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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Below are companies that have recently made their shareholders take notice with higher cash dividends:

Sensient Technologies (SXT) produces flavors, colors and fragrances for businesses operating in various industries, including food, pharmaceuticals and personal care. January 21st the company increased its quarterly dividend 5% to $0.21/share. The dividend is payable March 1, 2011, to shareholders of record on February 9, 2011. The ex-dividend date is February 7, 2011. The yield based on the new payout is 2.4%.

El Paso Pipeline (EPB) is a partnership owns and operates natural gas transportation pipelines and storage assets. January 21st the partnership raised its quarterly distribution 7.3% to $0.44/share. The distribution will be paid February 15, 2011, on all outstanding units to holders of record as of the close of business on February 1, 2011. The ex-distribution date is January 28, 2011. The yield based on the new payout is 5.2%.

Airgas (ARG) is a leading distributor of industrial, medical, and specialty gases and related equipment also distributes safety and other disposable supplies through its network of stores. January 21st the company increased its quarterly dividend 16% to $0.29/share. The dividend is payable on March 31, 2011 to shareholders of record as of March 15, 2011. The ex-dividend date is March 11, 2011. The yield based on the new payout is 1.8%.

Navios Maritime (NMM) owns and operates dry bulk carriers in Greece. January 21st the partnership raised its quarterly distribution 2.4% to $0.43/share. The distribution is payable on February 14, 2011 to unit holders of record as of February 9, 2011. The ex-distribution date is February 7, 2011. The yield based on the new payout is 9.1%.

Twin Disc Inc. (TWIN) designs, makes and distributes heavy-duty off-highway power transmission equipment for industrial, government, marine, and energy and natural resources markets. January 24th the company increased its quarterly dividend 14% to $0.08/share. The dividend is payable on March 1, 2011, to shareholders of record on February 11, 2011. The ex-dividend date is February 9, 2011. The yield based on the new payout is 1.1%.

Intel (INTC) is the world’s largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. January 24th the company raised its quarterly dividend 15% to 18.12/share. The dividend is payable on March 1, 2011 to stockholders of record on February 7, 2011. The ex-dividend date is February 3, 2011. The yield based on the new payout is 3.48%.

Williams Partners (WPZ) is a limited partnership that engages in gathering, transporting, processing, and treating natural gas, as well as fractionating and storing natural gas liquids. January 24th the partnership increases quarterly distribution 2.2% to $0.7025/unit. The distribution is payable on February 11, 2011, to unitholders of record at the close of business on February 4, 2011. The ex-distribution date is February 2, 2011. The yield based on the new payout is 6%.

Bladex (BLX) offers financial services for banks and corporations in Latin American and Caribbean. January 24th the company raised its quarterly dividend 17.7% to $0.20/share. The dividend is payable on February 11, 2011 to stockholders registered as of February 3, 2011. The ex-dividend date is February 1, 2011. The yield based on the new payout is 4.6%.

Martin Midstream (MMLP) engages in the storage and distribution of petroleum products and by-products primarily in the United States Gulf Coast region. January 24th the company increased its quarterly distribution 1.3% to $0.76/share. The distribution is payable on February 14, 2011 to common unitholders of record as of the close of business on February 3, 2011. The ex-distribution date is February 1, 2011. The yield based on the new payout is 7.5%.

Norfolk Southern (NSC) operates 21,200 route miles serving 22 eastern states, the District of Columbia, and Ontario, Canada. January 25th the company raised its quarterly dividend 11% to $0.40/share. The dividend is payable on March 10, 2011, to stockholders of record on Feb. 4, 2011. The ex-dividend date is February 2, 2011. The yield based on the new payout is 2.5%.

National Instruments (NATI) is a provider of software and hardware technology solutions for creating custom measurement and automation systems typically used for design, control and test applications. January 25th the company increased its quarterly dividend 15.4% to $0.15/share. The dividend is payable on February 21, to shareholders of record on February 4, 2011. The ex-dividend date is February 2, 2011. The yield based on the new payout is 1.5%.

Rollins (ROL) provides pest and termite control services to residential and commercial customers. January 25th the company raised its quarterly dividend 16.7% to $0.07/share. The dividend is payable on March 10 to shareholders of record on Feb. 10. The ex-dividend date is Feb. 8. The yield based on the new payout is 1.45%.

Buckeye Tech (BKI) manufactures and markets specialty cellulose and absorbent fibers used in a variety of consumer products. January 26th the company increased its quarterly dividend 25% to $0.05/share. The yield based on the new payout is 1%.

