Avoid Irrelevant Information

I tire of hearing the stock reports that sound like a horse race, ‘After early mixed results, the Dow edged up two points today despite a government report indicating unemployment is running at two-tenths of a percent above previous estimates…’ Will any of this have meaning in 10 years? 5 years? 1 year? In a month or a week? If you tune in to the same program tomorrow, you will likely hear an equally irrelevant, and possibly contrary, rant. Successful investing is a marathon, not a 40 yard dash.

Avoid Excess Trading

The investment community is geared toward trading. The media with their incessant play-by-play call of the market creates a sense of urgency.  If the market is going up, you are made to feel like you are missing out on enormous gains, while market declines leave the investor feeling the need to sell before losing it all. The common thread here is the investor is being pushed to trade. Excessive buying and selling will at best mute a portfolio’s return and at worse, will deplete it.

Buy And Hold

Its ironic that buy-and-hold (through dividend and value investing) is seeing a resurgence, while concurrently being attacked on many fronts as being dead and no longer valid. Some attacks are a result of ignorance on the part of those not fully understanding the concept. Buy-and-hold is not buy-and-forget. All investment strategies should have a well-defined exit plan. Making a quick buck is not part of the exit strategy of long-term buy-and-hold dividend and value investors. Instead, it is our desire to hold the stock forever, assuming the stock continues to meet out investing criteria. When the stock no longer performs as anticipated, such as cutting its dividend, it is immediately sold.

Dividend Stocks Worth Waiting On

If our investment horizon is forever, we must do our due diligence up front and select only the very best stocks. Below are several stocks that have earned the patience of many dividend growth investors:

Johnson & Johnson (JNJ) | Yield: 3.7%
Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries. JNJ is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 49 consecutive years.

McDonald’s Corp. (MCD) | Yield: 3.2%
McDonald’s Corporation is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries. MCD is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 35 consecutive years.

The Coca-Cola Company (KO) | Yield: 2.9%
The Coca-Cola Company is the world’s largest soft drink company, KO also has a sizable fruit juice business. KO is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 48 consecutive years.

Procter & Gamble Co. (PG) | Yield: 3.1%
The Procter & Gamble Company is a leading consumer products company that markets household and personal care products in more than 180 countries. PG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 54 consecutive years.

Wal-Mart Stores Inc. (WMT) | Yield: 2.8%
Wal-Mart Stores, Inc. is the largest retailer in North America, WMT operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets. WMT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 36 consecutive years.

Conclusion

We live in an action-oriented world. In a microwave society that provides us instant everything, we look for immediate feedback for our actions. Sometimes it is hard to abide by the old adage ‘if it’s not broke, don’t fix it’, but when it comes to our dividend growth investments, we need to allow time to work its wonders on our portfolio.

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

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(Photo Credit)

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

- Abbott Laboratories (ABT) | Yield: 3.9%
- Coca-Cola Co (KO) | Yield: 2.9%
- Exxon Mobil (XOM)| Yield: 2.1%
- Johnson & Johnson (JNJ)| Yield: 3.5%
- McDonald’s Corp (MCD)| Yield: 3.2%
- 3M Co. (MMM)| Yield: 2.4%
- Procter & Gamble (PG)| Yield: 3.1%
- Wal-Mart Stores (WMT) | Yield: 2.8%

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

- Avon Products Inc. (AVP) | Yield: 3.4%
- ConocoPhillips (COP) | Yield: 3.3%
- Chevron Corporation (CVX) | Yield: 2.8%
- Nucor Corporation (NUE) | Yield: 3.0%
- Raven Industries, Inc. (RAVN) | Yield: 1.2%

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

- Bowl America (BWL.A) | Yield: 5.0%
- Conn. Water Service (CTWS) | Yield: 3.8%
- Weyco Group Inc. (WEYS) | Yield: 2.6%

Membership in the Stock Ideas list declined in this edition, but it was significantly less than what was experience in the prior year. Overall the number of constituents fell to 198 in the 2011 Stock Ideas list from 218 stocks in the 2010 list.  There were 319 stocks in 2009. There were 28 companies that fell off the list, including these prominent stocks:

- Eli Lilly & Co. (LLY)
- Paychex Inc. (PAYX)
- Progress Energy Inc. (PGN)
- SUPERVALU Inc. (SVU)
- Integrys Energy Group, Inc. (TEG)

