Dividend Aristocrats: Companies in the S&P 500 that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. As the name denotes, these are the best of the best – the blue blood stocks, including names like:

- Clorox Co (CLX) | Yield: 3.30%
- Coca-Cola Co (KO) | Yield: 2.90% | Analysis
- Emerson Electric (EMR)| Yield: 2.80% | Analysis
- Exxon Mobil (XOM)| Yield: 2.60%
- Johnson & Johnson (JNJ)| Yield: 3.10% | Analysis
- McDonald’s Corp (MCD)| Yield: 3.40% | Analysis
- Procter & Gamble (PG)| Yield: 2.80% | Analysis
- Wal-Mart Stores (WMT) | Yield: 2.00% | Analysis

US Broad Dividend Achievers: Is comprised of companies incorporated in the United States or its territories, trade on the NYSE, NASDAQ or AMEX, and have increased their annual regular dividend payments for the last ten or more consecutive years. Notable names on this list include:

- Chevron Corporation (CVX) | Yield: 3.70%
- Donaldson Company (DCI) | Yield: 1.10%
- McCormick & Co. (MKC) | Yield: 2.80%
- Nucor Corp. (NUE) | Yield: 3.20% | Analysis
- Raven Industries, Inc. (RAVN) | Yield: 1.90% | Analysis

The U.S. Dividend Champions: Is maintained by Dave Fish of MoneyPaper. The list is updated monthly and located at the The Drip Investing Resource Center. Like the Dividend Aristocrats above the Dividend Champions list looks for companies that have increased their dividend for at least 25 consecutive years. However, since S&P 500 membership is not a requirement, the list is larger than the Dividend Aristocrats list and also includes small-cap companies.

- Bowl America (BWL.A) | Yield: 4.50%
- Conn. Water Service (CTWS) | Yield: 4.00%
- Weyco Group Inc. (WEYS) | Yield: 2.70%

Needless to say, last year saw many companies fall off the list. Overall the number of constituents fell to 218 stocks in 2010 from 319 in 2009. What made last year so unusual were the number of big-name companies that no longer qualified for inclusion on the list, some that had paid increasing dividends for decades, including:

- American International Group, Inc. (AIG)
– Bank of America Corporation (BAC)
– General Electric Co. (GE)
- The Home Depot, Inc. (HD)
- Johnson Controls Inc. (JCI)
- Pfizer Inc. (PFE)
- US Bancorp (USB)

The news wasn’t all bad. Partially offsetting the 133 companies that fell off the list were 32 new companies joining the Dividend Stock Ideas List. For the most part, these aren’t household names, not yet at least, but here are some names we will likely be seeing in the future:

- Arrow Financial Corporation (AROW) | Yield: 3.90%
- Energy Transfer Partners L.P. (ETP) | Yield: 7.80%
- Federated Investors, Inc. (FII) | Yield: 3.70%
- Getty Realty Corp. (GTY) | Yield: 8.50%
- Hudson City Bancorp, Inc. (HCBK) | Yield: 4.60%
- Investors Real Estate Trust (IRET) | Yield: 7.80%
- NSTAR (NST) | Yield: 4.60%
- Northeast Utilities (NU) | Yield: 3.80%
- Plains All American Pipeline LP (PAA) | Yield: 6.80%
- Suburban Propane Partners LP (SPH) | Yield: 7.30%

You can see the entire Dividend Stock Idea List here. Remember, not every stock listed here is a great dividend investment, but virtually all great dividend investments are on this list.

Full Disclosure: Long CLX, KO, EMR, JNJ, MCD, PG, WMT, CVX, NUE. See a list of all my income holdings here.

(Photo Credit)

Recently, Daniel Gross in a Newsweek article stated, “The Great Recession, which rolled over our financial lives like one of P.J. Keating’s giant pavers, is most likely over.” He went on to make the following observations in the article:

• The U.S. economy shrank at nearly a 6 percent annualized rate between September 2008 and March 2009, placing the global economy into recession for the first time since World War II.
• Home sales have risen for three straight months—a first since 2004.
• The stock market has rallied 44 percent since March.
• Seven of the 10 indicators in the Conference Board Leading Economic Index pointed upward.
• When economists proclaim a recession over, they mean economic output has stopped contracting.
• The U.S. economy needs annual growth of at least 1.5 percent just to feel like we’re standing still.
• Unemployment is likely to keep climbing.
• “I see 1 percent growth in the economy in the next few years. It’s going to feel like a recession, even when it ends.” stated New York University economist Nouriel Roubini
• The Obama administration’s strategy rests on what some might call industrial policy or excessive government intervention—or even creeping socialism.