RPC Inc. (RES) provides a range of specialized oilfield services and equipment primarily to independent and oil and gas companies. January 26th the company raised its quarterly dividend 47% to $0.07/share. The dividend is a 47% increase from the current rate of $0.0475/share. The dividend is payable March 10, 2011 to common stockholders of record at the close of business on February 10, 2011. The ex-dividend date is February 8, 2011. The yield based on the new payout is 1.6%.

Praxair (PX) is the largest producer of industrial gases in North and South America, and the second largest worldwide. It also provides ceramic and metallic coatings. January 26th the company increased its quarterly dividend 11% to $0.50/share. The dividend is payable on March 15, 2011 to shareholders of record on March 7, 2011. The ex-dividend date is March 3, 2011. PX is a Dividend Achiever and has raised its dividend for 18 consecutive years. The yield based on the new payout is 2.2%.

Energen Corp (EGN) is involved in natural gas distribution, and oil and gas exploration and production. January 26th the company raised its quarterly dividend 3.8% to $0.135/share. The dividend is payable March 1, 2011, to shareholders of record on February 15, 2011. The ex-dividend date is February 11, 2011. EGN is a Dividend Achiever and has raised its dividend for 18 consecutive years. The yield based on the new payout is 1%.

Teekay GP (TGP) provides marine transportation services for liquefied natural gas, liquefied petroleum gas (LPG), and crude oil. January 26th the partnership increased its quarterly distribution 5% to $0.63/share. The cash distribution is payable on February 14, 2011 to all unitholders of record on February 7, 2011. The ex-distribution date is February 3, 2011. The yield based on the new payout is 7.1%.

DPL Inc. (DPL) owns Dayton Power & Light, a utility that serves more than 500,000 electric retail customers in west central Ohio. January 26th the company increased its quarterly dividend 10% to $0.3325/share. The dividend is payable March 1, 2011 to common shareholders of record on February 15, 2011. The ex-dividend date is February 11, 2011. The yield based on the new payout is 5.0%.

Cardinal Financial (CFNL) provides banking products and services to customers in Virginia and greater Washington, D.C. metropolitan area. January 26th company raised its quarterly dividend 50% to $0.03/share. The dividend is payable on February 25, 2011 to shareholders of record as of the close of business on February 10, 2011. The ex-dividend date is February 8, 2011. The yield based on the new payout is 1%.

Eaton (ETN) products include electrical systems and components for power management, truck transmissions and fluid power systems, and services for industrial, mobile and aircraft equipment. January 27th the company increased its quarterly dividend 17% to $0.68 per common share. The dividend is payable on February 25 to shareholders of record at the close of business on February 7, 2011. The ex-dividend date is February 3. The yield based on the new payout is 2.6%.

Time Warner (TWC) is the largest pure-play U.S. cable multiple system operator (MSO), recently counting nearly 12.6 million customers, mostly located in New York, the Carolinas, Ohio, Southern California, and Texas. January 27th the company raised its quarterly dividend 20% to $0.48/share. The quarterly dividend is payable in cash on March 15, 2011 to stockholders of record at the close of business on February 28, 2011. The ex-dividend date is February 24, 2011. The yield based on the new payout is 2.8%.

Sandy Spring (SASR) owns and operates Sandy Spring Bank, which offers commercial banking, retail banking, and trust services in Maryland. January 27th the company raised its quarterly dividend to $0.08/share. The dividend is payable February 16, 2011 to shareholders of record on February 9, 2011. The ex-dividend date is February 7, 2011. The yield based on the new payout is 1.7%.

Magellan Midstream Partners (MMP) is engaged in the transportation, storage and distribution of refined petroleum products primarily through its 9,500-mile pipeline system. January 27th the partnership increased its quarterly distribution 2% to $0.7575/share. The distribution is payable February 14 to unitholders of record at the close of business on February 7, 2011. The ex-distribution date is February 3, 2011. The yield based on the new payout is 5.5%.

Harte-Hanks (HHS) provides direct marketing services and shopper advertising opportunities to local, regional, national and international consumer and business-to-business marketers. January 27th the company increased its quarterly dividend to $0.08/share. The dividend is payable on March 11 to shareholders of record on Feb. 25. The ex-dividend date is Feb. 23. The yield based on the new payout is 2.43%.

MarkWest Energy Partners (MWE) gathers, transports, and processes natural gas in the U.S. It also transports natural gas liquids and gathers and transports crude oil. January 27th the partnership increased its quarterly distribution 2% to $0.65/unit. The yield based on the new payout is 6.1%.

