Dividends Value » HCP

3 Dividend Stocks That I Will NEVER Lose Money On *

D4L — Wed, 16 Mar 2011 07:30:20 +0000

Wouldn’t it be nice to buy stocks that only had upside. While we are wishing why don’t we add in predictable earnings, predictable dividends and, of coarse, we don’t want to pay a premium for this investment. Does this sound unrealistic? Possibly, at face value, but there is a way to accomplish this. It won’t happen overnight, but it can be done. Here is how I have been able to do it…

Start With Quality Stocks

Just as ‘better ingredients make a better pizza’, higher quality stocks provide more predictable dividends and an increased chance of becoming one of these Golden Stocks. As with any income investment, I look for stocks that have consistently increased their dividends for many consecutive years and operate in businesses that do well over all parts of the economic cycle.

Add In A Generous Portion Of Time

This is not an overnight process. Most good things are worth waiting for. If you are to establish a long-term relationship with a stock, it better be a quality stock. Time is a powerful force, with it we can overcome poor choices, poor timing and bad decisions. Without it, we immediately are forced to pay for our indiscretions.

Strategic Selection Of Entry And Exit Points

Just typing the above made the hair on the back of my neck stand up — It sounds too much like market timing, for which I have no use for. However, all successful strategies have an element in them that encourages investors to buy low and sell high. Consider how asset allocation works. When one sector experiences a decline, the investor will buy that sector to keep his or her allocation in balance. Later when it rises, the investor may be forced to sell to rebalance their allocation. In much the same way, I tend to smile a lot when the market is crashing-and-burning. It is at these times when truly great stocks are being traded and rock-bottom prices. As we will see, these purchases are more quickly turned into Golden Stocks.

Three Golden Stocks

So what exactly is a Golden Stock? The concept did not originate with me, and others have different names for it, including ‘zero-basis stock.’ I don’t care for that name since, in reality it is nearly impossible to hold a stock with zero basis (at least the way the IRS calculates basis). A Golden Stock is one in which I have fully recovered my entire investment either through dividends or from partial liquidation or a combination of both. In my income portfolio, I am currently holding these 3 Golden Stocks:

3M Company (MMM) | YOC: 4.4% | Yield: 2.3%
This stock was originally purchased in March 2009 when the market was at its low. In October 2010, I sold 50% of my shares. Proceeds from that sale, along with dividends received, account for 101.1% of my original investment.

Emerson Electric Co. (EMR) | YOC: 3.5% | Yield: 2.3%
My EMR holdings were purchased in July 2009 and October 2009. The July purchase was at $31.64 while the October purchase was at $39.59. In February 2011, I sold 55% of my shares. Proceeds from that sale, along with dividends received, account for 100.4% of my original investment.

Integrys Energy Group, Inc. (TEG) | YOC: 7.3% | Yield: 5.4%
TEG is different from the first two stocks in that its quarterly dividend has been frozen at $0.62/share since March 2009. I purchased one block in November 2008 at $43.81 and a second block in February 2009 at $36.83. In March 2011, I sold 67% of my shares. Proceeds from that sale, along with dividends received, account for 102.7% of my original investment.

More Golden Stocks On The Way

In addition to the above, several of my other income holdings are well on their way to becoming Golden Stocks. These include:

The Coca-Cola Company (KO) | YOC: 3.8% | Yield: 2.7%
This stock is in most every dividend growth investors portfolio. I have currently recovered through sales and dividends 21.2% of my initial investment.

Realty Income Corp. (O) | YOC: 6.9% | Yield: 5.0%
This stock is hold-over from my yield chasing days. When I started investing the right way, I held on to a handful of the better high-yield dividend stocks. I have currently recovered through sales and dividends 26.8% of my initial investment.

Consolidated Edison, Inc. (ED) | YOC: 5.5% | Yield: 4.7%
I have held a position in this stock since January 2005. Though its dividend increases have been rather modest, they have been consistent. I have currently recovered through sales and dividends 43.8% of my initial investment.

Commercial Net Lease Realty, Inc. (NNN) | YOC: 7.9% | Yield: 5.9%
This stock is another hold-over from my yield chasing days. In May 2009, I sold 51% of my shares after NNN failed to raise its dividend. However, it later raised its dividend in August 2010 to keep its streak of annual dividend increases alive. I have currently recovered through sales and dividends 68.6% of my initial investment.

Health Care Property Investors Inc. (HCP) | YOC: 6.0% | Yield: 5.0%
Yet another hold-over from my yield chasing days. I have held a position in this stock since March 2005. On paper, I should have sold this stock a long time ago, but it has continued to appreciate and to raise its dividend. It will likely be my next Golden Stock. I have currently recovered through sales and dividends 81.2% of my initial investment.