The news wasn’t all bad. Partially offsetting the 28 companies that fell off the list were 5 new companies joining the Dividend Stock Ideas List. Some of these aren’t household names, not yet at least, but here are some names we will likely be seeing in the future:

- ConocoPhillips (COP) | Yield: 3.3%
- CARBO Ceramics Inc. (CRR) | Yield: 0.7%
- NextEra Energy, Inc. (NEE) | Yield: 4.0%
- Superior Uniform Group Inc. (SGC) | Yield: 4.7%
- Unisource Energy Corp. (UNS) | Yield: 4.6%

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

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

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(Photo Credit)

Fad Diets and Fad Investing Plans Rarely Work

Forget about those ‘Make 534% On Every Trade’ ads that you see on many financial websites. Real wealth is built with sweat equity and a sound financial plan. The only people making money off fad investments are the people selling them. To understand what will and will not work in the future you must understand the concepts that have worked in the past. Granted, each success story is different, but there are common traits as Philip E. Humbert noted when he studied successful people and came up with the “Top 10 Traits of Highly Successful People.” Here are 3 traits that we can apply to our investments:

1. Highly successful people work hard

They get up early, rarely complain. They expect high performance from others, but they expect extraordinary performance from themselves. Success starts with a recognition that hard work pays off. Highly successful investors don’t waste time trying to find an quick and easy way to get rich in the stock market.

2. Highly successful people are self-reliant and take responsibility

How many times have you heard, ‘I am fat because of my genes, my thyroid, my wife, my husband, …’ Or how many times have you heard, ‘I am broke because, I don’t make enough (my boss’ fault), things are so expensive (companies’ fault), Social Security will fund for my retirement, …’

3. Highly successful people “look over the horizon” to see the future

We live in a society of instant gratification. There is no planning for the future and certainly no foresight what the future will bring. A successful retirement just doesn’t happen – it is build with a plan over many decades.

Dividend Stocks To Help Grow Your Wealth

A long-term buy-and-hold investing approach focusing on quality dividend growth stocks has has provided the means for many investors to enjoy a comfortable retirement. If you start early enough, you will go beyond a comfortable retirement into the realm of building long-term wealth. For starters, you might consider these dividend stocks that have been rewarding their investors with growing dividends for 40 or more consecutive years:

Sysco Corporation (SYY) | Growth Yrs: 40 | Yield: 3.7%
Sysco Corporation is a large distributor of food and related products, primarily to the food-service or food-away-from-home industry.

Black Hills Corporation (BKH) | Growth Yrs: 40 | Yield: 4.7%
Black Hills Corp. is a South Dakota-based holding company that encompasses electric utility and integrated energy businesses.

California WaterService Group (CWT) | Growth Yrs: 43 | Yield: 3.4%
California Water Service Group operates regulated water utilities in California, Washington, New Mexico and Hawaii, and provides other non-regulated services.

Hormel Foods Corp. (HRL) | Growth Yrs: 45 | Yield: 1.9%
Hormel Foods Corp. company is a leading processor of branded, convenience meat products (primarily pork) for the consumer market.

Colgate-Palmolive (CL) | Growth Yrs: 47 | Yield: 2.6%
Colgate-Palmolive Company (Colgate) is a major consumer products company that markets oral, personal and household care, and pet nutrition products in more than 200 countries and territories.

Coca-Cola Company (KO) | Growth Yrs: 48 | Yield: 2.7%
The Coca-Cola Company is the world’s largest soft drink company, KO also has a sizable fruit juice business.

Johnson & Johnson (JNJ) | Growth Yrs: 48 | Yield: 3.5%
Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries.

Cincinnati Financial (CINF) | Growth Yrs: 50 | Yield: 4.7%
Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.

3M Company (MMM) | Growth Yrs: 52 | Yield: 2.3%
3M Co. provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives, and other chemical additives.

Procter & Gamble (PG) | Growth Yrs: 54 | Yield: 3.1%
The Procter & Gamble Company is a leading consumer products company that markets household and personal care products in more than 180 countries.

Emerson Electric Co. (EMR) | Growth Yrs: 55 | Yield: 2.3%
Emerson Electric Co. designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial, and consumer markets around the world.

Conclusion

If  losing weight and building wealth were easy, there wouldn’t be people wanting to sell you the secret. Notice there aren’t any seminars on how to yawn (though several accounting seminars have caused me to do it.) The first step toward success is deciding to take responsibility for our future. With a little planning, effort and the right dividend growth stocks, we can be well on our way to creating long-term wealth.