Not surprising, a lot of the hardest hit stocks have seen the largest increase off their 52 week low. Based on August 4, 2009 prices, these would include: General Electric (GE) 141%, U.S. Bank (USB) 169%, Manulife Financial Corp. (MFC) 249%, AFLAC Inc. (AFL) 268%,  Bank of America (BAC) 518%.

Not all dividend stocks have fully enjoyed the recent run up.  Some are still relatively close to their 52 week low and are fairly valued based on my buy price. Based on August 4, 2009 prices, here are some to consider:

• Procter & Gamble Co. (PG) – 26% – Recent Price: $55 – Fair Value: $65.98 – Analysis
• Sysco Corp. (SYY) – 26% – Recent Price: $24 – Fair Value: $27.56 – Analysis
• Automatic Data Processing Inc. (ADP) – 23% – Recent Price: $38 – Fair Value: $40.86 – Analysis
• McDonald’s Corp. (MCD) – 20% – Recent Price: $55 – Fair Value: $67.86 – Analysis
• Wal-Mart Stores, Inc. (WMT) – 8% – Recent Price: $50 – Fair Value: $56.19 – Analysis

I look at a market recovery as a bitter-sweet event. For a dividend investor, buying stocks at a highly depressed price is a Godsend, but for the market to remain healthy and liquid, it must eventually rise.

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

Comparing Berkshire Hathaway’s (BRK.A) December 31, 2008 13-F with its March 31, 2009 13-F, I made the following observations for Q1/2009:

• BRK didn’t add any new positions to its portfolio
• BRK didn’t fully liquidate any positions in its portfolio
• BRK added shares in seven stocks: BNSF Railway (BNI), Union Pacific (UNP), Wells Fargo (WFC), U.S. Bancorp (USB), Johnson & Johnson (JNJ), and Nalco Holding Company (NLC)
• BRK reduced shares in four stocks: CarMax (KMX), ConocoPhillips (COP), Costco Wholesale Corporation (COST) and Constellation Energy Group, Inc. (CEG)

Of the stocks held in BRK’s 13-F portfolio, the following ones are either held in my income portfolio or are on my watch list of dividend stocks:

Coca Cola (KO) – Yield 3.34% – Analysis
The Coca-Cola Company is the largest manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups in the world.

Johnson & Johnson (JNJ) – Yield 3.55% – Analysis
Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field.

Kraft Foods (KFT) – Yield 4.44% – Analysis
Kraft is engaged in manufacturing and marketing packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products.

Lowes Companies (LOW) – Yield 1.89% – Analysis
Lowe’s Companies, Inc. is a home improvement retailer.

M&T Bank (MTB) – Yield 5.57%
M&T Bank Corporation is a bank holding company. As of December 31, 2008, the Company had two wholly owned bank subsidiaries.

Procter & Gamble Co. (PG) – Yield 3.39% – Analysis
The Procter & Gamble Company is focused on providing branded consumer goods.

Wal-Mart Stores, Inc.  (WMT) – Yield 2.19% – Analysis
Wal-Mart Stores, Inc. operates retail stores in various formats worldwide.

In addition, Buffett continues to hold a position in several stocks that I sold over the last twelve months for either cutting or failing to raise their dividend. Those are:

Bank of America Corporation (BAC) – Yield 0.35%
Bank of America Corporation (Bank of America) is a bank holding company and a financial holding company.

General Electric (GE) – Yield 9.20%
General Electric Company is a diversified technology, media and financial services company.

The Home Depot, Inc. (HD) – Yield 3.89%
The Home Depot, Inc.is a home improvement retailer selling an assortment of building materials, home improvement and lawn and garden products, and provide a number of services.

