Linked here is a detailed quantitative analysis of HCC Insurance Holdings Inc. (HCC). Below are some highlights from the above linked analysis:

Company Description: HCC Insurance Holdings Inc. is a multi-line insurer specializes in aviation, marine, medical stop-loss, offshore energy and property and casualty insurance in the U.S. and the U.K.

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

HCC is trading at a discount to 1.), 3.) and 4.) above. The stock is trading at a 9.7% discount to its calculated fair value of $28.99. HCC 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%

HCC 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%. HCC 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 1996 and has increased its dividend payments for 14 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

HCC earned a Star in this section for its NPV MMA Diff. of the $2,883. This amount is in excess of the $2,100 target I look for in a stock that has increased dividends as long as HCC has. If HCC 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 3.71%.

Memberships and Peers: HCC is a member of the Broad Dividend Achievers™ Index. HCC’s peer group includes: American Financial Group Inc. (AFG) with a 1.8% yield, American National Insurance Co. (ANAT) with a 4.1% yield, Assurant Inc. (AIZ) with a 1.6% yield and Unitrin Inc. (UTR) with a 3.5% yield.

Conclusion: HCC earned one Star 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 five Stars. This quantitatively ranks HCC as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $29.56 before HCC’s NPV MMA Differential decreased to the $2,100 minimum that I look for in a stock with 14 years of consecutive dividend increases. At that price the stock would yield 1.89%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,100 NPV MMA Differential, the calculated rate is 13.9%. This dividend growth rate is below the 15% used in this analysis, thus providing a margin of safety. HCC has a risk rating of 1.50 which classifies it as a low risk stock.

HCC’s diverse business mix along with its underwriting discipline have positioned it well in an environment that has left many other insurers struggling. The company’s investment portfolio reflects management’s conservative bias and a culture that rewards profitability rather than growth. With very little debt and a low free cash flow payout, HCC’s financials are strong. The stock is favorably priced to my calculated fair value of $28.99. However, its yield of 2.14% is below by current minimum, so for now I will stay on the sidelines. 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 HCC (0.0% of my Income Portfolio). See a list of all my income holdings here.

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Below are several companies that have recently elected to send more cash to their shareholders in the form of increased dividends:

Stage Stores (SSI) operates in the U.S., offering brand name and private label apparel, accessories, intimates, home, gifts, outerwear, cosmetics & footwear. August 27th the company increased its quarterly dividend 50% to $0.075/share. The dividend is payable on September 22, 2010 to shareholders of record at the close of business on September 7, 2010. The ex-dividend date is September 3, 2010. The yield based on the new payout is 2.69%.

Golar LNG (GLNG) owns and operates a fleet of liquefied natural gas, or LNG, carriers. August 27th the company raised its quarterly dividend to $0.15/share. The record date for the dividend is September 9, 2010, ex-dividend date is September 6, 2010 and the dividend will be paid on or about September 27, 2010. The yield based on the new payout is 5.43%.

Altria Group (MO) is the largest U.S. cigarette producer. August 27th the company increased its quarterly dividend 8.6% to $0.38/share. The dividend is payable on October 12, 2010 to shareholders of record as of September 15, 2010. The ex-dividend date is September 13, 2010. MO is a Dividend Achiever and has raised its dividend for 42 consecutive years. The yield based on the new payout is 6.81%.

Harris Corp. (HRS) focuses on communications equipment for voice, data and video applications for commercial and governmental customers. August 30th the company raised its quarterly dividend 14% to $0.25/share. The dividend is payable September 17, 2010, to shareholders of record September 8, 2010, with an ex-dividend date is September 6, 2010. The yield based on the new payout is 2.38%.

HCC Insurance (HCC) is a multi-line insurer specializing in aviation, marine, medical stop-loss, offshore energy and property and casualty insurance in the U.S. and the U.K. September 1st the company increased its quarterly dividend 7.4% to $0.145/share. The dividend is payable to stockholders of record on October 1, 2010 and will be paid on or about October 15, 2010. The ex-dividend date is September 29, 2010. HCC is a Dividend Achiever and has raised its dividend for 14 consecutive years. The yield based on the new payout is 2.24%.

