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)

Linked here is a detailed quantitative analysis of AFLAC Incorporated (AFL). Below are some highlights from the above linked analysis:

Company Description: Aflac Incorporated 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 75% of revenues comes from Japan and 25% from the U.S.

Fair Value: I consider 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

AFL is trading at a discount to only 3.) above. The stock is trading at a 31.4% premium to its calculated fair value of $43.46. AFL 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%

AFL 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%. AFL earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 28 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

AFL earned a Star in this section for its NPV MMA Diff. of the $2,621. This amount is in excess of the $700 target I look for in a stock that has increased dividends as long as AFL has. If AFL grows its dividend at 15.0% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.4%.

Memberships and Peers: AFL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Delphi Financial Group, Inc. (DFG) with a 1.5% yield, Unum Group (UNM) with a 1.5% yield and CNO Financial Group (CNO) with a 0.0% yield.

Conclusion: AFL did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks AFL as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $93.51 before AFL’s NPV MMA Differential decreased to the $700 minimum that I look for in a stock with 28 years of consecutive dividend increases. At that price the stock would yield 1.22%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $700 NPV MMA Differential, the calculated rate is 10.5%. This dividend growth rate is below the 16.7% used in this analysis, thus providing a margin of safety. AFL has a risk rating of 1.50 which classifies it as a low risk stock.

Operating in the the U.S. and Japan, two largest insurance markets in the world, AFL has built a tremendous low-cost distribution system. Concerns about AFLs investment portfolio, which holds European bank hybrid bonds and European sovereign debt, have eased. However, deregulation in Japan has allowed more able competitors to enter Aflac’s key markets and a prolonged period of low interest rates dampen the company’s prospects. AFL’s is trading 31% above my fair value buy price of $43.46. It valuation, low yield and willingness to hold its dividend flat, as it did from Feb. 2009 to August 2010, will keep shares of this stock out of my portfolio. 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 AFL (0.0% of my Income Portfolio). See a list of all my income holdings here.

Related Articles:

- McDonald’s Corporation (MCD) Dividend Stock Analysis
- Johnson & Johnson (JNJ) Dividend Stock Analysis
- Owens & Minor, Inc. (OMI) Dividend Stock Analysis
- Pepsico, Inc. (PEP) Dividend Stock Analysis
- More Stock Analysis

My goals were defined in this December 1, 2007 Investing Goals post and updated in my 2010 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 $330, and Yield on Cost (YOC) decreased 0.01%. This month’s changes were a net of new purchases and dividend changes (no sales for the month). Let’s examine each of the these categories:

Purchases: The $399 increase in annual dividend income and 0.02% decrease in YOC related to the following purchases (yield at the time of purchase):

• $79 McDonald’s Corp. (MCD) 3.12%  [Analysis]
• $81 General Dynamics Corp. (GD) 2.64% [Analysis]
• $90 Automatic Data Processing, Inc. (ADP) 3.37% [Analysis]
• $149 iShares S&P U.S. Preferred Stock Index (PFF) 5.67%

Only PFF increased my YOC, while three securities lowered it. As noted in earlier updates, I generally expect YOC to drop each month since most new investments will yield less than my current YOC, and dividend increases will not be sufficient to offset it.

Dividend Changes: The $4 decrease in annual dividend income and the 0.03% decrease in YOC related to the following dividend changes (a=dividend stated in annual terms, q=quarterly, m=monthly):

• ($4) Invest Grade Corp Bond (LQD) $5.53a>$5.48a
• $1 Long-Term Bond ETF (BLV) $3.94a>$3.95a
• ($2) Intermediate-Term Bond ETF (BIV) $3.41a>$3.39a
• ($3) Emerging Markets Sovereign Debt (PCY) $1.65a>$1.64a
• $4 Clorox Corporation (CLX) $0.50q>$0.55q

Sales: The $65 decrease in annual dividend income and the 0.04% increase in YOC related to the following sales:

• ($65) AFLAC Inc. (AFL)

This month I exceeded my 2010 goal of $9,500 in annualized dividend income. With four months to go, I am confident of achieving $10,000 in annualized dividend income by December 31, 2010, assuming minimal dividend cuts.

