Due to technical and performance issues the content normally seen on Dividends Value will be moving to my new site:

Dividend Growth Stocks

(http://www.dividend-growth-stocks.com/)

This will be my last post on Dividends Value. Tonight I will transfer the feed to Dividend Growth Stocks. This means if you follow Dividends Value by email or by RSS feed you will not have to do anything. If you read online simply click on the link above and bookmark the new site.

I have begun the process of moving the historical content to the new site. Unfortunately, it is not automated, so it will take some time to port it over to the new site. In the future I plan to turn Dividends Value into an automated Dividend News Site.

I apologize for the inconvenience, but I think you will find the new site to be dramatically faster.

Thanks you for your continued support!
D4L

(Photo: Gerard79)

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.

Related Posts
- Dividend Stocks vs. a Safe Distribution Rate
- Seven Dividend Stocks Trading Below Fair Value
- The Most Important Financial Statement
- Never Confuse Desires With Goals
- All Investing Involves Risk

(Photo Credit)

• D4L-Dashboard: An easy to read, color-coded, dashboard that sorts the 190+ stocks by Stars and yield.
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Linked here is a detailed quantitative analysis of Genuine Parts Company (GPC). Below are some highlights from the above linked analysis:

Company Description: Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

GPC is trading at a premium to all four valuations above. The stock is trading at a 14.6% premium to its calculated fair value of $46.81. GPC did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

GPC earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. GPC earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 55 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of the $386 is below the $500 target I look for in a stock that has increased dividends as long as GPC has. If GPC grows its dividend at 4.8% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. GPC earned a check for the Key Metric ‘Years to >MMA’ since its 4 years is less than the 5 year target.

Memberships and Peers: GPC is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Advance Auto Parts Inc. (AAP) with a 0.4% yield, AutoZone Inc. (AZO) with a 0.0% yield and W.W. Grainger, Inc. (GWW) with a 1.6% yield.

Conclusion: GPC did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks GPC as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $50.39 before GPC’s NPV MMA Differential increased to the $500 minimum that I look for in a stock with 55 years of consecutive dividend increases. At that price the stock would yield 3.57%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.4%. This dividend growth rate is slightly above the 4.8% used in this analysis, thus providing no margin of safety. GPC has a risk rating of 1.25 which classifies it as a Low risk stock.

GPC’s long string of dividend increases are supported by its strong underlying fundamentals of sales, earnings and free cash flow growth. The company exhibits excellent financial leadership as evidenced perseverance through the recent downturn. From an operating standpoint, GPC has an extensive distribution network and it has built a loyal customer following over the years. Since the company is trading well above my buy price of $46.81 and slightly above the $50.39 maximum price supported by its dividend fundamentals, I will wait for a pullback before adding to my position. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in GPC (2.2% of my Income Portfolio). See a list of all my income holdings here.

Related Articles:
- Cardinal Health,Inc. (CAH) Dividend Stock Analysis
- Walgreen Co. (WAG) Dividend Stock Analysis
- Medtronic Inc. (MDT) Dividend Stock Analysis
- Weyco Group, Inc. (WEYS) Dividend Stock Analysis
- More Stock Analysis

• Festival of Stocks published: Cardinal Health,Inc. (CAH) Dividend Stock Analysis
• Carnival of Personal Finance published: Why Dividend Stocks Are Evil
• The Wealth Builder Carnival published: 13 Stocks Using Real Cash To Pay Higher Dividends

Articles I enjoyed reading included (in no particular order): The DIV-Net Featured Articles

• Dividends4Life presented Stock Analysis: Genuine Parts Company (GPC)
• Buy Like Buffett presented An Industrial Stock With A Solid Yield
• The Passive Income Earner presented Bell Canada (BCE) Dividend Stock Analysis
• Dividend Growth Investor presented Nestle Stock Analysis