SunTrust Banks, Inc. (STI) – Yield 3.04%
SunTrust Banks, Inc. is a diversified financial services holding company whose businesses provide a range of financial services to consumer and corporate clients.

U.S. Bancorp (USB) – Yield 1.04%
U.S. Bancorp operates as a financial holding company and a bank holding company. U.S. Bancorp provides a range of financial services, including lending and depository services, cash management, foreign exchange, and trust and investment management services.

It is not surprising that the most famous value investor holds several dividend stocks. Historically, stocks that pay dividends have out-performed those that don’t. When you buy dividend stocks at a discount, it’s like turbo-charging your return!

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

I. Change In Business Conditions

An abrupt or permanent shift in a company’s business model as a result of business conditions could lead to a dividend cut. Over the last 18 months or so, virtually all businesses have experienced an adverse change in business conditions.  However, the pertinent question is to what degree?

Consider Gannett Co. (GCI) who publishes 90 daily U.S. newspapers, nearly 1,000 non-daily publications in the U.S., and close to 300 U.K. titles. With the mass adoption of the internet, traditional news outlets such as newspapers are experiencing a slow death. GCI cut its dividend earlier this year after several years of declining earnings.

Pfizer’s (PFE) recent dividend cut would fall in this category. After years of unsuccessful attempts to get approval of a “blockbuster” drug, the cash rich company sought a merger partner with a good drug pipeline. In anticipation of it proposed combination with Wyeth, PFE cut its dividend.

II. Dividend Yield Above Historic and Industry Norms

A dividend yield that is higher than average and/or higher than others in the industry are indications, not all is well with the company. The market is adjusting to compensate for the higher risk of holding the company.  When dividend yields start creeping up, it is time to start evaluating if the company can continue to pay its dividend.

Consider Bank of America Corp. (BAC). Between 2000 and 2007 the company’s dividend yield hovered in the 3%-4% range. In 2008, the dividend yield ranged from around 5% to the teens prior to its dividend cut.  The same situation occurred with General Electric (GE) over the same period. GE’s dividend yield from 2000-2007 normally were in the range of 1.5%-3.5%. However, in 2008 they the dividend yield than doubled as investors lost confidence in the company. Eventually, BAC and GE cut their dividends.

III. Diminishing Cash Available to Pay Dividends

Ultimately, the ability of a company to pay its dividend is determined by its cash position – both cash on its balance sheet and its ability to generate cash flow.  All the companies above had one thing in common – a deterioration of cash flow available for paying dividends.

After GCI’s free cash flow peaked in 2004 at $1.3 billion, it slipped over the next four years to $852 million in 2008. Though GE’s free cash flow was increasing, the company was taking on significant debt. GE’s debt increased from  $201 billion in 2000 to $524 billion in 2008 and it could no longer afford its dividend.

A Look Ahead

Unfortunately, there will be more dividend cuts in the coming days. Two companies currently on my radar are Nucor Corp. (NUE) and Caterpillar Inc. (CAT).

On March 17th, NUE warned of a first quarter loss as the slumping economy sapped demand for the metal forcing it to cut output. “The economy has fallen off a cliff — and there is no visibility as to the timing of the recovery,” Nucor Chairman, Chief Executive and President Dan DiMicco said in a statement.  NUE’s free cash flows through 2008 had been strong and it ended 2008 with $920 million net debt (debt less cash) vs. $879 million in 2007. NUE is ok for now, but I look forward to reading their Q1 earnings release.

Last week CAT announced that its global machinery sales fell 27 percent in February, the third straight month of declines as the economic downturn has eroded demand for heavy equipment. In a separate announcement the company said it had notified an additional 2,454 workers in three states that they were losing their jobs as the company continues to try to bring production in line with plummeting demand. CAT’s financial position is not as strong as NUE. Its free cash flow in 2008 was less than half of 2007 and it ended 2008 with no cash and $33 billion in debt vs. $27 billion net debt in 2007. This is another quarterly earnings release that I look forward to reading.

The above three items will help you determine which companies are at risk of cutting their dividends. Cash is king, so pay special attention to free cash flows and debt levels.

Full Disclosure: Long CAT and NUE.