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

(Photo: sanja gjenero)

Significant Price Run-up Distorting Dividend Fundamentals

When you buy a dividend stock at a depressed level it will eventually return to its norm. However, at its normal level the dividend fundamentals could be so bad that you would be better off putting the money to work somewhere else. For this evaluation, my primary indicator is the NPV MMA Differential. When this metric goes negative, it in effect is saying you are better off putting the into a money market account for the next 20 years. When this occurs I look for a way to exit the position and retrieve my original investment, leaving the portion attributable to capital appreciation. Examples of stocks that I hold with these characteristics (or close to it) are:

- 3M Co. (MMM) | Yield: 2.60% | NPV MMA Diff: (117)
- Emerson Electric Co. (EMR) | Yield: 2.87% | NPV MMA Diff: (108)
- Genuine Parts Company (GPC) | Yield: 3.82% | NPV MMA Diff: 302
- Illinois ToolWorks Inc. (ITW) | Yield: 3.09% | NPV MMA Diff: 317

Dividend Freeze Leading to Poor Dividend Fundamentals

When a company fails to raise its dividend (dividend freeze), the dividend fundamentals quickly deteriorate if its yield is low. It is easier to be patient when the yield is higher and the stock is still earning its way. However, as dividend growth investors, ultimately we expect our dividends to grow: Below are several stocks that failed to raise their dividends at the expected time:

- Paychex Inc. (PAYX) | Yield: 4.89% | Dividend Flat Since: 07/2008
- Eli Lilly & Co. (LLY) | Yield: 5.74% | Dividend Flat Since: 02/2009
- Progress Energy Inc. (PGN) | Yield: 5.88% | Dividend Flat Since: 01/2009
- Integrys Energy Group, Inc. (TEG) | Yield: 5.56% | Dividend Flat Since: 02/2009

Historical Performance Is Not Indicative Of Expected Results

Sometimes historical results are indicating the stock is a good investment, but something just doesn’t seem right. In situations like this there is probably a reason for the uneasiness and it is in our best interest to understand why we feel that way. Usually we know something that is not reflected in the financials.

This recently occurred with my AFLAC Inc. (AFL) position. I had been closely watching AFL since the time it first failed to raise its dividend. For a stock with a yield as low as AFL, dividend growth is paramount for its long-term success. My model’s calculated dividend growth rate was higher than what I expected going forward, at least for the near term. Its annual dividend growth has been declining since 2008, with 2010 growth only 3.6% (considering 2 dividends at $0.28 and two at $0.30). This was the only single digit increase in the last 10 years. When considering AFL’s most recent increase, the NPV MMA differential is under-performing its target. AFL has a large exposure to hybrid bonds (particularly European banks) and exposure to European sovereign debt. This makes them more risky than many other Financial Services companies. I have been looking to reallocate a portion of my financial Financial Services holdings (currently in excess of 10%) and I considered AFL one of my weaker financial stocks, so I sold it.

Substantial Change In The Business

Sometimes the world changes and what you were selling yesterday at a premium you can’t give away today. This phenomenon has been played out since the beginning of time. Rock gathers were replace with club makers who were replaced with spear makers who were replaced with arrow makers who were replaced with musket makers who were replaced with rifle makers, and so on. We see this happening today with the print media. Companies like Courier Corporation (CRRC) that publishes, prints and sells books, and Gannett Co., Inc. (GCI) an international media company that owns USA Today have struggled recently as people have moved from print media to online. Both companies were unable to continue the string of consecutive dividend increases.

Other times a catastrophe will shake a company to it very foundation. This has been most evident with the recent oil disaster in the Gulf. BP (BP) was not prepared for a situation like it faced. As the damage claims mounted, investors lost confidence in management to stop the oil flow and began to sell off the stock. A dividend cut soon followed.

Buy-And-Hold Not Buy-And-Forget

All investors need to be vigilant and keep a close watch on their investments. There are few certainties in an uncertain world. Things change and adjustments must be made. Buy-and-hold is a successful investment strategy; buy-and-forget is a recipe for disaster.

Full Disclosure: Long MMM, EMR, GPC, ITW, PAYX, LLY, PGN, TEG. See a list of all my income holdings here.