Verizon Communications (VZ) offers wireline, wireless and broadband services primarily in the northeastern United States. September 2nd the company raised its quarterly dividend 2.6% to $0.4875/share. The dividend is payable on November 1, 2010, to Verizon Communications shareholders of record at the close of business on October 8, 2010. The ex-dividend date is October 6, 2010. The yield based on the new payout is 6.5%.

Friedman Industries (FRD) is engaged in steel processing, pipe manufacturing and processing, and steel and pipe distribution. September 2nd the company raised its quarterly dividend 100% to $0.08/share. The dividend is payableon November 19, 2010, to shareholders of record at the close of business on October 22, 2010. The ex-dividend date is October 20, 2010. The yield based on the new payout is 5.2%.

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: No position in the aforementioned securities. See a list of all my income holdings here.

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Often when I write about a stock that is yielding 2%, 3% or even 4%, I get a question that goes something like, “Why would you buy that stock when there are better options like ‘Amalgamated Risk?’ Its currently yielding 7%, 8%, 9% or more?” With this statement the reader has possibly identified themselves as an income investor, and but definitely established the fact that they are not a dividend growth investor.

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%.

Recently, I modified my D4L-Data model to include 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%.

20 Dividend Stocks With A 20% Yield In 20 Years

Sorting the stocks in my D4L-Data model by their 20 Year YOC and throwing out some bad apples, we are left with these 20 stocks that are projected to have a 20% YOC in 20 years:

Lowe’s Companies (LOW) | Analysis
- Current Yield: 1.29%
- Dividend Growth: 15.0%
- 20 Year YOC: 21.12%

McGrath RentCorp (MGRC) | Analysis
- Current Yield: 3.32%
- Dividend Growth: 10.26%
- 20 Year YOC: 23.40%

Fastenal Company (FAST)
- Current Yield: 1.46%
- Dividend Growth: 15.00%
- 20 Year YOC: 23.94%

Colgate-Palmolive (CL) | Analysis
- Current Yield: 2.41%
- Dividend Growth: 12.48%
- 20 Year YOC: 25.34%

C.H. Robinson (CHRW)
- Current Yield: 1.61%
- Dividend Growth: 15.00%
- 20 Year YOC: 26.32%

Canadian National (CNI)
- Current Yield: 1.75%
- Dividend Growth: 15.00%
- 20 Year YOC: 28.69%

Walgreen Company (WAG) | Analysis
– Current Yield: 1.57%
- Dividend Growth: 15.72%
- 20 Year YOC: 29.14%

Raven Industries (RAVN) | Analysis
- Current Yield: 1.81%
- Dividend Growth: 15.00%
- 20 Year YOC: 29.65%

Eaton Vance (EV)
- Current Yield: 1.82%
- Dividend Growth: 15.00%
- 20 Year YOC: 29.72%

HCC Insurance (HCC)
- Current Yield: 1.91%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.30%

Becton, Dickinson (BDX) | Analysis
- Current Yield: 1.94%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.72%

IBM (IBM)
- Current Yield: 1.94%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.72%

United Technologies Corp. (UTX) | Analysis
- Current Yield: 2.05%
- Dividend Growth: 15.00%
- 20 Year YOC: 33.63%

Praxair, Inc. (PX)
- Current Yield: 2.15%
- Dividend Growth: 15.00%
- 20 Year YOC: 35.17%

Owens & Minor (OMI)
- Current Yield: 2.25%
- Dividend Growth: 15.12%
- 20 Year YOC: 37.55%

Linear Technology (LLTC)
- Current Yield: 2.93%
- Dividend Growth: 15.00%
- 20 Year YOC: 47.94%

McDonald’s Corp. (MCD) | Analysis
- Current Yield: 3.12%
- Dividend Growth: 15.00%
- 20 Year YOC: 51.01%

Nucor Corporation (NUE) | Analysis
- Current Yield: 3.18%
- Dividend Growth: 15.00%
- 20 Year YOC: 52.00%

Cardinal Health, Inc. (CAH) | Analysis
- Current Yield: 2.02%
- Dividend Growth: 17.65%
- 20 Year YOC: 52.06%

Meridian Bioscien (VIVO) | Analysis
- Current Yield: 3.40%
- Dividend Growth: 15.00%
- 20 Year YOC: 55.67%

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 all the above stocks are yielding well under 4%. It is also important to note that I do not believe that all the above stocks will achieve their 20 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 20 years, the rewards are potentially much higher than those of a high-yield, low growth stock.