Conclusion

Needless to say, the statement that I will NEVER lose money on my 3 Golden Stocks is predicated on not purchasing any additional shares, which may or may not be the case. These stocks have already paid for themselves once, and given the right circumstances, I would be willing to let them do it again. Dividend growth stocks are truly stocks that pay you to own them.

Full Disclosure: Long MMM, EMR, TEG, KO, O, ED, NNN, HCP. See a list of all my income holdings here.

(Photo Credit)

What Determines A Dividend Stock’s Yield *

D4L — Wed, 16 Jun 2010 07:30:11 +0000

If income investing were as simple as picking the stock with the highest yield, everyone would be an expert. Most assume (rightfully so) that yield is heavily influenced by risk, but much more goes into determining yield. Below are several important factors that influence a stock’s yield, along with some illustrative examples:

Industry

Have you ever noticed that stocks within an industry often have similar yields? This makes sense when you consider they often have like operations with similar processes, cost structures and margins. This is evident when you look at retailers who buy similar products, resell them in a physical location and have fairly low margins due to the intense competition. Note the yield similarity of Target Corp. (TGT) with a 1.3% yield and Costco (COST) with a 1.5% yield. Even WalMart (WMT) with their economies of scale and focus on efficiency has a yield only slightly higher at 2.4%. The same analysis could be done with The Coca-Cola Company (KO) with a 3.4% yield and Pepsico, Inc. (PEP) with a 3.1% yield.

Maturity and Growth Potential

When Microsoft (MSFT) and Intel (INTC) were formed they paid no dividend. Instead they funneled all their cash back into growing the business. As they matured and growth slowed, each began to pay a very nominal dividend. Today, as they have continued to mature, their yields have continued to increase with MSFT paying 2.0% and INTC paying 3.0%.

Legal Considerations

Real Estate Investment Trusts (REIT), such as Realty Income Corp. (O) and HCP, Inc. (HCP), are not taxed as standalone entities. Instead, they are legally required each year to pay out a certain percentage of their profits as dividends. In effect this forces the shareholders to incur the tax as earnings are generated, leaving the company very little to fund growth. To pay for growth, REIT’s usually have to issue debt and/or equity. All of this combined usually results in REITs having a higher than average yield, for example O yields 5.8% and HCP yields 6.2%.

Risk

Risk still plays an important role in setting the yield for a company. Consider these energy companies with a similar yields: Chevron Corp. (CVX) with a 4.0% yield, Exxon Mobil Corp. (XOM) with a 3.0% yield and ConocoPhillips (COP) with a 4.1% yield. Then there is BP plc (BP) with a 9.0% yield. Is there any question which of these is the more risky stock to own?

The above list is not meant to be an exhaustive, but highlights some of the more common drivers of yield. When we see a yield that appears to be too good to true, we need to ask ourselves why is the yield so high, and is it sustainable?

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

(Photo Credit)

Increasing Dividend Yield Part II: REITs *

D4L — Wed, 10 Mar 2010 11:30:04 +0000

This is the second installment in a multi-part series that looks at various options used by income investors to boost their yield while waiting for dividend growth to lift their portfolio’s overall yield-on-cost. Last week we looked at Utilities. This week we are looking at Real Estate Investment Trusts (REITs).

Below is some background information on REITs from REIT.com:

Congress created REITs in the U.S. in 1960 as a way to make investment in large-scale, income-producing real estate accessible to all investors in the same way they typically invest otherwise – through the purchase and sale of liquid securities. U.S. REITs have seen their equity market capitalization soar from $90 billion to roughly $200 billion in just the past 10 years.

In order for a company to qualify as a REIT in the U.S., it must comply with certain ground rules specified in the Internal Revenue Code. These include: investing at least 75 percent of total assets in real estate; deriving at least 75 percent of gross income as rents from real property or interest from mortgages on real property; and distributing annually at least 90 percent of taxable income to shareholders in the form of dividends.

The 90% distribution requirement and no corporate taxes are the reasons REITs yields are often above average. However, it is important to note that because REITs pay no income tax, they are not eligible for the special treatment as a “qualified dividends”, which are normally taxed at 15%. When comparing REIT yields to investments with qualified dividends, you must always look at them on an after-tax basis.

Consider an example where a taxpayer with a federal marginal tax rate of 30% owns AT&T (T) with a yield of 6.56% and Universal Health Realty Income Trust (UHT) with a yield of 6.82%. On an after-tax basis T, which qualifies for the 15% tax rate, will yield 5.58%, while UHT will only yield 4.78%.

