:

• A $393 million first-quarter loss
• That it is looking for a $7 billion cash infusion
• Plans to cut 500 jobs
• A provision for credit losses of $2.8 billion
• Stock offerings for an aggregate of $7 billion
• A 41% cut in its quarterly dividend to $0.375

I held shares of WB in my Roth IRA. I consider it an income investment and, as such, it was subject to the same income rules as my taxable account – if you cut your dividend you are off the team and escorted out of my portfolio.

This is not necessarily a bad thing. When the last financial shoe drops, those left standing will be battle-tested warriors ready to face adversity without blinking. My portfolio just got stronger.

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If winning isn’t everything, why do they keep score?
– Vince Lombardi

There is a lot of truth in that statement. We live in a highly competitive world that extends well beyond the sports field. Employers are competing for the best employees so they can better compete for your business. A better business then allows them to compete in the financial markets for your investing dollars. As investors we pit one investment against another when deciding what to add to our portfolio and it shouldn’t stop there. Once an investment makes it into your portfolio, it should continue to compete with other investments to keep its spot.

To compete you must keep score. One of the metrics that I use to score an individual stock’s performance is Internal Rate of Return (IRR). The IRR is the discount rate that equates the present value of an investment’s cash flow to its initial cost and subsequent investments and withdrawals. In simple terms, it is the interest rate you would need to earn to make the same money off of an interest bearing account assuming the same investment.

I have extracted out of my two massive financial spreadsheets a sample model from the portfolio tab that demonstrates how to calculate an IRR for an individual stock investment. Tomorrow I will post a link to the model and describe how to use it.

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“The people who want to achieve and aspire to be very good in their profession don’t mind the way we do things. It’s not normal to want to be as good as you can be. It’s normal to be average. “
– Nick Saban, Head Football Coach, University of Alabama

Ok, I’ll go ahead and fess up. I am a college football fan, more specifically a University of Alabama football fanatic (Roll Tide!). Unfortunately, we have drifted in and out of mediocrity since Coach “Bear” Bryant retired after the 1982 season. We have had highs like winning our 12th national championship in 1992 and lows of being put on NCAA probation in 2002. We have changed coaches many times since 1982 and each time I hoped the new coach would be a winner. I never knew what was coming, until Coach Saban was hired.

From the first time I heard Coach Saban speak, it was no longer a matter of if we would return to our past championship ways, I knew it was only a matter of time. This is a man that will not settle for average. He points out in his book that his philosophy and teachings are not football specific. They can be applied to anything in life, including your family, your job or even your portfolio.

So many people just put their money in an index fund and are content with earning slightly below average returns (slightly below average = average – a management fee). Don’t get me wrong, that’s ok for most people. If someone doesn’t have the time, desire or aptitude to personally manage their investments, they should be commended for saving the best way they know how.

However, my goal is never to be average. For a market average to exist there must be stocks above and below the midpoint. I’m willing to sacrifice and put in the time and effort necessary to be above average. Time and effort doesn’t always equate to success, but it sure doesn’t hurt. I would have much rather tried and failed than to have never tried at all.

I’m pumped! Let’s go analyze some stocks! Roll Tide!

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