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

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Linked here is a detailed quantitative analysis of HCC Insurance Holdings Inc. (HCC). Below are some highlights from the above linked analysis:

Company Description: HCC Insurance Holdings Inc. is a multi-line insurer that specializes in aviation, marine, medical stop-loss, offshore energy and property and casualty insurance in the U.S. and the U.K.

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

HCC is trading at a discount to all four valuations above. The stock is trading at a slight discount to its calculated fair value of $26.41. HCC 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%

HCC 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% and 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 (1999-2002, 2000-2003, 2001-2004, 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 1985 and has increased its dividend payments for 13 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

HCC earned a Star in this section for its NPV MMA Diff. of the $2,387. This amount is in excess of the $2,200 target I look for in a stock that has increased dividends as long as HCC has. If HCC 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 3.72%.

Other: HCC is a member of the Broad Dividend Achievers™ Index.

Conclusion: HCC earned one Star 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 five Stars. This quantitatively ranks HCC as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $26.94 before HCC’s NPV MMA Differential decreased to the $2,200 minimum that I look for in a stock with 13 years of consecutive dividend increases. At that price the stock would yield 1.93%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,200 NPV MMA Differential, the calculated rate is 14.7%. This dividend growth rate is slightly less than the 15.0% used in this analysis, thus providing very little margin of safety. HCC has a risk rating of 1.50 which classifies it as a low risk stock.

HCC uses an opportunistic underwriting approach in which the it waits for other insurers to suffer losses in a particular insurance line. Then the company enters benefiting from their mistakes. Risks of catastrophic events in HCC’s aviation and energy businesses increase earnings volatility. Also, as a result of the financial crisis, there is increased risk associated with HCC’s directors and officers business. Although, the stock is trading slightly below my buy price of $26.41, its reliance on a high dividend growth rate to achieve its target NPV MMA Diff , along with a dividend yield of less than 2% will keep me on the sidelines for now. 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 HCC (0.0% of my Income Portfolio). What are your thoughts on HCC?

When many investors think of dividend growth stocks, large-caps like Johnson & Johnson (JNJ) [Analysis], The Procter & Gamble Company (PG) [Analysis], The Coca-Cola Company (KO) [Analysis] and 3M Co. (MMM) [Analysis] come to mind first.  Often small/mid-cap stocks are associated with growth stocks, and since the underlying companies are looking to grow there is little or no cash available for dividends. Not all small/mid-cap stocks fall under the growth category, many are considered value stocks and quite a few of these consistently increase their dividends.

For a stock to be included on my Stock Ideas list it must have increased its dividend for at least 10 consecutive years (10 years for Achievers, 25 years for Aristocrats and Champions).  Below is a representative sample of several small/mid-cap dividend stocks included on the list, along with the number of years of consecutive dividend increases:

Genuine Parts Co. (GPC) Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. This company has increased its dividend for 53 consecutive years and is currently yielding 4.43%. [Analysis]

The Clorox Company (CLX) is a manufacturer and marketer of consumer products. The Company markets brand names, including Clorox bleach, Armor All, STP, Fresh Step/Scoop Away, Kingsford, Hidden Valley, KC Masterpiece, Brita , Glad, etc. This company has increased its dividend for 32 consecutive years and is currently yielding 3.20%.

Integrys Energy Group, Inc. (TEG) operates as a regulated electric and natural gas utility company in the United States and Canada. It purchases, generates, and distributes electric power; and purchases and distributes natural gas. This company has increased its dividend for 51 consecutive years and is currently yielding 7.13%.

Courier Corporation (CRRC) publishes, prints and sells books. Founded in 1824, Courier has two lines of business: full-service book manufacturing and specialty publishing. This company has increased its dividend for 16 consecutive years and is currently yielding 6.34%.

Community Trust Bank Corp. (CTBI) owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company. This company has increased its dividend for 29 consecutive years and is currently yielding 5.22%. [Analysis]

HCC Insurance Holdings Inc. (HCC) is a multi-line insurer that specializes in aviation, marine, medical stop-loss, offshore energy and property and casualty insurance in the U.S. and the U.K. This company has increased its dividend for 13 consecutive years and is currently yielding 1.99%.