Arthur J. Gallagher (AJG) an international insurance brokerage and risk management services firm, is headquartered in Itasca, Illinois. January 27th the company raised its quarterly dividend 3% to $0.33/share. The dividend is payable on April 15, 2011 to shareholders of record as of March 31, 2011. The yield based on the new payout is 4.4%.

Parker Hannifin (PH) is a global maker of industrial pneumatic, hydraulic, and vacuum motion/control systems, including related pumps, valves, filters, hoses, etc. Its products are used in everything from jet engines to trucks and autos and utility turbines. January 27th the company increased its quarterly dividend 10% to $0.32/share. The dividend is payable March 4, 2011 to shareholders of record as of February 10, 2011. The ex-dividend date is February 8, 2011. PH is a Dividend Achiever and has raised its dividend for 55 consecutive years. The yield based on the new payout is 1.5%.

J. M. Smucker’s (SJM) products include coffee, fruit spreads, peanut butter, shortening and oils, ice cream toppings, health and natural foods, and beverages. January 27th the company raised its quarterly dividend 10% to $0.44/share. The dividend is payable on Tuesday, March 1, 2011, to shareholders of record at the close of business on Friday, February 11, 2011. The ex-dividend date is February 9, 2011. SJM is a Dividend Achiever and has raised its dividend for 12 consecutive years. The yield based on the new payout is 2.8%.

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

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

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Consider the following table:

The first column is the initial yield of the stock. The second column is the dividend growth rate over the period. The final 3 columns are the yields on cost (YOC) after the 5th, 10th and 20th years.  After 10 years, the YOC has either doubled (initial yields of 1%-4%), nearly doubled (initial yield of 5%) of exceeded 10% (initial yields of 6%-9%). After 20 years all the YOCs exceeded 10% except the 1% initial yield. Note that the sum of each initial yield and growth rate equals 12%, which is a nice rule of thumb to look for.

The following dividend stocks have a current yield + growth rate between 10%-12%:

There is no hard and fast rule to what initial yield + growth rate should equal. To be more conservative you could limit your selection criteria to less than 10%. This of course will lower the future YOC, but highlight stocks that should have a greater chance of performing. As always, a careful evaluation should be performed before buying or selling any stock.

Full Disclosure: Long ABT, JNJ, HGIC, KMB, INTC, CTL, PG, KO. See a list of all my income holdings here.

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Below are several dividend stocks that recently rewarded their shareholders with increased cash dividends:

Wendy’s/Arby’s (WEN) the combined restaurant systems include more than 10,000 restaurants in 50 states and 21 countries worldwide. November 12th the company increased its quarterly dividend 33%to $0.015/share. The dividend is payable on December 15, 2010 to Wendy’s/Arby’s Group, Inc. stockholders of record as of December 1, 2010. The ex-dividend date is November 29, 2010. The yield based on the new payout is 1.7%.

Sysco Corp. (SYY) is a large distributor of food and related products, primarily to the foodservice or food-away-from-home industry. November 12th the company raised its quarterly dividend 4% to $0.26/share. The dividend is payable on January 28, 2011, to common shareholders of record at the close of business on January 7, 2011. The ex-dividend date is January 5, 2011. SYY is a Dividend Achiever and has raised its dividend for 41 consecutive years. The yield based on the new payout is 3.6%.

Intel (INTC) is the world’s largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. November 12th the company increased its quarterly dividend 13% to $0.18/share. The yield based on the new payout is 3.4%.

Adams Resources & Energy (AE) is engaged in the business of marketing crude oil, natural gas and petroleum products. November 12th the company raised its quarterly dividend 8% to $0.54/share. The dividend is payable on December 15, 2010 to shareholders of record as of December 1, 2010. The yield based on the new payout is 2.3%.

Chicago Rivet & Machine (CVR) produces and sells rivets, cold-formed fasteners, screw machine products, automatic rivet setting machines, parts and tools for such machines, and leases machines. November 15th the company increased its quarterly dividend 20% to $0.12/share. The dividend is payable December 20, 2010 to shareholders of record at the close of business on December 3, 2010. The ex-dividend date is December 1, 2010. The yield based on the new payout is 2.6%.