Full Disclosure: Long SYY, CL, KO, JNJ, CINF, MMM, PG, EMR. See a list of all my income holdings here.

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(Photo Credit)

Here are some eye-opening statistics from saperston.com:

The latest census figures indicate that only one in every ten Americans today is financially prepared to retire when they reach age 65. Here are a few other facts on retirement gathered from a variety of sources.

* Forty-seven percent of U.S. households are not covered by either a defined benefit or defined contribution plan (The WEFA Group). Twenty-five percent of employees who qualify for 401(k) plans do not contribute to them (an estimate from Buck Consultants).

* At the end of WWII, there were 42 workers paying into Social Security for each person receiving benefits. Today, barely three people contribute for each recipient. Projections are that by 2030, when most baby boomers will have retired, just two working people will contribute for each person receiving benefits (Social Security Administration, Trust Funds Report, 1992).

* Social Security benefits will replace only 16% of the income of married couples earning $50,000 to $100,000 and only 9.5% of the income of married couples earning $100,000 and only 9.5% of the income of married couples earning $100,000-plus (Office of Research and Economic Analysis, Pension and Welfare Administration).

* Sixty-nine percent of American adults aged 25 to 44 expect to retire in the “traditional” sense of spending retirement in leisure. But reality hits home as they near retirement-63% of 45- to 54-year-olds expect a retirement of leisure, and only 49% of those 55 or older say the same (Aetna Life Insurance and Annuity Co.).

* Working people tend to think their retirement lifestyle will be better than their current lifestyle, but retirees report their standard of living has declined. Example: Twenty-six percent of workers say they are “just making ends meet,” but only 16% think they will live this way in retirement. Of retirees, 20% are “just making ends meet,” while 16% describe their pre-retirement lifestyle this way (Employee Benefit Research Institute).

* A Baby Boom Retirement Savings Index, published each year by Merrill Lynch, shows that as of November ’94, baby boomers were saving only 38.2% of what they will need to maintain growth-adjusted living standards in retirement. The index is basically unchanged in the three years the index has been published (Merrill Lynch Strategic Planning).

It doesn’t have be this way. A little knowledge and planning will get you on the road to financial security. Often the first question is ‘what will I make in retirement if I start saving today?’ This can be difficult to answer given all the uncertainties in the future. However, I have made it easy for you by setting up a Google Documents Retirement Calculator Spreadsheet that can be used to model your projected retirement income from dividend stocks. Please do NOT edit the spreadsheet, only enter values in the yellow cells and leave the calculator usable for the next person. For those with access to Excel or Open Office, you can download the spreadsheet here.

The spreadsheet is really easy to use. It has three relevant tabs: 1.) Input, 2.) Results and 3.) Details. Let’s work through a simple example. On the input tab enter:

Current Age: 20
Retirement Age: 65

Income Stocks Current Value: 5000
Income Stocks Cost Basis: 4000 (What you paid for the stocks)
Income Stocks Annual Dividend Income: 225
Annual Contribution: 1200 (or $100 per month)

Dividend Growth Rate: 6%
Contribution Growth Rate: 4% (e.g. your annual raise from your employer)
Inflation Rate: 3% (important, but often overlooked)

Enter this in then go to the Results Tab. Here you will see what things will look like at retirement if all your assumptions are correct. In this case:

In 45 years when you retire at age 65:

- Your portfolio’s market value will be: $2,334,233
- Your portfolio’s cost basis will be: $1,061,365

- Your portfolio’s current yield will be: 4.50%
- Your portfolio’s yield-on-cost will be: 9.90%

- Your portfolio’s annual income will be: $105,040
- The above income In today’s dollars will be: $27,777

The 4.5% yield may seem high, but it is an average yield. Consider the following basket of stocks that would give you about a 4.5% yield and 6% dividend growth rate:

A $2 million dollar portfolio paying me $105 thousand a year sounds pretty good, but look at the last line. Could you live on $27,777 today? With 3% annual inflation that $105 thousand in 45 years has the same purchasing power as $27 thousand dollars today. Ouch!

It sounds bad but the reality is that if you know this is coming you can plan for it. After the kids are out of college and your house is paid for you will have a lot more disposable income to put toward retirement. The problem is that many people don’t realize they have a problem and that disposable income goes toward European trips, vacation homes, bass boats, et. al. Also, there will likely be other retirement income sources, such as a pension, 401(k), social security, etc.