Articles From DIV-Net Members

• Dividend Growth Investor presented Dividend Macro trends: The Baby Boomer Retirement Investment
• Buy Like Buffett presented 3 Dividend Stocks That Offer Good Passive Income
• The Passive Income Earner presented How To Track Your Dividend Investment Performance
• The Dividend Guy presented Dividend Stocks Vs Corporate Bonds
• The Div Guy presented March Dividend Income Update
• Disciplined Approach to Investing presented Dividend Payers Underperforming Through First Quarter
• Triaging My Way To Financial Success presented Historical Canadian Bank Data
• 40percent 20years presented Small Cap Borsdata.se
• The Market Capitalist presented Regression Toward the Mean & Investing
• Dividend Monk presented Step 3: Identify Your Core Competencies
• Frankly Speaking presented How the Stock Market Works
• The Dividend Pig presented 8 Companies With Consistent Dividend Growth Over 20%
• Dividend Ninja presented High Yield Canadian Stocks: Part 1
• The Twenty Year Millionaire presented IBM: One of the Best Values on the Market

Articles from D4L-News:

• You Can Take This 4% Yield To The Bank
• The Hunt for Yield
• Don’t Miss These Dividend Princes
• The New Better Bonds: Dividend Stocks
• Dividend stocks now turning some heads
• More Dividend News

There are some really good articles here, please take time and read a few of them. (Photo: Sachin Ghodke)

My goals were defined in this December 1, 2007 Investing Goals post and updated in my 2011 Investing Goals post. Below is an updated version of the table found in the original post.

The above information covers the current month and year-to-date through the current month.

Click here for a Detailed Historical Progress Table.

For the month, annualized dividend income increased $405, and Yield on Cost (YOC) was down -0.02%. This month’s changes were a net of new purchases, dividend changes and sales. Let’s examine each of the these categories:

Purchases: The $526 increase in annual dividend income and -0.03% decrease in YOC related to the following purchases (yield at the time of purchase):

• $211 U.S. Preferred Stock Index (PFF) 6.0%
• $50 Leggett & Platt, Incorporated (LEG) 4.7%
• $85 Wal-Mart Stores Inc. (WMT) 2.8%
• $180 ConocoPhillips (COP) 3.5%

PFF and LEG raised my YOC, while all of the other stocks lowered it. As noted in earlier updates, I generally expect YOC to drop in most months since new investments will yield less than my current YOC, and dividend increases will not be sufficient to offset the decline.

Dividend Changes: The $53 increase in annual dividend income and the 0.03% increase in YOC related to the following dividend changes (a=dividend stated in annual terms, q=quarterly, m=monthly):

• $17 U.S. Preferred Stock Index (PFF) $2.35a>$2.40a
• $2 3M Co. (MMM) $0.525q>$0.55q
• $2 Consolidated Edison Inc. (ED) $0.595q>$0.60q
• $32 Owens & Minor Inc. (OMI) $0.177q>$0.20q

Sales: The $174 decrease in annual dividend income and the -0.02% decrease in YOC related to the following sale:

• $174 Integrys Energy Group, Inc. (TEG)

As a result of significant price appreciation and a failure to raise its dividend in 2010, I sold 67% of my TEG holdings in February. TEG is now a Golden Stock since I have recouped 104.5% of my original investment through dividends and share sales.

After March, I am still on track to reach my goal of $15,500 in annualized dividend income by December 31, 2011.

That’s it for this time. The next monthly progress update will be early May.

(Photo: sanja gjenero)

Below are several dividend stocks building shareholder returns with higher cash dividends:

Tanger Factory Outlet Centers, Inc. (SKT) is a publicly-traded REIT headquartered in Greensboro, North Carolina that operates and owns, or has ownership interests in, a portfolio of 34 upscale outlet shopping centers in 22 states. April 7th the company increased its quarterly dividend 3.2% to $0.20/share. The dividend is payable on May 13, 2011 to shareholders of record on April 29, 2011. The yield based on the new payout is 3.2%.

PNC Financial Services Group, Inc. (PNC) is one of the nation’s largest diversified financial services organizations providing retail and business banking. April 7th the company increased its quarterly dividend 250% to $0.35/share. The dividend is payable May 5, 2011 to shareholders of record at the close of business on April 18, 2011. The yield based on the new payout is 2.2%.

Richardson Electronics, Ltd. (RELL) is a global provider of engineered solutions, a global distributor of electronic components to the electron device markets, and a global provider of display solutions to the display systems markets. April 6th the company increased its quarterly dividend 150% to $0.05/share. The dividend will be payable on May 20, 2011, to all common stockholders of record on May 6, 2011. The yield based on the new payout is 1.5%.