(Photo Credit)

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The “%” column is the percentage decrease between the “Sell Price” and “Recent Price”.  As you can see, each of the stocks continued to fall after it was sold. That adds substantive evidence that my sell after a dividend cut rule is the correct thing to do. With that said, I have begun to question if there were other indicators that should have led me to an earlier sale. Four of the above stocks have one other thing in common – they froze their dividend before cutting it. The table below shows those stocks and the price on the dividend freeze date (declaration date), along with the three stocks I currently hold with a frozen dividend:

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The “Freeze Price” is the closing price the first trading day after the dividend freeze was announced. The “Sell Price” for the first four (those that I have already sold), is the actual price I sold it for and for the three I still hold it is a recent price. Based on the above, it appears the prudent thing to do would be to sell a stock after it freezes its dividend. Like a dividend cut, an investment with a froze dividend is no longer aligned with my dividend portfolio’s goal of building an ever-increasing source of dividend income.

Care should be taken in considering that not only have the above stocks fell over the last year or so, but virtually every other stock has fell. So what appears to be hard and fast rules in this market, will need to be evaluated under different phases of the cycle. But for now, selling after a dividend cut or a dividend freeze appears to be a prudent rule to follow. However, I do not see the dividend freeze rule as stringent as the dividend cut rule. Each situation needs to be evaluated and sometimes an immediate sale is not warranted. Considering all this, I would phrase my dividend rule as such:

When an individual stock held as a dividend investment freezes its dividend, this is a strong sell indicator. The specific facts and circumstances should be immediately evaluated and continuously monitored until the stock is either sold or it increases its dividend.

If it is decided not to sell the stock, the pressure to sell should increase as time passes.  Another strong indicator to sell would be if the dividend freeze persists long enough to incur a flat dividend year-over-year. Dividend freezes need to be monitored closely. In many instances they are the first step to a dividend cut.

Full Disclosure: Long HD, MTB, RY

When President Obama announced a $500,000 salary cap on pay for executives at institutions receiving bailout funds this caused a great deal grief for our friends working in Manhattan. It was pointed out in a recent article just how difficult it is to live in the heart of NYC on a measly half-mill a year. With Harvard Club dues at $2,000 a year per couple, and Westchester County golf clubs typically charge $16,000; food and entertaining tabs are another $15,000, what’s the well-to-do to-do on a paltry $500,000 per year?

Well at least those guys have a job. What about the poor Joe’s (and Jane’s) that spent a mint ($32k/year out of state) to attend at a top flight institution with hopes of landing a job on Wall Street? As this article points out, for decades, investment banking was a well-worn path to affluence for business-school graduates. As big banks including Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS) cut tens of thousands of jobs, MBA students who just a few years ago would have been aggressively recruited by companies now expect to fight for the handful of positions available.

How about those those less-fortunate wealthy families – those only earning six-figures. As noted in this article, the Lower Hudson Valley’s small, wealthy communities have not gone unscathed in the troubled economy. The six-figure household incomes earned by many residents in such places as Harrison, Mamaroneck, Yorktown and New City have declined or risen less than 5 percent since 2000 while mortgages and rents have risen by double-digit percentages in many of these communities.

Still not convinced the wealthy are having difficult times?

This Wall Street Journal article shows just how bad it has become for the upper-tier. “Rich people are getting hit, and they’re all expressing the need to curtail unnecessary spending,” said Russ Alan Prince, president of Prince & Assoc., a wealth-research firm based in Connecticut. “Lovers are part of the same calculation.” According to a new survey by Prince & Assoc., more than 80% of multimillionaires who had extra-marital lovers planned to cut back on their gifts and allowances. Still, only 12% of the multimillionaire cheaters said they plan to give up on their lovers altogether for financial reasons.

See, the wealthy are just like you and me. They are feeling the pain of this economic downturn, but they just haven’t been here before. As I work on getting my tongue out of my cheek, I’ll leave my wealthy friends with 21 Suggestions for Success to consider while they work on getting their lives back together.

Full Disclosure: No position in the aforementioned securities.