Remember, everyone has a retirement plan – some have a thoughtful roadmap that they are following, while the others, by default, are planning to fail. Which group are you in?

Full Disclosure: Long ABT, CL, CTL, HGIC, JNJ, LEG, PG, T, UHT. See a list of all my income holdings here.

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(Photo: Steve Woods)

In the U.S., the Securities and Exchange Commission (SEC) requires institutional investment managers who exercise investment discretion over $100 million or more in Section 13(f) securities to report their holdings on Form 13F with the SEC.  Because of this required filing we can analyze the holdings of Berkshire Hathaway (Warren Buffett’s holding company) or any other large institution. However, once the Form 13Fs are aggregated, we can see who the large shareholders are for any public company, including these high profile dividend growth companies:

Johnson & Johnson (JNJ) | Yield: 3.5%
- 62.44% Institutional Ownership (%)
- 20.20% Top 10 Institutions (%)
- 00.79% 5%/Insider Ownership (%)
- 4.9% State Street Global Advisors (US)
- 3.8% Vanguard Group, Inc.
- 3.3% BlackRock Institutional Trust Company, N.A.
- 1.6% Berkshire Hathaway Inc.
- 1.4% State Farm Insurance Companies

The Coca-Cola Company (KO) | Yield: 2.8%
- 62.87% Institutional Ownership (%)
- 29.60 Top 10 Institutions (%)
- 04.68% 5%/Insider Ownership (%)
- 8.6% Berkshire Hathaway Inc.
- 3.7% Vanguard Group, Inc.
- 3.6% State Street Global Advisors (US)
- 3.2% Fidelity Management & Research
- 3.1% BlackRock Institutional Trust Company, N.A.

Procter & Gamble Co. (PG) | Yield: 3.0%
- 57.01% Institutional Ownership (%)
- 20.00% Top 10 Institutions (%)
- 00.34% 5%/Insider Ownership (%)
- 3.9% State Street Global Advisors (US)
- 3.8% Vanguard Group, Inc.
- 3.5% BlackRock Institutional Trust Company, N.A.
- 2.7% Berkshire Hathaway Inc.
- 1.5% Fidelity Management & Research

For the above I used MSN MoneyCentral, but many other services provide the same information. Obviously, large index mutual funds, such as the Vanguard Group, Inc. and Fidelity, will hold significant positions in S&P 500 companies, and those in other indexes. Insurance companies, such as Berkshire Hathaway Inc. and State Farm, will always have large sums invested in equities. The above three popular dividend growth stocks are all held by Berkshire Hathaway Inc. (BRK.A). As you can see from BRK.A’s latest 13F on the SEC’s website, they are also holding these other dividend growth stocks:

- Becton Dickinson & Co. (BDX) | Yield: 2.0%
- ConocoPhillips (COP) | Yield: 3.3%
- Exxon Mobil Corp. (XOM) | Yield: 2.3%
- Lowes Companies Inc. (LOW) | Yield: 1.8%
- Wal-Mart Stores, Inc. (WMT) | Yield: 2.2%

Buffett is a renowned value investor. As such, BRK.A’s 13F is one of the most viewed each quarter when it is filed. Investors want to know what the Oracle has bought and sold. Many websites use this information to set up a Buffett Tracking Portfolio, along with other respected investors. There is a great deal of information freely available to investors. Sometimes we just need to detour from our familiar paths to discover it.

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

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(Photo Credit)

The down side to this is that great values are harder to find. However, that is not to say they aren’t still out there. Of the 198 stocks I track, only 29 (15%) are trading below my calculated fair value, up from 7% this time last year. Here are some of the more interesting ones…

Becton, Dickinson and Co. (BDX) provides a wide range of medical devices and diagnostic products used in hospitals, doctors’ offices, research labs and other settings.
Fair Value: $109.88 | Recent Price: $84.73 | Yield: 1.6%

Owens & Minor, Inc. (OMI) is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.
Fair Value: $35.94 | Recent Price: $29.56 | Yield: 2.4%

Wal-Mart Stores, Inc. (WMT) is the largest retailer in North America. The company operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam’s Club, and International.
Fair Value: $63.69 | Recent Price: $54.56 | Yield: 2.2%