Mattel (MAT) is a large toy company whose brands and products include Barbie dolls, Fisher-Price toys, American Girl dolls and books, and Hot Wheels. November 15th the company raised its annual dividend 10.7% to $0.83/share. The dividend is payable on December 16, 2010, to stockholders of record on December 3, 2010. The ex-dividend date is December 1, 2010. The yield based on the new payout is 3.4%.

Elbit Systems (ESLT) is an international defense electronics company. November 16th the company increased its quarterly dividend 22% to $0.36/share. The dividend’s record date is November 30, 2010, and the dividend will be paid on December 13, 2010. The ex-dividend date is November 26, 2010. The yield based on the new payout is 2.9%.

Comerica (CMA) is a bank holding company based in Dallas with operations in Michigan, California, Texas, Arizona, and Florida. November 16th the company raised its quarterly dividend 100% to $0.10/share. The dividend is payable on Jan. 1, 2011, to shareholders of record on Dec. 15. The yield based on the new payout is 1.1%.

Montpelier Re (MRH) provides insurance and reinsurance solutions to the global market. November 16th the company increased its quarterly dividend 11% to $0.10/share. The dividend is payable on January 14, 2011, to all shareholders of record as of December 31, 2010. The ex-dividend date is December 29, 2010. The yield based on the new payout is 2.1%.

MeadWestvaco Corp. (MWV) is primarily a major producer of paperboard packaging used in a variety of consumer markets. November 17th the company raised its quarterly dividend 9% to $0.25/share. The dividend is payable on December 1, 2010, to stockholders of record at the close of business on November 26, 2010. The ex-dividend date is November 24, 2010. The yield based on the new payout is 3.9%.

S.Y. Bancorp (SYBT) provides commercial banking, personal banking, investment management, and trust services in the United States. November 17th the company increased its quarterly dividend 6% to $0.18/share. The dividend is payable January 3, 2011, to stockholders of record as of December 13, 2010. The ex-dividend date is December 9, 2010. The yield based on the new payout is 3.0%.

Teck Resources (TCK) is engaged in mining and related activities. November 17th the company raised its semi-annual dividend 54% to $0.30/share. The dividend is payable January 4, 2011, to shareholders of record at the close of business on December 15, 2010. The ex-dividend date is December 13, 2010. The yield based on the new payout is 1.3%.

Johnson Controls (JCI) supplies building controls and energy management systems, automotive seating, and batteries. November 17th the company increased its quarterly dividend 23% to $0.16/share. The dividend is payable January 4, 2011 to shareholders of record at the close of business on December 10, 2010. The yield based on the new payout is 1.7%

New Jersey Resources (NJR) is an energy services holding company providing retail and wholesale energy services to customers in states from the Gulf Coast to the New England regions. November 17th the company raised its quarterly dividend 5.9% to $0.36/share. The dividend is payable January 3, 2011 to shareholders of record on December 15, 2010. The ex-dividend date is December 13, 2010. NJR is a Dividend Achiever and has raised its dividend for 16 consecutive years. The yield based on the new payout is 3.5%.

Schawk (SGK), one of the world’s largest providers of digital graphics services, designs, creates and manages images and text for reproduction to precise specifications for a variety of promotional and advertising media. November 18th the company increased its quarterly dividend to $0.08/share. The dividend is payable on December 30, 2010, to stockholders of record as of December 13, 2010. The ex-dividend date is December 9, 2010. The yield based on the new payout is 1.9%.

Neenah Paper (NP) is a leading international producer and distributor of premium fine papers and technical products used in filtration, tape, abrasives, and other specialty markets. November 18th the company raised its quarterly dividend 10% to $0.11 per share. The dividend is scheduled to be paid in March 2011. The yield based on the new payout is 2.5%.

Union Pacific (UNP) operates the largest U.S. railroad, with over 32,000 miles of rail serving the western two-thirds of the country. November 18th the company increased its quarterly dividend 15% to $0.38/share. The dividend is payable on Jan. 3 to shareholders of record on Nov. 30. The ex-dividend date is Nov. 26. The yield based on the new payout is 1.66%.

Brown-Forman (BF-A) manufactures, bottles, imports, exports and markets a variety of alcoholic beverage brands. November 18th the company raised its quarterly dividend 6.7% to $0.32/share. The dividend is payable December 27, 2010, to shareholders of record as of December 7, 2010. The ex-dividend date is December 3, 2010. The yield based on the new payout is 2%.

Campbell Soup (CPB) is a major producer of branded soups and other grocery food products. November 18th the company raised its quarterly dividend 5% to $0.29/share. The dividend is payable on January 31, 2011 to shareholders of record at the close of business on December 27, 2010. The ex-dividend date is December 23, 2010. The yield based on the new payout is 3.4%.