Like utilities, most REITs rely on new capital either in the form of debt or equity to fund investments, pay debt and pay dividends, albeit to a lesser extent. Consider the following:

Universal Health Realty Income Trust (UHT) – Yield: 6.82%
Shares Outstanding: 2000 9m; 2008 11m
Long-Term Debt: 1999 $75.2m; 2008 $32.7m
Years of Negative Free Cash Flow: 0 of 10

National Retail Properties, Inc. (NNN) – Yield: 6.76%
Shares Outstanding: 2000 30m; 2009 79m
Long-Term Debt: 1999 $101.7m; 2009 $0m ($961.1m in short-term)
Years of Negative Free Cash Flow: 5 of 10

HCP, Inc. (HCP) – Yield: 6.12%
Shares Outstanding: 2000 102m; 2009 274m
Long-Term Debt: 2000 $1,158.9m; 2009 $5,456.1m
Years of Negative Free Cash Flow: 5 of 10

Realty Income Corporation (O) – Yield: 6.00%
Shares Outstanding: 2000 53m; 2009 103m
Total Debt: 2000 $404m; 2009 $1,354.6m
Years of Negative Free Cash Flow: 7 of 10

Essex Property Trust (ESS) – Yield: 4.56%
Shares Outstanding: 2000 18m; 2009 29m
Long-Term Debt: 2000 $595.5m; 2009 $0.0m ($1,847.4m short-term)
Years of Negative Free Cash Flow: 6 of 10

Corporate Office Properties Trust, Inc. (OFC) – Yield: 4.07%
Shares Outstanding: 2000 25m; 2009 56m
Long-Term Debt: 2000 $193.7m; 2009 $0.0m ($2,053.8m short-term)
Years of Negative Free Cash Flow: 9 of 10

Federal Realty Investment Trust (FRT) – Yield: 3.67%
Shares Outstanding: 2000 39m; 2009 59m
Long-Term Debt: 2000 $485.3m; 2009 $1,731.6m
Years of Negative Free Cash Flow: 2 of 10

Each of the above companies are growing their debt and/or shares outstanding, while not always generating sufficient cash to fund their operating expenses, including normal capital replacements (except for UHT). For a company to consistently raise its dividend, it must generate cash flows sufficient to meet operating obligations and to service outstanding debt. Since a REIT is legally required to pay out 90% of its earnings, it is less likely to eliminate its dividend, but it could drastically cut the dividend in the face of persistent weak earnings (like any company).

Similar to the utilities mentioned last week, I purchased some of the above companies many years ago, but I won’t be rushing to add to increase my positions.

Full Disclosure: Long T, NNN, HCP, O. See a list of all my income holdings here.

(Photo Credit)

Five High-Yield Positive Return Investments *

D4L — Wed, 10 Feb 2010 11:30:59 +0000

Readers of this space know that the primary focus of my income portfolio is to create ever-increasing income by investing in dividend growth securities. This means that often I will choose a lower yielding security with better dividend growth prospects over a higher yielding security. However, as one that values diversity, I also invest in some high yield securities. Here are some of the better performers, along with my life-to-date return:

National Retail Properties, Inc. (NNN) is a real estate investment trust (REIT) that invests in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants.
Purchased: September 2005 | Life-To-Date Return: 5.04% | Yield: 7.58%

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in United States.
Purchased: May 2006 | Life-To-Date Return: 5.75% | Yield: 6.53%

Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) operates as a diversified and closed-end management investment company. The fund invests primarily in common and preferred stocks of the United States and foreign issuers.
Purchased: July 2008 | Life-To-Date Return: 7.97% | Yield: 7.80%

Health Care Property Investors, Inc. (HCP) operates as a real estate investment trust in the United States. The company, through its subsidiaries and joint ventures, invests in health care-related properties and provides mortgage financing on health care facilities.
Purchased: March 2005 | Life-To-Date Return: 10.92% | Yield: 6.56%

CenturyLink Inc. (CTL) provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin.
Purchased: November 2008 | Life-To-Date Return: 32.50% | Yield: 8.28%

High-yield securities often carry a higher risk factor. Before adding any security to your portfolio you should understand its effect on your overall portfolio’s risk and allocation.

Full Disclosure: Long CTL, ETO, HCP, NNN, O. See a list of all my income holdings here.

(Photo Credit)

16 Dividend Stocks Aspiring To Be A Champion *

D4L — Fri, 05 Feb 2010 11:30:46 +0000

There are winners and there are champions in every walk of life. The difference is subtle, but very real. A champion is driven for success and will not let anything stand in its way. Some dividend stocks can be classified as champions. A bad economy, tight credit markets and a dark cloud of uncertainty are enough send some dividend companies running for the exit. However, these are the times that champions stand firm.

This week a several companies answered the call and rewarded their shareholders with higher cash dividends:

CMS Energy (CMS) is the largest utility in Michigan and the sixth largest gas and 13th largest electric utility in the U.S. January 29th the company increased its quarterly dividend to $0.15/share. The dividend is payable Feb. 26, 2010 to shareholders of record on Feb. 8, 2010. The ex-dividend date is February 4, 2010. The yield based on the new payout is 3.91%.