Related Posts
- 9 Stocks With a Sustainable Dividend
- What’s More Powerful Than Compound Interest?
- Who is Ben Grossbaum and Why Should We Listen to Him?
- When Is Enough, Enough
- Dividend Stocks Secret Ingredient

(Photo: sanja gjenero)

Below are several companies confident and secure enough in their business to increase their cash dividends:

EXCO Resources (XCO) is an independent oil and natural gas company that acquires, develops, and exploits onshore properties located in the continental U.S. August 5th the company increased its quarterly dividend 33% to $0.04/share. The dividend is payable on September 15, 2010 to holders of record on August 31, 2010. The yield based on the new payout is 1.05%.

Ritchie Bros. Auctioneers (RBA) in an auctioneer of industrial equipment sells, through unreserved public auctions, a range of industrial equipments, trucks, and other assets used in the agricultural industries. August 6th the company raised its quarterly dividend to $0.105/share. The yield based on the new payout is 2.31%.

Buckeye GP Holdings L.P. (BGH) owns a small general partnership interest and incentive distribution rights in Buckeye Partners L.P. August 6th the partnership increased its quarterly distribution 4.7% to $0.45/unit. The distribution is payable on August 31, 2010 to unitholders of record on August 16, 2010. The ex-distribution date is August 12, 2010. Yield on the distribution is 4.1%. The yield based on the new payout is 4.17%.

Carlisle Co. (CSL) is a diversified manufacturer of rubber roofing and insulation, small tires and wheels, heavy duty braking systems, foodservice plastics, and specialty wire. August 6th the company raised its quarterly dividend 6.3% to $0.17/share. The dividend is payable on September 1, 2010 to shareholders of record at the close of business on August 17, 2010. The ex-dividend date is August 15, 2010. CSL is a Dividend Achiever and has raised its dividend for 34 consecutive years. The yield based on the new payout is 2.15%.

Illinois Tool Works (ITW) is a diversified manufacturer operates a portfolio of about 840 industrial and consumer businesses throughout the world. August 6th the company increased its quarterly dividend 10% to $0.34/share. The dividend will be paid on Wednesday, October 13, 2010 to stockholders of record on Thursday, September 30, 2010. The ex-dividend date is September 28, 2010. ITW is a Dividend Achiever and has raised its dividend for 47 consecutive years. The yield based on the new payout is 3.01%.

Chemed Corp. (CHE) provides hospice services for patients with severe, life-limiting illnesses; and also provides plumbing and drain cleaning services. August 6th the company raised its quarterly dividend 16.7% to $0.14/share. The dividend is payable on September 7, 2010, to shareholders of record as of August 16, 2010. The ex-dividend date is August 12, 2010. The yield based on the new payout is 1.05%.

CMS Energy (CMS) principal subsidiary is Consumers Energy, the largest utility in Michigan and the sixth largest gas and 13th largest electric utility in the U.S. August 6th the company raised its quarterly dividend 40% to $0.21/share. The yield based on the new payout is 4.97%.

Harleysville Group (HGIC) underwrites a broad array of personal and commercial coverages. These insurance coverages are marketed primarily in the Eastern and Midwestern United States. August 6th the company raised its quarterly dividend 11% to $0.36/share. The dividend is payable September 30, 2010, to shareholders of record on September 15, 2010. The ex-dividend date is September 13, 2010. HGIC is a Dividend Achiever and has raised its dividend for 24 consecutive years. The yield based on the new payout is 4.55%.

Aflac (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 75% of revenues comes from Japan and 25% from the U.S. August 10th the company increased its quarterly dividend 7.1% to $0.30/share. The dividend is payable on December 1, 2010, to shareholders of record at the close of business on November 17, 2010. AFL is a Dividend Aristocrat and has raised its dividend for 28 consecutive years. The yield based on the new payout is 2.42%.

Scotts Miracle-Gro (SMG) is a leading international supplier of products for the consumer lawn and garden and professional turf and horticulture markets. August 10th the company raised its quarterly dividend by 100% to $0.25/share. The yield based on the new payout is 2.11%.