Once considered to be the best run bank in America by many analysts, WFC is starting to struggle. Did the WFC executives turn a blind eye to the underlying financial data and only focus on the prize they had been eying for some time? From an outsider looking in, this appears to be the case. After a much larger loss in the fourth quarter than expected, most analysts that follow the bank believe a dividend cut is inevitable and, like BAC, a second trip to the TARP trough could be in the works. Are the shareholders possibly looking at a $0.01 dividend in the future?

Analysts from Friedman, Billings, Ramsey & Co. in a January 29 note pointed out that WFC only remained “well capitalized” by regulators’ lights because of the government’s $25 billion TARP injection. WFC’s 7.88% capital cushion does not compare well with other troubled banks such as Citigroup (11.8%), J.P. Morgan (JPM) (10.8%) and Bank of America (10.7%).

Other warning signs include a sharp increase in the amount of assets held for sale $178 billion from $106 billion in the prior quarter. Goodwill climbed to $23 billion from $14 billion. In this environment, goodwill is a difficult asset to justify to the auditors and ultimately to the Securities and Exchange Commission (SEC). Could future impairments be in the works, as Wachovia did in its final days?

There is reason to be concerned. Though the actors are different, I have seen this play before and the outcome is tragic.

Full Disclosure: No position in the aforementioned stocks.

The Good

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

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

The Bad

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

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

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

The Ugly

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

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

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

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

The TARP money comes with strings. One of which is a reduction of common dividends. BAC declared a first-quarter dividend of $.01 per share. The company’s previous two dividends were $0.32 and $0.64 per share. Not to be out done, Citigroup (C) declared a quarterly dividend on the company’s common stock of $0.01 per share. Its last two dividends were $0.16 and $0.32 per share.

Tuesday, concern spread to Wells Fargo (WFC) after analysts at Friedman Billings Ramsey said Wells Fargo will likely cut its dividend in the first half of the year because the bank needs to conserve cash. That resulted in a 20% drop in its share price. Then yesterday, SunTrust Banks, Inc. (STI) reported a fourth quarter loss of $1.08 per share and reduced its quarterly dividend from $0.54 to $0.10 per share.

While the big banks are taking government funds and slashing dividends, here are some smaller banks standing strong by raising dividends:

• Bar Harbor Bankshares (BHB) raises dividend by 4% (Yield: 4.68)
  
• Hudson City Bancorp (HCBK) increases qtr. dividend to $0.14/share (Yield: 4.68)
• Comm Bancorp (CCBP) boosts qtr. dividend from $0.27 to $0.28/share (Yield: 2.86)
• Westamerica Bancorp (WABC) Boosts Qtr. Dividend $0.01 to $0.36/share (Yield: 3.36%)

Today’s market has been challenging to even the most seasoned investors. Dividend stocks provide an opportunity for long-term growth and income if we follow a few simple rules.

Disclosure: No position in the aforementioned securities.

(Photo: Steve Woods)

In a report issued last Friday, the Congressional Budget Office (CBO) concluded that the Treasury lost more than 25% of the $247 billion it spent as of Dec. 31 bailing out banks, according to a report released on Friday.

The CBO used a modified Black-Scholes option pricing model to value the TARP assets. The calculation was based on the present value of the dividends banks are required to pay taxpayers on the warrants issued in exchange for the funds received. The present value of the warrants was only $183 billion at December 31st, resulting in the Treasury providing a “subsidy” to the banks of $64 billion.

Terms of the TARP agreement require banks to pay back 5% annually in dividends for the first five years, and 9% after that if taxpayers haven’t been repaid. The warrants expire in 10 years. Last Thursday, Lawrence Summers, President-elect Barack Obama’s chief economic advisor, promised that the incoming administration would take steps to improve returns on TARP funds for taxpayers, in part by limiting dividend payouts to shareholders.

Prominent financial companies participating in TARP include:

• American Express Company (AXP)
• Bank of America Corporation (BAC)
• BB&T Corp. (BBT)
• U.S. Bancorp (USB)
• Wells Fargo & Co. (WFC)

Some institutions, such as Bank of America, have returned to the trough to feed again off TARP funds. As dividend investors, we must carefully consider whether or not banks participating in the TARP program should be included in our income portfolios.

Full Disclosure: Long BBT, USB