HCP (HCP) holds direct and joint venture investments in health care-related facilities across the U.S. February 1st the company increased its quarterly dividend to $0.465/share. The dividend will be paid on February 23, 2010 to stockholders of record as of the close of business on February 11, 2010. The ex-dividend date is February 9, 2010. The yield based on the new payout is 6.36%.

Source Capital (SOR) is a diversified closed-end management investment company. February 1st the company boosted its quarterly dividend 20% to $0.60/share. The dividend is payable Mar. 15, 2010, to shareholders of record as of the close of business Feb. 19, 2010. The yield based on the new payout is 5.65%.

Hershey (HSY) is a major producer of chocolate and confectionery products. February 2nd the company increased its quarterly dividend to $0.32/share. The dividend is payable March 15, 2010, to stockholders of record February 25, 2010. The yield based on the new payout is 3.45%.

L-3 Comm (LLL) is a provider of intelligence, surveillance, and reconnaissance systems. February 2nd the company raised its quarterly dividend to $0.40/share. The dividend is payable on March 15, 2010 to shareholders of record at the close of business on March 1, 2010. The ex-dividend date is February 25, 2010. The yield based on the new payout is 1.84%

Unitrin (UTR) provides property and casualty insurance, life and health insurance, and automobile finance services. February 3rd the company boosted its quarterly dividend 10% to $0.22/share. The dividend is payable on March 1, 2010 to its shareholders of record as of February 12, 2010. The ex-dividend date is February 10. The yield based on the new payout is 3.86%

News Corp (NWS) is a media conglomerate, with controlling interests in leading content and distribution assets across the globe, including Fox Entertainment. February 3rd the company increased its semi-annual dividend 25% to $0.075/share. The dividend is payable on April 14, 2010 with a record date for determining dividend entitlements of March 10, 2010. The ex-dividend date is March 8, 2010. The yield based on the new payout is 0.94%

Ross Stores (ROST) is an off-price retailer providing in-season branded apparel and other merchandise through over 1,000 stores in 27 states and Guam. February 4th the company raised its quarterly dividend 45% o $0.16/share. The dividend is payable on March 31, 2010 to stockholders of record as of February 19, 2010. The ex-dividend date is February 17, 2010. ROST is a Dividend Achiever and has raised its dividend for 16 consecutive years. The yield based on the new payout is 1.41%.

AGL Resources (AGL) is an energy services holding company provides natural gas to about 2.3 million customers. February 4th the company boosted its quarterly dividend 2.3% to $0.44/share. The dividend is payable March 1, 2010, to shareholders of record at the close of business on February 19, 2010. The yield based on the new payout is 5.00%.

PennantPark Investment (PNNT) specializes in direct and mezzanine investments in middle-market companies. February 4th the company increased its quarterly dividend to $0.26/share. The dividend is payable on April 1, 2010 to stockholders of record as of March 25, 2010. The ex-dividend date is March 23, 2010. The yield based on the new payout is 11.60%.

Archer Daniels Midland (ADM) is one of the world’s leading agribusiness companies, with major market positions in agricultural processing and merchandising. February 4the the company raised its quarterly dividend to $0.15/share. The dividend is payable March 11, 2010, to stockholders of record February 18, 2010. The ex-dividend date is February 16. ADM is a Dividend Aristocrat and has raised its dividend for 35 consecutive years. The yield based on the new payout is 2.00%.

Colgate-Palmolive (CL) is a consumer products company markets oral, personal and household care, and pet nutrition products. February 4th the the company boosted its quarterly dividend 20% to $0.53/share. The dividend will be paid on May 14, 2010 to shareholders of record as of April 26, 2010. The ex-dividend date is April 22. On an annual basis, the new dividend rate is $2.03 vs. $1.72 per share previously. CL is a Dividend Achiever and has raised its dividend for 16 consecutive years. The yield based on the new payout is 2.66%.

UPS (UPS) is the world’s largest express delivery company. February 4th the company increased its quarterly dividend to $0.47/share. The dividend is payable March 3, 2010, to shareholders of record on Feb. 16, 2010. The yield based on the new payout is 3.28%.

Hasbro (HAS) is a large toy company has brands that include Monopoly, Playskool and Tonka. February 4th the company raised its quarterly dividend by 25% to $0.25/share. The dividend will be payable on May 17, 2010 to shareholders of record at the close of business on May 3, 2010. The ex-dividend date is April 30. The yield based on the new payout is 3.20%.

J. B. Hunt Transport Services (JBHT) provides truckload, intermodal, and contract carriage services. February 4th the company boosted its quarterly dividend $0.12/share. The dividend is payable to stockholders of record on February 12, 2010. The dividend will be paid on February 26, 2010. The yield based on the new payout is 1.58%.