NSTAR (NST) serves some 1.4 million electric and natural gas customers in Massachusetts, has agreed to be acquired by Northeast Utilities. November 18th the company raised its quarterly dividend 6.3% to $0.425/share. The dividend is payable February 1, 2011 to shareholders of record as of January 7, 2011. The ex-dividend date is January 5, 2010. NST is a Dividend Achiever and has raised its dividend for 12 consecutive years. The yield based on the new payout is 4.1%.

Ruddick (RDK) derives the bulk of its sales from its Harris Teeter supermarket chain, which operates in eight southeastern states. It also manufactures thread and yarn. November 18th the company increased its quarterly dividend to $0.13/share. The dividend is payable on January 1, 2011, to shareholders of record on December 10, 2010. The yield based on the new payout is 1.4%.

Nike (NKE) is the world’s leading designer and marketer of high-quality athletic footwear, athletic apparel, and accessories. November 18th the company raised its quarterly dividend 6.9% to $0.31/share.The dividend is payable on Dec. 30 to shareholders of record on Dec. 6. The ex-dividend date is Dec. 2. The yield based on the new payout is 1.5%.

Laclede Group (LG) primarily distributes natural gas on a retail basis in St. Louis and nearby suburban areas. November 18th the company raised its quarterly dividend 2.5% to $0.405/share. The dividend is payable on January 4, 2011, to shareholders of record on December 10, 2010. The ex-dividend date is December 8, 2010. The yield based on the new payout is 4.6%.

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

Full Disclosure: Long SYY, INTC. See a list of all my income holdings here.

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This expectation does not change even when the economy turns down and earnings decline; dividend growth investors still require annual dividend growth. The companies that are able to accomplish this are those with a operating model that generates strong free cash flows with room to pay out a higher percentage as dividends. Below are several companies with a low free cash flow payout (below 40%):

An interesting twist to the above is a 2006 study conducted by Credit Suisse that found high dividend yield stocks generally
outperformed those with lower yields. However, the best returns did not come from those with the highest yields, but those with higher yields coupled with low payout ratios. The study found that high yield, low payout stocks that produced the better returns were priced at low ratios of price-to-earnings, and as a corollary, at high ratios of earnings-to-price; i.e., earnings yield. Put another way, the stocks prices were depressed, thus creating the higher yield and a value play. Below are several dividend growth stocks with a higher yields (around 4%+) and low free cash flow payouts (50% and below):

At some point we will all want to retire, but that is not to say we want our portfolio to stop working for us. A good dividend growth stock portfolio will not only provide us income in our retirement, but provide us more income each year than the one before.

Full Disclosure: Long GD, MDT, ADP, PG, INTC, ABT, GPC, TEG, CINF, LLY, HGIC. See a list of all my income holdings here.

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One concern is how will Social Security, pensions and other retirement vehicles withstand the strain. The 2008 market crash has added concern to the viability of these plans. In a New York Times article, “The Unloved Annuity Gets a Hug From Obama“, income annuities are what the administration is promoting to alleviate the pending problem, but is this really a workable solution?

What are income annuities?

The New York Times article describes annuities  as:

“At its simplest, which is how the White House seems to want to keep it, an annuity is something you buy with a large pile of cash in exchange for a monthly check for the rest of your life.”

What are the problems with income annuities?

Charlie Farrell in “Why Annuities Won’t Fix The Retirement Problem“, described the following problems with income annuities:

I. Cash Out Is Determined By Cash In
The income an annuity will produce is directly related to the amount of money you put into the annuity. So if you don’t have much money saved for retirement, you won’t get much of an income stream from an annuity. And most people don’t have much money saved for retirement.

II. Payment Rates Aren’t High
At today’s interest rates, you’ll get about $5.85 of income per year for every $100 you contribute to the annuity (based on a recent quote from a highly-rated insurer). And this $5.85 would be paid to you and your spouse for as long as you both live. That’s basically a 5.85% payout on your savings in retirement.

III. No Provision For Inflation
Annuity payments don’t increase and are fixed for life. So if inflation runs at 3% a year (the average for the last 80 years), your retirement income will be cut by about 45% by the time you’re 85. Meaning that the $5,850 of income will buy you about $3,220 of stuff in today’s dollars, and the $58,500 will buy you about $32,200. You can buy an inflation-adjusted annuity, but when you do that, your initial payout goes down to somewhere around 4%.