The TJX Companies, Inc. (TJX) is a leading off-price retailer of apparel and home fashions in the U.S. and worldwide. April 5th the company increased its quarterly dividend 27% to $0.19/share. The dividend is payable June 2, 2011, to shareholders of record on May 12, 2011. Carol Meyrowitz, Chief Executive Officer of The TJX Companies, Inc. stated, “I am pleased to report that our Board of Directors has approved this 27% increase in our quarterly dividend, which reflects our confidence in the business and marks our 15th consecutive year of dividend increases.” The yield based on the new payout is 1.5%.

Government Properties Income Trust (GOV) is a real estate investment trust, or REIT, which owns properties leased primarily to the U.S. Government and state governments located throughout the United States. GOV is headquartered in Newton, MA. April 5th the company increased its quarterly dividend 2.4% to $0.42/share ($1.68 per share per year). This distribution will be paid to GOV’s common shareholders of record as of the close of trading on April 26, 2011 and distributed on or about May 24, 2011. The yield based on the new payout is 6.2%.

Bank of the Ozarks, Inc. (OZRK) owns a state-chartered subsidiary bank that conducts banking operations through 94 offices in Arkansas, Texas, Georgia, Florida, South Carolina, North Carolina, and Alabama. April 1st the company increased its quarterly dividend 5.9% to $0.18/share. The dividend is payable April 22, 2011 to shareholders of record as of April 15, 2011. The Company has increased its quarterly dividend in five of the last six quarters. The yield based on the new payout is 1.6%.

Selecting stocks with increasing dividends is critical for an income growth strategy. The above list contains stocks that recently raised their dividends; it is not a list of recommend buys. As always, due diligence should be performed before buying or selling any stock. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

Full Disclosure: Long KO, GPC, KMB, PNY, WMT. See a list of all my income holdings here.

Related Posts
- Finding Low Risk Dividend Stocks
- Dividend Stocks: Confident and Secure
- Passing the Torch – Part 1 of 2
- Dividend Stocks Poised To Beat Inflation
- Are Defense Stocks Good Defensive Stocks?

(Photo Credit)

Dividend Growth Provides For Inflation

Inflation is the silent killer for many retirement portfolios. Over time, prices tend to increase. If you rely solely on a portfolio of long-term fixed income securities, you will lose purchasing power each year as inflation robs your portfolio. Dividend growth rates on traditional high-yield stocks (e.g. utilities, REITs, etc.) are often less than inflation. However, most blue-chip dividend growth stocks grow their dividends well in excess of the annual inflation rate.

Dividend Growth Often Provides For Higher Value

The combination of a good starting yield and respectable dividend growth will often provide the investor with greater long-term value when compared to alternatives with higher current yields and lower growth dividend rates. The only way to know for sure is to run the numbers using a model such as my D4L-PreScreen.xls.

Compound Dividend Growth Is Powerful

Compound interest is what occurs when interest previously earned is added to the principle and is considered when calculating future interest – i.e. earning interest on interest. Compound dividends are like compound interest on steroids. Like compound interest, dividends are being reinvested. However, these dividends are growing which provides and added boost.

Conservative View Of Dividend Growth

The dividend growth rate is a key metric in many calculations. As such, I use a conservative estimate as follows: The minimum dividend growth rate of the 1, 3, 5, 7, 10 year compound annual growth rate or 15%, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.

10 Stocks With a 10%+ Dividend Growth Rate

General Dynamics Corp. (GD) | Yield: 2.5% | Growth: 10.1%
General Dynamics is the world’s fifth largest military contractor and also one of the world’s biggest makers of corporate jets. GD is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 19 consecutive years.

Hormel Foods Corp. (HRL) | Yield: 1.9% | Growth: 10.6%
Hormel Foods Corp. company is a leading processor of branded, convenience meat products (primarily pork) for the consumer market. HRL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1928 and has increased its dividend payments for 45 consecutive years.

Wal-Mart Stores Inc. (WMT) | Yield: 2.8% | Growth: 11.0%
Wal-Mart Stores, Inc. is the largest retailer in North America, WMT operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets. WMT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 36 consecutive years.

Colgate-Palmolive Co. (CL) | Yield: 2.9% | Growth: 12.5%
Colgate-Palmolive Company (Colgate) is a major consumer products company that markets oral, personal and household care, and pet nutrition products in more than 200 countries and territories. CL is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1895 and has increased its dividend payments for 47 consecutive years.