D&B (DNB) is a worldwide provider of business information and related decision support services and commercial receivables management services. February 4th the company increased its quarterly cash dividend to $0.35/share. This quarterly cash dividend is payable on March 18, 2010, to shareholders of record at the close of business on March 3, 2010. The yield based on the new payout is 1.80%.

To be a true dividend champion, a stock must consistently raise its dividend over more than just a few years. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

Full Disclosure: Long HCP. See a list of all my income holdings here.

(Photo Credit)

High-Yield Dividend Stocks: A Safer Approach *

D4L — Tue, 13 Oct 2009 10:30:47 +0000

When people learn that I am an income investor, the reaction is often a desire to discuss high-yield investments. The uninitiated commonly confuse income investing with high-yield investing. The two are not the same.

High-yield investing often carries a greater degree of risk than I am willing to accept. Recently, a reader alerted me to an article describing a 20-year study by the Schwab Center for Financial Research demonstrates that investments with the highest yields don’t necessarily provide the highest returns and offers a safer way to implement a high-yield approach. Here are some key excerpts from the article:

Stocks with the highest dividend yield haven’t provided the best total return.
Research found the highest-yielding stocks had twice as many dividend cuts as the other dividend-paying groups.
Price momentum is a stock indicator based on the idea that stocks that have been outperforming in the past will continue to do so.
A simple screen using the six-month price momentum strategy applied to the highest-yielding stocks can help you pick the best performers.
The screen is implemented using:
- Stocks in the S&P 500, 400 and 600 indexes.
- Dividend Yield and click the dividend yields greater than 1.5 times the S&P 500 yield.
- Capture analyst ratings.
- 6 Months Price Performance > Price Change.
- Sort by price performance and select the highest analyst ranked stocks within the top 45.

Since the article was very Schwab specific, I tried to generalize the above screen. If you have a Schwab account, please refer to the article for more specific instructions.

So, what does all this mean? If you are an income investor that enjoys trading instead of buy and hold, then this may be something you want to explore further. However, the 11.5% earned with this strategy vrs. the 10.73% for dividend stocks not in the highest yielding group hardly seems worth the effort.

For me, I will continue to focus on high-quality dividend stocks at lower, but growing, yields. However, for those looking to bump their yield a little, below are several Dividend Aristocrats and Achievers that are currently yielding more than 5%:

CenturyLink Inc. (CTL) – Aristocrat – Yield: 8.6%
Lilly Eli & Co. (LLY) – Aristocrat – Analysis -Yield: 6.0%
Integrys Energy Group Inc. (TEG) – Aristocrat – Yield: 7.8%
Consolidated Edison Inc. (ED) – Aristocrat – Yield: 5.8%
Progress Energy Inc. (PGN) – Achiever – Analysis – Yield: 6.5%
Realty Income Corp (O) – Achiever – Yield: 7.1%
Health Care Property Investors, Inc. (HCP) – Achiever – Yield: 6.8%
Cincinnati Financial Corp. (CINF) – Aristocrat – Yield: 6.2%
Leggett & Platt Inc. (LEG) – Aristocrat – Analysis – Yield: 5.7%
Pitney Bowes Inc. (PBI) – Aristocrat – Yield: 6.0%
AT&T Inc. (T) – Achiever – Yield: 6.2%
Black Hills Corp. (BKH) – Achiever – Yield: 5.8%
Capital City Bank Group (CCBG) – Achiever – Yield: 5.6%
Universal Health Realty Income Trust (UHT) – Achiever – Yield: 7.5%

This by no means is an endorsement of the above stocks. If you are looking for high-yields, you might lower your risk some by looking at a pool of stocks that have a long history of increasing their dividends.

Full Disclosure: Long CTL, LLY, TEG, ED, PGN, O, HCP . See a list of all my income holdings here.

(Photo: Steve Woods)

High Yield, High Risk Dividend Stocks *

D4L — Wed, 23 Sep 2009 10:30:06 +0000

It is not unusual after I publish a list of stocks to get a comment or two asking why those stocks and not these stocks. Often the real thrust of the question is why buy those low yield stocks when you can buy these high yield stocks. The answer involves risk and its management.

When I started investing in dividend stocks for income, I did as most new income investors – I chased yield. To make things worse, I had success early on. At one time I had a portfolio consisting of Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs) and high yield, high risk stocks. The portfolio’s yield was consistently in the low to mid-teens. I remember once being disappointed in buying a stock that only yielded 8%.

As I continued to read and learn about investing in dividend stocks, it became apparent that I was doing it the wrong way. I started to unwind my high-yield strategy and move into more traditional dividend stocks. However, the high-yield strategy was still experiencing some success so I did not move as fast as I should and ultimately suffered some unnecessary losses.