Questar Corp. (STR) is engaged in gas transportation and storage, and retail gas distribution primarily in Utah. August 10th
the company increased its quarterly dividend 7.7% to $0.14/share. The dividend is payable September 13, 2010 to shareholders of record on August 20, 2010, is a $0.01 increase from the previous quarter. The ex-dividend date is August 18, 2010. STR is a Dividend Aristocrat and has raised its dividend for 31 consecutive years. The yield based on the new payout is 3.31%.

CAE (CAE) provides simulation and modeling technologies and integrated training services and products to the civil aviation industry and defense forces around the globe. August 11th the company raised its quarterly dividend 33.3% to $0.04/share. The dividend is payable on September 30, 2010 to shareholders of record at the close of business on September 15, 2010. The yield based on the new payout is 1.69%.

Connecticut Water Service (CTWS) is a provider of regulated water utility services to customers in Connecticut also conducts unregulated operations. August 12th the company increased its quarterly dividend 2.2% to $0.2325/share. The dividend is payable on September 15, 2010, for shareholders of record as of September 1, 2010, and an ex-dividend date of August 30, 2010. The yield based on the new payout is 4.36%.

Textainer (TGH) engage in the purchase, management, leasing, and resale of a fleet of marine cargo containers worldwide. August 12th the company raised its quarterly dividend 4.2% to $0.25/share. The dividend is payable on September 1, 2010 to shareholders of record as of August 23, 2010. The ex-dividend date is August 19, 2010. The yield based on the new payout is 3.63%.

Parker Hannifin (PH) is a global maker of industrial pumps, valves, pneumatics, and hydraulics. Its products are used in everything from jet engines to trucks and autos and utility turbines. August 12th the company increased its quarterly dividend 4% to $0.27/share. The dividend is payable September 3, 2010 to shareholders of record as of August 23, 2010. The ex-dividend date is August 19, 2010. PH is a Dividend Achiever and has raised its dividend for 54 consecutive years. The yield based on the new payout is 1.72%.

Torchmark (TMK) derives most of its earnings from its life and health insurance operations. August 12th the company raised its quarterly dividend 6.7% to $0.16/share. The dividend is payable November 1, 2010, to shareholders of record as of October 2, 2010. The ex-dividend date is September 30, 2010. The yield based on the new payout is 1.25%.

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 HGIC.  See a list of all my income holdings here.

Related Posts
- 7 Investor Traits to Achieve Success
- Increasing Dividend Yield Part IV: Bonds
- Increasing Dividend Yield Part V: MLPs
- Seven Important Reasons for Dividend Investing
- Who is Jeremy J. Siegel and Why Should We Listen to Him?

(Photo Credit)

As for my portfolio, I consider asset allocation only when looking at my holdings in total. It would be much too difficult to maintain a good allocation within individual portfolios (income, growth, 401(k), Roth IRA, etc.), while trying to maintain my overall allocation. However, an investor could build a degree of allocation into a portfolio of dividend income securities. Consider the following:

Business Services Sector

• Automatic Data Processing Inc. (ADP)
  Yield: 3.33% | Style: Large Growth | Analysis
• C H Robinson Worldwide Inc. (CHRW)
  Yield: 1.86% | Style: Large Growth
• Expeditors International of Washington Inc. (EXPD)
  Yield: 1.16% | Style: Mid Growth

Consumer Goods Sector

• Clorox Company (CLX)
  Yield: 3.23% | Style: Mid Core
• Coca-Cola Company (KO)
  Yield: 3.04% | Style: Large Growth | Analysis
• Procter & Gamble Company (PG)
  Yield: 2.85% | Style: Large Core | Analysis

Consumer Services Sector

• Genuine Parts Company (GPC)
  Yield: 4.19% | Style: Mid Value | Analysis
• Sysco Corporation (SYY)
  Yield: 3.56% | Style: Large Core | Analysis
• McDonald’s Corporation (MCD)
  Yield: 3.22% | Style: Large Core | Analysis

Energy Sector

• BP Plc ADR (BP)
  Yield: 6.15% | Style: Large Value
• Chevron Corporation (CVX)
  Yield: 3.75% | Style: Large Value
• ExxonMobil Corporation (XOM)
  Yield: 2.56% | Style: Large Value