Abbott Laboratories (ABT) is a diversified life science company and is a leading maker of drugs, nutritional products, diabetes monitoring devices, and diagnostics.
Fair Value: $55.43 | Recent Price: $47.82 | Yield: 3.6%

Colgate-Palmolive (CL) is a major consumer products company that markets oral, personal and household care, and pet nutrition products in more than 200 countries and territories.
Fair Value: $91.57 | Recent Price: $79.79 | Yield: 2.5%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries.
Fair Value: $70.24 | Recent Price: $62.82 | Yield: 3.4%

Walgreen Company (WAG) is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico.
Fair Value: $43.77 | Recent Price: $39.32 | Yield: 1.50%

Medtronic Inc. (MDT) is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management, and other medical markets.
Fair Value: $41.34 | Recent Price: $37.41 | Yield: 2.4%

Harleysville Group Inc. (HGIC) underwrites a broad array of personal and commercial coverages. These insurance coverages are marketed primarily in the Eastern and Midwestern United States.
Fair Value: $41.10 | Recent Price: $37.39 | Yield: 3.6%

Microsoft Corporation (MSFT) is the world’s largest software company, develops PC software, including the Windows operating system and the Office application suite.
Fair Value: $28.55 | Recent Price: $27.98 | Yield: 2.3%

I calculate Fair Value weighing The Mid-2 Price and the NPV MMA Price. The wieght depends on where we are in the cycle. Currently it is weighted as 25% Mid-2 price + 75% NPV MMA price. The Mid-2 Price considers four fair value calculations, Avg. High Yield Price, 20-Year DCF Price, Avg. P/E Price and Graham Number, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. The NPV MMA Price is where the NPV MMA value equals the NPV MMA target.

Needless to say, we need to consider a lot more than just valuation when making a stock purchase. As dividend growth investors, I would argue that dividend fundamentals are more important than valuation. As long-term buy and hold investors, we can over-come paying too much for a great stock with time. However, time is unlikely to help a fairly valued stock with poor dividend fundamentals.

Full Disclosure: Long OMI, WMT, ABT, CL, JNJ, MDT, HGIC. See a list of all my income holdings here.

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(Photo Credit)

Abbott Laboratories (ABT) in April 2010 raised its dividend 10% to $0.44/share from $0.40/share. In April 2009 it raised its dividend 11%. ABT has increased its dividend for 38 consecutive years and I expect them to do so again next year. The 2011 increase should be similar to the 2010 increase, or possibly higher, since the company’s 12-month trailing free cash flow is up significantly compared to 2009. I project a 2011 increase of 10%. The stock is currently yielding 3.7%.

Kimberly-Clark Corp. (KMB) in March 2010 raised its dividend 10% to $0.66/share from $0.60/share. In 2009 it raised its dividend 3.4%. KMB has increased its dividend for 38 consecutive years and I expect them to do so again next year. I project 2011 be lower than the 2010 increase since the company’s 12-month trailing free cash flow is down from the 2009 high. I project a 2011 increase of 8%. The stock is currently yielding 4.2%.

Clorox Company (CLX) in July 2010 raised its dividend 10% to $0.55/share from $0.50/share. In 2009 it raised its dividend 8.7%. CLX has increased its dividend for 33 consecutive years and I expect them to do so again next year. I project the 2011 increase will be similar to the 2010 increase since the company’s 12-month trailing free cash flow is flat with 2009. I project a 2011 increase of 10%. The stock is currently yielding 3.5%.

Johnson & Johnson (JNJ) in May 2010 raised its dividend 10.2% to $0.54/share from $0.49/share. In 2009 it raised its dividend 6.5%. JNJ has increased its dividend for 48 consecutive years and I expect them to do so again next year. I project the 2011 increase will be higher than the 2010 increase since the company’s 12-month trailing free cash flow is up from 2009. I project a 2011 increase of 12%. The stock is currently yielding 3.5%.

McDonald’s Corp. (MCD) in November 2010 raised its dividend 10.9% to $0.61/share from $0.55/share. In 2009 it raised its dividend 10%. MCD has increased its dividend for 34 consecutive years and I expect them to do so again next year. I project the 2011 increase will be lower than the 2010 increase since the company’s 12-month trailing free cash flow growth is less than the 2010 dividend increase. I project a 2011 increase of 7%. The stock is currently yielding 3.5%.