IV. Investment Risk
With an annuity, you lose access to your money. Essentially, you gave your money to the insurance company to purchase the annuity. It’s theirs to keep forever, and your income is dependent on the insurance executives running a sound insurance company for the next 30 or so years. That’s always hard to predict and carries it’s own risks.

Dividend Stocks – A Viable Alternative

Instead of turning over your life-savings to an insurance company (that could be the next AIG), why not build a diversified portfolio of dividend growth stocks? This works best if you have time before retirement. The initial rate may not be as high as the 5.85% quoted above, but careful stock selection will allow growth well in excess of inflation. Unlike depending on a single insurance company, a diversified portfolio of at least 30 stocks will greatly reduce the risk. Below are some good dividend growth stocks that will provide a yield-on-cost greater than 5.85% in ten years, based on the listed assumptions:

		Current	Dividend	10-Year
Company	Analysis	Yield	Growth	YOC
Sysco Corp. (SYY)	Link	3.16%	6.52%	5.95%
Piedmont Nat. Gas (PNY)	Link	4.17%	3.74%	6.02%
Clorox Company (CLX)	-	3.24%	6.83%	6.27%
Intel Corporation (INTC)	-	3.07%	7.44%	6.29%
Coca-Cola (KO)	Link	3.19%	7.32%	6.47%
Chevron Corp. (CVX)	Link	3.73%	5.95%	6.64%
General Dynamics (GD)	Link	2.68%	10.07%	6.99%
Procter & Gamble (PG)	Link	2.95%	9.87%	7.55%
Universal Health (UHT)	-	7.26%	1.47%	8.40%
CenturyLink, Inc. (CTL)	-	8.14%	3.57%	11.56%

Social Security was never intended as a retirement plan, but as a supplement to savings. The key to a successful retirement is not to rely on any single income stream, but to build multiple income streams. These would include Social Security, 401(k), IRA (Roth and/or Traditional), pension plan, bonds, and of course, good dividend growth stocks. There is a reason the insurance companies are excited that Obama is focusing on annuities, and it isn’t because they care about you.

Full Disclosure: Long SYY, CLX, INTC, KO, CVX, PG, CTL. See a list of all my income holdings here.

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(Photo: sanja gjenero)

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.

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(Photo Credit)

Working to to increase their shareholders yield on cost, these companies recently announced higher cash dividend payments:

El Paso Pipeline Partners (EPB) owns and operates natural gas transportation pipelines and storage
assets. January 22nd the company increased its quarterly distribution of 2.9% to $0.36/unit. The distribution will be paid February 12, 2010 on all outstanding common and subordinated units to holders of record as of the close of business on February 1, 2010. The yield based on the new payout is 5.76%.

Intel (INTC) is the world’s largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. January 22nd the company raised its quarterly 12.5% to $0.1575/share. The dividend will be payable on March 1, 2010 to stockholders of record on Feb. 7, 2010. The ex-dividend date is February 4, 2010. The yield based on the new payout is 3.15%.

Rollins (ROL) provides pest and termite control services to residential and commercial customers. January 26th the company boosted its quarterly dividend 28.6% to $0.09/share. The dividend will be payable March 10, 2010 to stockholders of record at the close of business February 10, 2010. The ex-dividend date is February 8, 2010. The yield based on the new payout is 1.80%.

National Instruments (NATI) is a provider of software and hardware technology solutions for creating custom measurement and automation systems that are typically used for design, control, and test applications. January 26th the company approved an 8% sequential increase in the quarterly dividend to $0.13/share. This dividend is payable on March 1, 2010, to shareholders of record on February 8, 2010. The ex-dividend date is February 4, 2010. The yield based on the new payout is 1.70%.

Sunoco Logistics Partners (SXL) is a master limited partnership (MLP) formed by Sunoco Inc. to acquire, own and operate a group of refined product and crude oil pipelines and terminal facilities. January 26th the company raised its distribution 2.3% to $1.09/unit. The distribution is payable February 12, 2010 to unit holders of record on February 8, 2010. The yield based on the new payout is 6.16%.

Praxair (PX) is the largest producer of industrial gases in North and South America, and the second largest worldwide and it provides ceramic and metallic coatings. January 27th the company boosted its quarterly dividend 13% to $0.45/share. The dividend is payable on March 15, 2010 to shareholders of record on March 5, 2010. The ex-dividend date is March 3, 2010. PX is a Dividend Achiever and has raised its dividend for 17 consecutive years. The yield based on the new payout is 2.37%.