My portfolio still carries some remnants of my high yield investing days with stocks such as:

Integrys Energy Group Inc. (TEG) – Yield: 7.62% – Div. Growth: 1.5%
National Retail Properties (NNN) – Yield: 6.75% – Div. Growth: 1.4%
Realty Income Corp. (O) – Yield: 6.33% – Div. Growth: 2.1%
Health Care Property Investors, Inc. (HCP) – Yield: 6.12% – Div. Growth: 1.1%

None of the above stocks are currently on my buy list, mainly due to their underlying fundamentals. I suspect over time they will work their way out of my portfolio.

The focus of my income portfolio is now on blue chip dividend stocks with a long record of growing their dividends. Examples of companies I now follow include:

Johnson & Johnson (JNJ) – Yield: 3.18% – Div. Growth: 7.5% – Analysis
The Coca-Cola Company (KO) – Yield: 3.05% – Div. Growth: 7.9% – Analysis
Abbott Laboratories (ABT) – Yield: 3.48% – Div. Growth: 8.4% – Analysis
Emerson Electric Co. (EMR) – Yield: 3.21% – Div. Growth: 6.4% – Analysis

You will notice the yields on each of these stocks are much lower than those in the first group, but they provide a much stronger dividend growth rate. Over time their yield on cost will grow much faster than the first group, thus have a good chance of producing more income.

That is not to say I have completely walked away from high yield investments. Like salt and pepper, I use them to add a little flavor to my income portfolio, but in limited and controlled portions. Here are some high yield securities that I hold that have performed well for me:

Alpine Total Dynamic Dividend Fund (AOD) – Yield: 15.74%
Eaton Vance Tax Advantaged Global Dividend Fund (ETO) – Yield: 7.33%
CenturyLink Inc. (CTL) – Yield: 8.86%

AOD and ETO are ETF’s that pay a steady monthly dividend, but each has cut the dividend over the last 12 months. CTL’s dividend has been flat at $0.70/share for 5 straight quarters. If you invest in such securities, you should understand the inherent risk and limit your exposure. I likely will always have a place in my income portfolio for riskier securities, but as I grow older the place will grow smaller.

Full Disclosure: Long ABT, AOD, CTL, EMR, ETO, HCP, JNJ, KO, NNN, O, TEG. See a list of all my income holdings here.

(Photo: Gravity X9)

Are REITs and Utilities Good Dividend Investments? *

D4L — Wed, 29 Jul 2009 10:30:29 +0000

Dividend stocks. When you hear those two words what do you think of? Many people think of widows and orphans, along with their stereotypical investment in utility stocks. While others may think of maximizing income by finding the highest yielding stocks available like Real Estate Investment Trusts (REITs). But are utilities and REITs really good dividend investments?

I have been using my new evaluation model now for about a month now. So far, I have been quite pleased with the results. It is helping me to efficiently review a lot of dividend stocks and identify those with strong financials, that are likely to continue increasing their dividends and that are fairly priced. As I was developing and testing the new model I noticed it had a distinct dislike of Real Estate Investment Trusts (REITs) and utilities.

This got me to looking at these classes of stocks and asking the fundamental question, ‘Are they really quality dividend investments?’ Sure both are known to have above average yields, but as any knowledgeable dividend investor will tell you, current yield is just one small part of what makes up a great dividend stock.

I currently own three utilities and three REITs. In addition to those, I follow three other utilities and three other REITs. Let’s take a look at some of them and determine if they are good dividend investments:

REITs
Health Care Property Investors Inc. (HCP) – 0 Stars
Debt to Total Capital: 52%
Free Cash Flow Payout: 131%

Realty Income Corp (O) – 0 Stars
Debt to Total Capital: 47%
Free Cash Flow Payout: -65%

Federal Realty Investment Trust (FRT) – 2 Stars
Debt to Total Capital: 51%
Free Cash Flow Payout: 101%

Kimco Realty Corporation (KIM) – 2 Stars
Debt to Total Capital: 55%
Free Cash Flow Payout: -1753%

National Retail Properties, Inc. (NNN) – 4 Stars
Debt to Total Capital: 39%
Free Cash Flow Payout: -144%

Utilities
SJW Corp. (SJW) – 0 Stars
Debt to Total Capital: 49%
Free Cash Flow Payout: -94%

Progress Energy, Inc. (PGN) – 1 Stars
Debt to Total Capital: 56%
Free Cash Flow Payout: -36%

Atmos Energy Corporation (ATO) – 1 Stars
Debt to Total Capital: 54%
Free Cash Flow Payout: 1045%

Black Hills Corp. (BKH) – 2 Stars
Debt to Total Capital: 48%
Free Cash Flow Payout: -105%

Integrys Energy Group, Inc. (TEG) – 3 Stars
Debt to Total Capital: 18%
Free Cash Flow Payout: -47%

Consolidated Edison, Inc. (ED) – 3 Stars
Debt to Total Capital: 52%
Free Cash Flow Payout: -40%

For a company to consistently raise its dividends, it must generate strong free cash flows sufficient enough to meet other obligations, such as debt, before paying a dividend. I look for a maximum of 45% Debt to Total Capital and a maximum of 60% Free Cash Flow Payout with the last 10 years positive.