Owens & Minor Inc. (OMI) | Yield: 2.6% | Growth: 13.2%
Owens & Minor Inc. 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. OMI is a member of the Broad Dividend Achievers™ Index. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 13 consecutive years.

ConocoPhillips (COP) | Yield: 3.3% | Growth: 13.2%
ConocoPhillips Co. is the fourth largest integrated oil company in the world. COP is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 10 consecutive years.

Target Corp. (TGT) | Yield: 2.0% | Growth: 15.5%
Target Corp. operates about 1,500 Target and 250 SuperTarget general merchandise stores across the U.S. TGT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1965 and has increased its dividend payments for 43 consecutive years.

Southside Bancshares Inc. (SBSI) | Yield: 3.2% | Growth: 16.6%
Southside Bancshares Inc. primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations. SBSI is a member of the Broad Dividend Achievers™ Index. The company has paid a cash dividend to shareholders every year since 1969 and has increased its dividend payments for 12 consecutive years.

Walgreen Co. (WAG) | Yield: 1.7% | Growth: 18.5%
Walgreen Co 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. WAG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 36 consecutive years.

Casey’s General Stores Inc. (CASY) | Yield: 1.4% | Growth: 19.8%
Casey’s General Stores Inc. has over 1,500 convenience stores in the Midwest, selling food, beverage, health and automotive products. CASY is a member of the Broad Dividend Achievers™ Index. The company has paid a cash dividend to shareholders every year since 1990 and has increased its dividend payments for 10 consecutive years.

Conclusion

If time is on your side, you should investigate if certain lower yielding stocks with a dividend growth rate fits into your long-term investment strategy. When making this evaluation, it is important to note that the sustainability of the dividend growth rate must be evaluated on a go-forward basis. Like high-yield stocks, there is increasing risk as the dividend growth rises.

Full Disclosure: Long GD, WMT, CL, OMI, COP. See a list of all my income holdings here.

Related Posts
- 13 Dividend Stocks With A Good Yield/Growth Mix
- Increasing Dividend Yield Part V: MLPs
- Dividend Stocks: A Disciplined Approach
- 7 Low-Debt High-Rated Dividend Stocks
- Increasing Dividend Yield Part VI: Time

(Photo Credit)

Linked here is a detailed quantitative analysis of Microsoft Corporation (MSFT). Below are some highlights from the above linked analysis:

Company Description: Microsoft is the world’s largest software company, develops PC software, including the Windows operating system and the Office application suite.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MSFT is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 6.6% discount to its calculated fair value of $27.44. MSFT earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

MSFT earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 2003 and has increased its dividend payments for 8 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of the $1,707 is below the $2,700 target I look for in a stock that has increased dividends as long as MSFT has. If MSFT grows its dividend at 12.0% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Memberships and Peers: MSFT is a member of the S&P 500. The company’s peer group includes: Apple Inc. (AAPL) with a 0.0% yield, Hewlett-Packard Company (HPQ) with a 0.8% yield and Google Inc. (GOOG) with a 0.0% yield.

Conclusion: MSFT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks MSFT as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $21.60 before MSFT’s NPV MMA Differential increased to the $2,700 minimum that I look for in a stock with 8 years of consecutive dividend increases. At that price the stock would yield 2.96%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,700 NPV MMA Differential, the calculated rate is 13.6%. This dividend growth rate is slightly above the 12.0% used in this analysis, thus providing no margin of safety. MSFT has a risk rating of 1.50 which classifies it as a Low risk stock.

MSFT was one of the first large tech. companies to pay a dividend in 1990. Since then several other large tech. companies have followed suit, including Intel (INTC) in 1992, Oracle (ORCL) in 2009 and just this month Cisco (CSCO) announced its first dividend. MSFT has seen a slow recovery in IT spending, and suffered market share losses in smartphones and other mobile devices. The company’s free cash flow payout and debt to total capital is low, the combination of its yield, dividend growth rate and years of dividend growth fall short of my expectations. In addition, it failed to raise its dividend for 8 consecutive quarters between November 2008 and August 2010. For these reasons I will remain on the sidelines even though the stock is trading below by calculated fair value of $27.44. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in MSFT (0.0% of my Income Portfolio), but was long in INTC. See a list of all my income holdings here.

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There are some really good articles here, please take time and read a few of them. (Photo: Sachin Ghodke)