Holly Energy Partners (HEP) is a master limited partnership was formed by Holly Corp. to acquire, own and operate refined product pipeline and terminal facilities. January 27th the company increased its quarterly dividend to $0.805/unit. HEP has increased its distribution to unitholders every quarter since becoming a public partnership in July 2004 or 21 consecutive quarterly increases. The distribution will be paid February 12, 2010, to unitholders of record February 5, 2010. The ex-dividend date is February 3, 2010. The yield based on the new payout is 7.77%.

Energen (EGN) is a diversified energy company is involved in natural gas distribution, and oil and gas exploration and production. January 27th company raised its quarterly dividend 4% to $0.13/share. The dividend is payable March 1, 2010, to shareholders of record on February 15, 2010. The ex-dividend date is February 11, 2010. EGN is a Dividend Achiever and has raised its dividend for 28 consecutive years. The yield based on the new payout is 1.14%.

SJW (SJW) provides water service to a population of approximately one million people in the metropolitan San Jose (California) area. January 28th the company boosted its quarterly dividend to $0.17/share. The dividend is payable on March 1, 2010 to shareholders of record at the close of business on February 8, 2010. The ex-dividend date is February 4, 2010. SJW is a Dividend Achiever and has raised its dividend for 28 consecutive years. The yield based on the new payout is 3.07%.

Airgas (ARG) is a leading distributor of industrial, medical and specialty gases and related equipment also distributes safety and other disposable supplies through its network of stores. January 28 the company increased it quarterly dividend to $0.22/share. The dividend is payable March 31, 2010 to shareholders of record as of March 15, 2010. The yield based on the new payout is 1.88%.

A healthly yield on cost is one that is growing via regular dividend increases. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

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

(Photo Credit)

Here are several companies looking to increase their long-term returns by raising their cash dividends:

Intel (INTC) is the world’s largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products. November 16th, the company raised its quarterly dividend 12.5% to $0.1575/share. Paul Otellini, Intel president and CEO commented “With one of the highest dividend yields in the technology industry, the dividend increase is another sign of our confidence in business prospects going forward.” The yield based on the new payout is 3.26%.

Lancaster Colony (LANC) manufactures and markets consumer products in two  segments: Specialty Foods, and Glassware and Candles. November 16th the company increased its dividend 5.3% to $0.30/share. The payable is payable December 31, 2009 to shareholders of record on December 10, 2009. The ex-dividend date is December 8. LANC is a Dividend Achiever and has increased its dividend for 47 consecutive years. The yield based on the new payout is 2.41%.

Brown-Forman (BF.A) on November 16 raised its dividend 4.3% to $0.30/share. Stockholders of record on December 7, 2009 will receive the cash dividend on January 4, 2010. This is Brown-Forman’s 64th consecutive year of quarterly dividends and the 26th consecutive year it has increased the annual dividend. The yield based on the new payout is 2.23%.

Sysco (SYY) is the largest U.S. marketer and distributor of foodservice products. November 17th the company boosted its dividend to $0.25/share. The dividend is payable on January 22, 2010, to common shareholders of record at the close of business on December 31, 2009. The ex-dividend date is December 29, 2009. LANC is a Dividend Achiever and has increased its dividend for 39 consecutive years. The yield based on the new payout is 3.66%.

Royal Gold (RGLD) is the largest U.S.-based company engaged in the acquisition and management of precious metal royalty interests. November 18th the company increased its quarterly dividend 13% to $0.09/share. The dividend is payable January 15, 2010, to shareholders of record at the close of business on January 4, 2010. The ex-dividend date is December 31, 2009. The yield based on the new payout is 0.68%.

PennantPark (PNNT) specializes in direct and mezzanine investments in middle-market companies. November 18th the company raised its quarterly dividend 4.2% to $0.25/share.The dividend is payable on January 4, 2010 to stockholders of record as of December 24, 2009. The ex-dividend date is December 22. The yield based on the new payout is 11.96%.

Harsco (HSC) is a industrial service provider and manufacturer has operations in steel
mill services and access services, as well as construction. November 19th the company boosted it quarterly dividend for the 16th consecutive year to $0.205/share. The dividend is payable February 16, 2010 to Harsco stockholders of record as of January 15, 2010. The ex-dividend date is January 13. The dividend yield on the new payout is 2.5%. LANC is a Dividend Achiever and has increased its dividend for 19 consecutive years. The yield based on the new payout is 2.52%.