With the exception of NNN and TEG, each of the above companies failed the Debt to Total Capital and Free Cash Flow Payout tests. NNN and TEG passed the Debt to Total Capital test while failing the Free Cash Flow Payout test. All the above companies had multiple years of negative FCF over the last 10 years thus their dividends are supported via non-operating cash such as debt issuances and property sales. Ironically, NNN was the only 4 Star stock and it just recently froze its dividend.

Most REITs and utilities may provide your income portfolio with an additional boost in yield, but may end up costing you more in the long run. I will continue to look at REITs and utilities, but they must measure up like any other stock.

Full Disclosure: Long HCP, O, NNN, PGN, TEG, ED. See a list of all my income holdings here.

Nine Companies Bucking The Trend And Raising Dividends *

D4L — Fri, 06 Feb 2009 11:30:09 +0000

What if you don’t want to spend your retirement managing and worrying about your portfolio? Put it on Auto Pilot, specifically on a Dividend Investing Auto Pilot. Dividends from a quality, well-diversified portfolio are much more predictable than capital gains and best of all, they are passive. You don’t have to do anything, they just show up in your brokerage account each quarter. Inflation? Not to worry, the good companies routinely raise their dividends well in excess of the inflation rate.

Here are several companies rewarding their shareholders with higher cash distributions through increased dividends:

HCP (HCP) Raises Qtr. Dividend 1% to $0.46/share (8.00% yield)
Aqua America (WTR) Bumps Quarterly Dividend 8% to $0.135 (2.57% yield)
Avon Products (AVP) Increases Dividend 5% (3.86% yield)
Black Hills Corp. (BKH) Raises Qtr. Dividend (5.97% yield)
Infinity Property and Casualty (IPCC) Bumps Dividend to $0.12/share (1.22% yield)
Ross Stores (ROST) Increases Qtr. Dividend by 16% to $0.11/share (1.24% yield)
J.B. Hunt Transport (JBHT) Boosts Qtr Dividend 10% to $0.11 (1.64% yield)
Archer Daniels Midland (ADM) Bumps Quarterly Dividend (1.95% yield)
L-3 Communications (LLL) Raises Qtr. Dividend by 17% to $0.35, (1.51% yield)

Retirement is not when you want to start learning how to dividend invest. There is a degree of art to dividend investing. Start young, time is always a great ally.

Full Disclosure: Long HCP

(Photo: Steve Woods)

Refining Risk Measurement Of Dividend Stocks *

D4L — Tue, 30 Dec 2008 11:30:00 +0000

Earlier we looked at the RQ (Risk/Quality) ratings of individual stocks. This was a good start to help us understand the risk profile of a stock, and our dividend stock portfolio, but it didn’t quite go far enough. Since then I have continued to measure, calculate and calibrate a more comprehensive measure of risk. I sill use the RQ rating as 50% of the new measure, but I have added these two important indicators of risk:

I. Current Price vs. Calculated Price (P)
As part of my quantitative analysis, I calculate a “Buy Below” price. In short, this price is the lower of 1.) the Mid-2 Fair Value or 2.) price needed to generate an acceptable NPV MMA Differential. If the current price is less than plus or minus 10% of the calculated price then this portion of the calculation is assigned a value of 1 (low risk). A difference between plus or minus 10% but less than 20% is assigned a value 2 (medium risk), while anything plus or minus 20% or greater is assigned a 3 (high risk). The 10% and 20% are purely arbitrary and subject to future calibration.

This portion of the calculation determines if the stock is trading within an expected range based on historical metrics such as P/E and yield. Also considered are its valuations using a Graham number and a discounted cash flow model (DCF).

II. Dividend Yield (Y)
Dividend yield is an indication of market sediment, and often an early warning for a troubled stock. In this portion of the calculation, the current yield is compared to predetermined levels and a risk value is assigned. Currently, I am assigning a 1 (low risk) to yields less than 5%, a 2 (medium risk) to values from 5% to less than 8% and a 3 (high risk) for values 8% and greater. As above, the predetermined levels are purely arbitrary and subject to future calibration.

Some might argue that it is “normal” for certain industries to pay out a higher yield, such as 10%. However, I think that “normal” higher yield could be indicative of the implicit higher risk of that industry. Blue water shipping (ocean going) would be an example of this. Also, certain industries, such as utilities, tend to sustain a higher yield due to their lack of growth opportunities.

RQ Revisted
As noted in Measuring Dividend Stocks Investment Risk Profile, the RQ portion is calculated based on S&P’s Qualitative Risk Assessment (R) and Quality Ranking (Q).