Financial Services Sector

• Harleysville Group Inc. (HGIC)
  Yield: 3.90% | Style: Small Value | Analysis
• Chubb Corporation (CB)
  Yield: 2.85% | Style: Large Value | Analysis
• Aflac Inc. (AFL)
  Yield: 2.38% | Style: Large Core | Analysis

Hardware Sector

• Diebold Incorporated (DBD)
  Yield: 3.67% | Style: Small Value
• Linear Technology (LLTC)
  Yield: 3.23% | Style: Mid Core
• Raven Industries Inc. (RAVN)
  Yield: 1.90% | Style: Small Growth | Analysis

Health Care Sector

• Meridian Bioscience Inc. (VIVO)
  Yield: 3.27% | Style: Small Growth
• Johnson & Johnson (JNJ)
  Yield: 3.08% | Style: Large Core | Analysis
• Cardinal Health Inc. (CAH)
  Yield: 2.10% | Style: Large Core | Analysis

Industrial Materials Sector

• Nucor Corp. (NUE)
  Yield: 3.40% | Style: Large Core | Analysis
• Emerson Electric Co. (EMR)
  Yield: 2.90% | Style: Large Core | Analysis
• 3M Company (MMM)
  Yield: 2.58% | Style: Large Core

Media Sector

• McGraw-Hill Companies Inc. (MHP)
  Yield: 2.63% | Style: Large Core

Pharmaceuticals Sector

• Eli Lilly & Company (LLY)
  Yield: 5.77% | Style: Large Value
• Abbott Laboratories (ABT)
  Yield: 2.97% | Style: Large Growth | Analysis

Real Estate Sector

• Essex Property Trust (ESS)
  Yield: 5.14% | Style: Mid Core
• Corporate Office Properties Trust Inc. (OFC)
  Yield: 4.29% | Style: Mid Core
• Federal Realty Investment Trust (FRT)
  Yield: 4.06% | Style: Mid Core

Telecommunications Sector

• CenturyLink Inc. (CTL)
  Yield: 8.10% | Style: Large Value
• AT&T Inc. (T)
  Yield: 6.54% | Style: Large Value | Analysis

Utilities Sector

• Integrys Energy Group Inc. (TEG)
  Yield: 6.61% | Style: Mid Value
• Consolidated Edison Company (ED)
  Yield: 5.59% | Style: Large Value
• MGE Energy Inc. (MGEE)
  Yield: 4.45% | Style: Small Core

Bonds

• Vanguard Short-Term Bond ETF (BSV)
  Yield: 2.74% | Style: Short-Term Bond
• Vanguard Intermediate-Term Bond ETF (BIV)
  Yield: 4.32% | Style: Intermediate-Term Bond
• Vanguard Long-Term Bond ETF (BLV)
  Yield: 5.16% | Style: Long-Term Bond

Needless to say, the above will not provide a perfect allocation, but it goes a long way to provide diversity in a portfolio focused only on income securities. In my personal portfolio, I buy the best available dividend securities and use my other investments to balance my asset allocation.

Full Disclosure: Long ABT, ADP, AFL, BIV, BLV, BP, CLX, CTL, CVX, ED, EMR, GPC, HGIC, JNJ, KO, LLY, MCD, MMM, NUE, PG, SYY, T, TEG. See a list of all my income holdings here.

(Photo Credit)

Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a less risky money market account? When I look for worthy dividend investments, one of my first tests is to determine if the investment will perform better than a MMA over time. I use the NPV MMA Diff. calculation to help make this determination.

The basis of the NPV MMA Diff. calculation is a hypothetical $1,000 investment in a dividend stock a Money Market Account. The value calculated is the net present value (NPV) of the differences between the dividend earnings of this investment and the interest income from the MMA over 20 years. Other assumptions include: 1.) dividends grow at a consistent dividend growth rate, 2.) dividends are reinvested, 3.) share price appreciation is not considered, 4.) interest income is reinvested in the MMA. Once calculated, The NPV MMA Diff. is compared to a target amount.