NSTAR (NST) was created through the 1999 merger of BEC Energy and Commonwealth Energy System. November 19th the company increased its quarterly dividend 6.7% to $0.40/share.The payable February 1, 2010 to shareholders of record as of January 8, 2010. The ex-dividend date is January 6. The yield based on the new payout is 4.98%.

Laclede Group (LG) distributes natural gas on a retail basis in St. Louis and nearby suburban areas. November 19th the company raised its quarterly dividend to $0.395/share. The dividend will be payable on January 4, 2010, to shareholders of record on December 11, 2009. The ex-dividend date is December 9, 2009. Yield on the dividend is 5%. The yield based on the new payout is 5.00%.

Bob Evans Farms (BOBE) owned and operated 571 Bob Evans Restaurants & 132 Mimi’s Cafes. November 19th the company announced a 12.5% increase in the quarterly cash dividend to $0.18/share. The dividend is payable on Dec. 15 to stockholders of record at the close of business on Dec. 4. The yield based on the new payout is 2.83%.

Nike (NKE) is the world’s leading designer and marketer of high-quality athletic
footwear, athletic apparel, and accessories. November 19th, the company increased its quarterly dividend 8% to $0.27/share. The dividend is payable on January 4, 2010 to shareholders of record at the close of business on December 7, 2009. The yield based on the new payout is 1.70%.

When looking for stocks with growing dividends, longevity of consecutive increases is important.  For a list of stocks with a long string of consecutive dividend increases, see this list.

Full Disclosure: Long INTC, SYY. See a list of all my income holdings here.

(Photo Credit)

Below are ten dividend stocks that have out-performed the S&P 500 this year through May 15, 2009:

10. Coca-Cola Co (KO) – Return: 0.4% – Yield: 3.76%
The Coca-Cola Company engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates and syrups worldwide. Risk Rating: Low (1.50) – Analysis

9. Sysco Corp (SYY) – Return: 0.5% – Yield: 4.20%
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. Risk Rating: Low (1.00) – Analysis

8. BP ADR (BP) – Return: 1.4% – Yield: 7.37%
This supermajor integrated oil company (formerly BP Amoco p.l.c.) is based in London and is the world’s second largest publicly owned oil company and the fourth largest U.S. refiner. Risk Rating: Medium (1.75) – Analysis

7. 3M Co (MMM) – Return: 1.8% – Yield: 3.52%
3M Co. is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications. Risk Rating: Low (1.50) – Analysis

6. Paychex Inc (PAYX) – Return: 4.1% – Yield: 4.63%
Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States. Risk Rating: Medium (1.75) – Analysis

5. Intel Corp (INTC) – Return: 5.6% – Yield: 3.69%
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. Risk Rating: Medium (1.75) – Analysis

4. Canadian National Railway ADR (CNI) – Return: 7.0% – Yield: 2.24%
Canadian National Railway Company (CNI) operates Canada’s largest railroad, linking customers in Canada, the U.S., and Mexico through approximately 20,400 miles of track. Risk Rating: Low (1.25) – Analysis

3. Manulife Financial Corp ADR (MFC) – Return: 8.0% – Yield: 4.78%
Manulife Financial Corporation is a life insurance company with customers in the United States, Canada and Asia. It is the holding company of The Manufacturers Life Insurance Company and John Hancock Financial Services. Risk Rating: Medium (1.75) – Analysis

2. CenturyTel Inc (CTL) – Return: 13.5% – Yield: 9.27%
CenturyTel Inc. provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin. Risk Rating: High (2.50) – Analysis

1. Royal Bank of Canada ADR (RY) – Return: 22.8% – Yield: 4.47%
Royal Bank of Canada (RBC) offers a range of banking and financial services in North America and internationally. Risk Rating: Low (1.50)

Over the same period the S&P 500 (VFINX) was down 1.2%. The returns were calculated using Yahoo’s dividend adjusted stock price for December 31, 2008 as the starting point. Some interesting items to note: The list contains four ADRs (3 Canadian, 1 British). RY’s dividend has been frozen since November 2007. CTL is the only High Risk stock to make the list based on my risk rating. The top five were less traditional dividend stocks that had been beaten down to low levels.

Short-term performance is never the sole reason for long-term investors to buy. What goes up significantly usually comes back down. Case in point, last years two dividend darlings, Wal-Mart (WMT) and McDonalds (MCD), found themselves in the bottom ten of this list, each down 13.2%.

Full Disclosure: Long in all the aforementioned securities. See a list of all my income holdings here.