Cincinnati Financial Corp. (CINF) markets primarily property and casualty coverage; it also conducts life insurance and asset management operations. This company has increased its dividend for 49 consecutive years and is currently yielding 6.23%

Leggett & Platt Inc. (LEG) makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets. This company has increased its dividend for 37 consecutive years and is currently yielding 5.21%. [Analysis]

RLI Corp. (RLI) provides selected property, casualty and surety insurance. This company has increased its dividend for 35 consecutive years and is currently yielding 2.12%. [Analysis]

The above is not a buy list, but does demonstrate the availability of small/mid-cap dividend growth stocks to potentially help meet this portion of your asset allocation. Sometimes smaller companies are still run my the original founders’ or their families and there is a pride in these companies that is not always found in those run by “professional managers”.

Full Disclosure: Long JNJ, PG, KO, MMM, GPC, CLX, TEG. See a list of all my income holdings here.

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Below are several companies showing confidence in the future by rewarding their shareholders with higher cash dividends:

G&K Services (GKSR) rents uniforms, and offers uniforms and other related products for sale. This past week, the company increased its quarterly dividend by 7% to $0.075/share. The dividend is payable on September 24, 2009 to shareholders of record at the close of business on September 17, 2009. The current yield based on the new dividend is 1.31%.

HCC Insurance (HCC) is a multi-line insurer specializes in aviation, marine, medical stop-loss, offshore energy and property and casualty insurance in the U.S. and the U.K. Recently, the company increased its quarterly dividend by 8% to $0.135/ahare. The dividend is payable to stockholders of record on October 1, 2009, and will be paid on or about October 14, 2009. HCC is a Dividend Achiever and has increased its dividend for 13 consecutive years. The current yield based on the new dividend is 2.06%.

Delta Natural Gas (DGAS) distributes or transports natural gas to some 38,000 retail customers in central and southeastern Kentucky; and transports natural gas to industrial customers. Last Friday, the company boosted its quarterly dividend 1.6% to $0.325/share. The dividend will be paid September 15, 2009 to all common shareholders of record as of August 31, 2009. The current yield based on the new dividend is 5.18%.

MGE Energy (MGEE) is the holding company is Madison Gas & Electric, which generates and distributes electricity and distributes natural gas in Wisconsin. This past week, the company raised its quarter dividend to $0.3684/share. The dividend is payable Sept. 15, 2009, to shareholders of record Sept. 1, 2009. MGEE is a Dividend Achiever and Dividend Champion, and has increased its dividend for 33 consecutive years. The current yield based on the new dividend is 4.01%.

Westlake Chemical (WLK) is an integrated manufacturer of petrochemicals, polymers and fabricated vinyl products. Monday, the company raised its quarterly dividend 9.5% to $0.0575/share. The dividend is payable September 17, 2009, to stockholders of record on September 2, 2009. The current yield based on the new dividend is 0.93%.

Alliance Financial (ALNC) provides financial and banking products and services via 29 customer service facilities and a trust administration center in New York. Tuesday, the company boosted its quarterly dividend 7.7% to $0.28/share. The dividend is payable October 2, 2009 to shareholders of record on September 17, 2009. The current yield based on the new dividend is 4.01%.

Guess? (GES) offers one of the world’s leading lifestyle collections of contemporary apparel and accessories for men, women and children. Wednesday, the company raised its quarterly dividend 25% to $0.125/share. The current yield based on the new dividend is 1.56%.

ESSA Bancorp (ESSA) is a holding company of ESSA Bank & Trust, a full-service, community-oriented savings association. Wednesday, the company jumped its quarterly dividend 25% to $0.05/share. The dividend is payable on September 30, 2009. The current yield based on the new dividend is 1.48%.

Altria (MO) Yesterday, the company increased its quarterly dividend 6.4% to $0.34/share. The quarterly dividend is payable on October 9, 2009 to stockholders of record as of September 15, 2009. The current yield based on the new dividend is 7.44%.

Lawson Products (LAWS) primarily distributes replacement fasteners and other parts. Thursday doubled its quaterly dividend to $0.06/share. The dividend is payable October 13, 2009 to stockholders of record September 29, 2009. The current yield based on the new dividend is 1.26%.

Increasing dividends are a positive sign that companies have confidence in the future. For stocks with a long string of consecutive dividend increases, see this list.

Full Disclosure: No position in the aforementioned stocks. See a list of all my income holdings here.

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