The target is based on the number of consecutive years of dividend increases. The formula is: Target = Base – (Years x Increment) + Minimum where Base=3,000, Increment=100, Minimum=500. Thus 0 years yields a $3,500 target and 30 years yields a $500 target. The MMA rate is an estimate of the average rate earned over a 20 year period. This rate is periodically validated by looking at a 20 year Treasury rate. For more information on calculating the NPV MMA Diff, see the D4L-PreScreen spreadsheet.

Below are 10 high-rated stocks that have a NPV MMA Diff. above their target:

The Procter & Gamble Company (PG) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
NPV MMA Diff. % Above Target: 29.7% | 4 Star | Yield: 2.89% | [Analysis]

Johnson & Johnson (JNJ) engages in the manufacture and sale of various products in the health care field worldwide.
NPV MMA Diff. % Above Target: 54.2% | 4 Star | Yield: 2.99% | [Analysis]

AT&T Inc. (T) provides telephone and broadband service, and the company holds full ownership of AT&T Mobility (formerly Cingular Wireless).
NPV MMA Diff. % Above Target: 78.4% | 4 Star | Yield: 6.36% | [Analysis]

SYSCO Corporation (SYY), through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily for foodservice industry in the United States and Canada.
NPV MMA Diff. % Above Target: 20.11% | 4 Star | Yield: 3.48% | [Analysis]

Abbott Laboratories (ABT) is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products including: drugs, nutritional products, diabetes monitoring devices and diagnostics.
NPV MMA Diff. % Above Target: 83.7% | 4 Star | Yield: 2.88% | [Analysis]

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.
NPV MMA Diff. % Above Target: 218.4% | 4 Star | Yield: 2.16% | [Analysis]

RLI Corp. (RLI), based in Peoria, IL, provides selected property, casualty and surety insurance.
NPV MMA Diff. % Above Target: 401.3% | 4 Star | Yield: 2.03% | [Analysis]

Aflac Incorporated (AFL) engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
NPV MMA Diff. % Above Target: 534.6% | 4 Star | Yield: 2.19% | [Analysis]

Nucor Corporation (NUE) is engaged in the manufacture and sale of steel and steel products. As the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.
NPV MMA Diff. % Above Target: 1273.9% | 4 Star | Yield: 2.95% | [Analysis]

Becton, Dickinson and Co. (BDX) provides a wide range of medical devices and diagnostic products used in hospitals, doctors’ offices, research labs, and other settings.
NPV MMA Diff. % Above Target: 345.7% | 5 Star | Yield: 1.94% | [Analysis]

Some might question why not just target yields that are higher than the MMA Rate? That ignores the most powerful concept of Dividend Income Investing – Dividend Growth. Compound interest (interest on interest) is a powerful concept, but growing, compound dividends is the income investor’s most powerful ally.

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

(Photo: Steve Woods)

Procter & Gamble Co. (PG) in April 2009 raised its dividend 10% to $0.44/share from $0.40/share. PG has increased its dividend for 53 consecutive years and I expect them to do so again next year. 2010′s increase may not be as strong since 2009′s free cash flow was down 8.5% from 2008. However, it is still strong and the trailing 12-months is above the 2008 level. Also, PG’s 2009 share count is down in and its cash balance is up. Given this, I project a 2010 increase of 6-8%. The stock is currently yielding 2.9%. [Analysis]

Colgate-Palmolive Co. (CL) in April 2009 also raised its dividend 10% to $0.44/share from $0.40/share. CL has increased its dividend for 46 consecutive years and I expect them to do so again next year. The 2010 increase should be higher then 2009′s since the company’s 12-month trailing free cash flow is up over 41% compared to 2008. The company’s most recet cash balance is up 52% and shares outstanding are down. I project a 2010 increase of 10-12%. The stock is currently yielding 2.1%.