If the Qualitative Risk Assessment is A, 1 (low risk) is assigned; if B, 2 (medium risk) is assigned and if C, 3 (high risk) is assigned. For the Quality Ranking, S&P assigns ratings of A+, A, A-, B+, B, B-, C, D and Not Ranked. For this calculation, 1 (low risk) is assigned if the rating is A+, 2 (medium risk) is assigned if the rating is A or A-, everything else is assigned a 3 (high risk). Again, the predetermined levels are purely arbitrary and subject to future calibration.

Putting It All Together
My Risk Rating is calculated by averaging the four numeric values above, as such:

(R + Q +P +Y)/4 = Risk Rating

This calculation will yield values between 1 and 3. I divided this range into thirds and assigned an overall rating based on this table:

1.00 to less than 1.67 = Low Risk
1.67 to less than 2.34 = Medium Risk
2.34 to 3.00 = High Risk

Snapshot Of My Dividend Stock Holdings
Currently, I am holding 35 dividend stocks (excluding ETFs and CEFs). Of which three are rated as high risk:

CenturyTel Inc. (CTL)
CenturyTel Inc. provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (2 + 2 + 3 + 3)/4 = 2.50Pfizer Inc. (PFE)
Pfizer, Inc. engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals in the United States, Europe, Canada, Asia, and Latin America.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (2 + 3 + 3 + 2)/4 = 2.50

Health Care Property Investors Inc. (HCP)
Health Care Property Investors, Inc. operates as a real estate investment trust in the United States. The company, through its subsidiaries and joint ventures, invests in health care-related properties and provides mortgage financing on health care facilities.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (2 + 3 + 3 + 2)/4 = 2.50

17 of my dividend stock holdings are rated as medium risk. Some familiar stocks include:

Intel Corporation (INTC)
Intel Corporation engages in the manufacture and sale of semiconductor chips, as well as in the development of advanced integrated digital technology platforms for the computing and communications industries worldwide.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (2 + 3 + 3 + 1)/4 = 2.25

Eli Lilly and Co. (LLY)
Eli Lilly and Company discovers, develops, manufactures and sells prescription drugs that offers a wide range of treatments for neurological disorders, diabetes, cancer, and other conditions. The company also sells animal health products.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (2 + 3 + 2 + 2)/4 = 2.25

Nucor Corp. (NUE)
Nucor Corporation 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.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 3 + 3 + 1)/4 = 2.00

McDonald’s Corp. (MCD)
McDonald’s Corporation primarily franchises and operates McDonald’s restaurants in the food service industry. These restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (2 + 2 + 3 + 1)/4 = 2.00

Consolidated Edison, Inc. (ED)
Consolidated Edison, Inc., through its subsidiaries, provides electric, gas, and steam utility services in the United States serving parts of New York, New Jersey and Pennsylvania.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 3 + 1 + 2)/4 = 1.75

I am holding 15 dividend stocks in the low risk category. Included in this group are:

PepsiCo, Inc. (PEP)
PepsiCo, Inc. (PepsiCo) is a global snack and beverage company. The Company manufactures, markets and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 1 + 3 + 1)/4 = 1.50

Wal-Mart Stores, Inc. (WMT)
Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam’s Club, and International.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 1 + 2 + 1)/4 = 1.25

Kimberly-Clark Corporation (KMB)
This global consumer products company produces tissue, personal care and health care. Its brands include Huggies, Pull-Ups, Kotex, Depend, Kleenex, Scott and Kimberly-Clark.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 2 + 1 +1)/4 = 1.25

The Coca-Cola Company (KO)
The Coca-Cola Company engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates and syrups worldwide.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 2 + 1 + 1)/4 = 1.25

Johnson & Johnson (JNJ)
Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 1 + 2 + 1)/4 = 1.25

Three dividend stocks had a perfect score of 1.00 (low risk). They were:

United Technologies Corp (UTX)
United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 1 + 1 + 1)/4 = 1.00

Sysco Corp (SYY)
SYSCO Corporation, 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.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 1 + 1 + 1)/4 = 1.00

Procter & Gamble Co. (PG)
The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
Using the above formula (R + Q +P +Y)/4 = Risk Rating: (1 + 1 + 1 + 1)/4 = 1.00

Overall, the weighted average (based on annual income) of my dividend stocks is 2.26, which would put it on the higher end of the medium category. In an effort to build up a risk reserve that can be accessed when a company cuts its dividend, I would like to lower this number to around 2.

I am still refining and calibrating the calculations. However, this is a good start in helping me manage and control the risk associated with my dividend stock portfolio.

Full Disclosure: Long CTL, PFE, HCP, INTC, LLY, NUE, MCD, ED, PEP, WMT, KMB, KO, JNJ, UTX, SYY, PG