W.W. Grainger Inc. (GWW) in May 2009 raised its dividend 15% to $0.46/share from $0.40/share. GWW has increased its dividend for 38 consecutive years and I expect them to do so again next year. The 2010 increase could be higher since the company’s 12-month trailing free cash flow is up over 62% compared to 2008 and its most recent cash balance is up nearly 70%. I project a 2010 increase of 15-17%. The stock is currently yielding 1.8%. [Analysis]

Abbott Laboratories (ABT) in April 2009 raised its dividend 11% to $0.40/share from $0.36/share. ABT has increased its dividend for 37 consecutive years and I expect them to do so again next year. The 2010 increase should be similar to the 2009 increase since the company’s 12-month trailing free cash flow is down slightly (2%) compared to 2008,  but it is currently sitting on 18% more cash. I project a 2010 increase of 10%. The stock is currently yielding 2.9%. [Analysis]

Wal-Mart Stores Inc. (WMT) in March 2009 raised its dividend 15% to $0.2725/share from $0.2375/share. WMT has increased its dividend for 35 consecutive years and I expect them to do so again next year. This cash generating machine continues to hum with a 10% increase (12-month trailing) in free cash flow compared to 2008. The more impressive statistic is the 12-month trailing cash flow is 2.4 time higher than the 2008 amount. I project a 2010 increase of 10%. The stock is currently yielding 2.0%. [Analysis]

Walgreen Company (WAG) in August 2009 raised its dividend 22% to $0.1375/share from $0.1125/share. WAG has increased its dividend for 34 consecutive years and I expect them to do so again next year. This is another cash generating machine that saw a 2009 free cash flow increase of 168% compared to 2008 and the 2009 ending cash balance is 4.7 time higher than 2008′s. I project a 2010 increase of 15-20%. The stock is currently yielding 1.5%. [Analysis]

AFLAC Inc. (AFL) in February 2009 raised its dividend 17% to $0.28/share from $0.24/share. AFL has increased its dividend for 27 consecutive years and I expect them to do so again next year. In spite of all the negative publicity aimed at the financial sector, AFL’s free cash flow has grew approximately 15% the last 12 months compared to 2008 and its most recent cash balance has nearly doubled from the 2008 level. I project a 2010 increase of 10%. The stock is currently yielding 2.4%. [Analysis]

Obviously, the above increases are pure speculation on my part. But in a world where cash is king, somehow great companies always find a way to increase their dividends each year.

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

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One of the largest uses for cash is to repay debt and its associated interest. Prior to the most recent downturn many companies took on enormous levels of debt, usually for one of these two reasons:

1. Fund An Acquisition:  Debt has been relatively cheap for some time and easy to access. When sellers thought the buyers stock was overpriced, they would demand significant levels of cash to close the deal. Debt was often used to raise the cash.
2. Restructuring: Analysts that follow companies have a target debt to total capital they are looking for. If they consider it is too low, management is encouraged to issue debt and use the proceeds to purchase their stock. (As an aside, I own a company that was encouraged to do this and eventually issued debt and purchased their stock close to its high. Then when the economy turned down they had to raise operating cash by, you guessed it, issuing stock well below where they purchased it.)

One of the key metrics I look for when evaluating a company is a debt to total capital ratio of 45% or less. Below are seven dividend companies with a debt to total capital less than 30%:

Nucor Corporation (NUE) is engaged in the manufacture and sale of steel and steel products. As the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas. [Analysis]

• Debt to Total Capital: 29%
• Current Rating: 4-Stars

Aflac Incorporated (AFL) engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan. [Analysis]

• Debt to Total Capital: 29%
• Current Rating: 4-Stars

Becton, Dickinson and Co. (BDX) provides a wide range of medical devices and diagnostic products used in hospitals, doctors’ offices, research labs, and other settings. [Analysis]

• Debt to Total Capital: 27%
• Current Rating: 5-Stars

Johnson & Johnson (JNJ) engages in the manufacture and sale of various products in the health care field worldwide. [Analysis]

• Debt to Total Capital: 25%
• Current Rating: 4-Stars

Harleysville Group Inc. (HGIC) is a regional holding company for property and casualty insurance companies that operates in 32 states, primarily in the eastern half of the U.S.

• Debt to Total Capital: 13%
• Current Rating: 4-Stars

RLI Corp (RLI), based in Peoria, IL, provides selected property, casualty and surety insurance. [Analysis]

• Debt to Total Capital: 12%
• Current Rating: 4-Stars

Raven Industries Inc. (RAVN) manufacturer provides electronic precision-agriculture products, reinforced plastic sheeting, electronics manufacturing services, specialty aeronautics, and sewn products.

• Debt to Total Capital: 0%
• Current Rating: 4-Stars

Having low levels of debt provides companies with greater financial flexibility. Of coarse, we must look at more than just debt as we evaluate a company, but the above can serve as a good starting point for your review.

Full Disclosure: Long NUE, AFL, JNJ. See a list of all my income holdings here.

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High Yield/Low Growth

I would classify dividend stocks with a yield over 5% and dividend growth less than 2% in this group. This is probably the most popular group, particularly among those new to income investing. It is human nature to want it now and lots of it, and high yield stocks appear to deliver that desire. However, there is often a reason the stock’s yield is so high and many times the investor learns the hard way the yield is not always sustainable. Examples of stocks in the high yield/low growth group include:

• National Retail Properties, Inc. (NNN) – Yield: 7.12 – Dividend Growth: 1.4%
• Integrys Energy Group, Inc. (TEG) – Yield: 6.63 – Dividend Growth: 1.5%
• Realty Income Corporation (O) – Yield: 6.61 – Dividend Growth: 2.1%
• CenturyTel Inc. (CTL) – Yield: 5.97 – Dividend Growth: 0.0%

Low Yield/High Growth

I would classify dividend stocks with a yield less than 2.5% and dividend growth greater than 7.5% in this group. Low yield and high growth dividend stocks are the other extreme of high yield and low growth stocks. Their long-term risk is associated with growing the yield-on-cost over time. If the dividend growth rate is cut, the investor’s future earnings and yield will also be cut. Stocks in this group would include:

• Aflac Incorporated (AFL) – Yield: 2.44 – Dividend Growth: 16.7% [Analysis]
• United Technologies Corp. (UTX) – Yield: 2.25 – Dividend Growth: 15.0% [Analysis]
• Eaton Vance Corp. (EV) – Yield: 2.05 – Dividend Growth: 15.0%
• Colgate-Palmolive Company (CL) – Yield: 2.02 – Dividend Growth: 10.3%
• Wal-Mart Stores, Inc. (WMT) – Yield: 2.01 – Dividend Growth: 11.3% [Analysis]
• Canadian National Railway Company (CNI) – Yield: 1.63 – Dividend Growth: 15.0%
• Lowe’s Companies, Inc. (LOW) – Yield: 1.53 – Dividend Growth: 15.0% [Analysis]

Moderate Yield/Moderate Growth

I would classify dividend stocks with a yield between 2.5% to 5% and a dividend growth rate between 2% to 7.5% in this group. This is a good compromise between the above too extremes. It is an approach focusing on a moderate yield and dividend growth rate. Keeping these two metrics at a reasonable level will help reduce the likelihood of either being cut. Companies in this group are your traditional dividend growth stocks, as seen from the list below:

• Chubb Corp. (CB) – Yield: 2.88 – Dividend Growth: 6.1% [Analysis]
• The Procter & Gamble Company (PG) – Yield: 2.81 – Dividend Growth: 7.3% [Analysis]
• Johnson & Johnson (JNJ) – Yield: 3.00 – Dividend Growth: 7.5% [Analysis]
• Automatic Data Processing Inc. (ADP) – Yield: 3.09 – Dividend Growth: 5.5% [Analysis]
• Emerson Electric Co. (EMR) – Yield: 3.13 – Dividend Growth: 6.4% [Analysis]
• Chevron Corporation (CVX) – Yield: 3.41 – Dividend Growth: 5.1%
• SYSCO Corporation (SYY) – Yield: 3.39 – Dividend Growth: 4.3% [Analysis]

In my personal investing strategy, I incorporate measured participation in each of the above groups. My primary focus is on the Moderate Yield/Moderate Growth stocks, believing that over time this group carriers the highest probability of success. The remaining two groups offer the potential for above average returns – as long as they continue to perform at the estimated level, which is often difficult to do over time.

Full Disclosure: Long NNN, TEG, O, CTL, AFL, UTX, WMT, CNI, CB, PG, JNJ, ADP, EMR, CVX, SYY. See a list of all my income holdings here.

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