Wal-Mart Stores Inc. (WMT) in March 2010 raised its dividend 11% to $0.3025/share from $0.2725/share. In 2009 it raised its dividend 14.7%. WMT has increased its dividend for 36 consecutive years and I expect them to do so again next year. I project the 2011 increase will be lower than the 2010 increase since the company’s 12-month trailing free cash flow growth is less than the 2010 dividend increase. I project a 2011 increase of 5%. The stock is currently yielding 2.3%.

Eaton Vance Corp. (EV) in October 2010 raised its dividend 12.5% to $0.18/share from $0.16/share. In 2009 it raised its dividend 3.2%. EV has increased its dividend for 30 consecutive years and I expect them to do so again next year. I project the 2011 increase will be similar to the 2010 increase since the company’s 12-month trailing free cash flow is similar to 2010. I project a 2011 increase of 12%. The stock is currently yielding 2.3%.

Colgate-Palmolive Co. (CL) in March 2010 raised its dividend 20% to $0.53/share from $0.44/share. In 2009 it raised its dividend 10%. CL has increased its dividend for 47 consecutive years and I expect them to do so again next year. I project the 2011 increase will be lower than the 2010 increase since the company’s 12-month trailing free cash flow growth is lower that 2010′s growth. I project a 2011 increase of 15%. The stock is currently yielding 2.6%.

Walgreen Company (WAG) in March 2010 raised its dividend 27% to $0.175/share from $0.1375/share. In 2009 it raised its dividend 22%. WAG has increased its dividend for 35 consecutive years and I expect them to do so again next year. I project the 2011 increase will be lower than the 2010 increase since the company’s 12-month trailing free cash flow growth is less than the 2010 dividend increase. I project a 2011 increase of 12%. The stock is currently yielding 1.8%.

Target Corp. (TGT) in August 2010 raised its dividend 47% to $0.25/share from $0.17/share. In 2009 it raised its dividend 6.2%. TGT has increased its dividend for 43 consecutive years and I expect them to do so again next year. I project the 2011 increase will be lower than the 2010 increase since the company’s 12-month trailing free cash declined from the the 2010 level. I project a 2011 increase of 7%. The stock is currently yielding 1.7%.

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

Full Disclosure: Long ABT, KMB, CLX, JNJ, MCD, WMT, CL. See a list of all my income holdings here.

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(Photo Credit)

There is not a lot of research in this area since most people spend their time contemplating capital accumulation, not spending it. However, there are a few studies on “safe” withdrawal rates. Let’s look at a few of them and consider what could be a better alternative…

The Bengen Study

In February 1997, the Wall Street Journal columnist Jonathan Clements reported on a study by San Diego based financial planner William Bengen. Bengen looked at year-by-year returns since 1925 for a 50/50 stock/bond portfolio. He assumed half the portfolio was in the S&P 500 and half in intermediate term government bonds. Using a 30 year holding period, he calculated that a 4.1% withdrawal rate would allow you to survive the worst market declines.

The Harvard Study

In 1973, Harvard University did a study to determine how much they could safely withdraw from their endowment fund without eroding the principal. Assuming a portfolio of 50% stocks and 50% bonds and cash, Harvard’s analysts calculated they could withdraw 4% the first year and then adjust the subsequent year’s withdrawals for inflation. For example, if there was 10% inflation, the second year’s withdrawal would be 4.4% of the initial (i.e., first year) asset value.

The Trinity Study

Dallas Morning News columnist Scott Burns has written extensively on a “safe” withdrawal study by three Trinity University researchers. The Trinity Study measures the “success rate” of various portfolios from 1926 to 1995. The “success rate” is the percent of time a retiree could sustain a given withdrawal rate without depleting his retirement assets. The optimal asset mix is 75% stock/25% long term corporate bonds. For a 30 year payout period and a 4% withdrawal rate, this mix had a 98% success rate. At a 3% withdrawal rate, the 75/25 mix had a 100% success rate. Interpolating these results would give you a “safe” withdrawal rate of slightly less than 4%, virtually identical to the Harvard study.

So it seems that 4% is the number that all these studies are pointing to based on on historical data. But is it a safe number if you retire today? More recently Burns wrote:

The established safe-withdrawal-rate rules of thumb are based on long periods of time in which yields were higher than they are today and stock valuations were lower. A growing school of thought believes future withdrawal rates should be reduced to reflect expected lower future returns. This would knock another 1.5 to 2 percentage points off the safe withdrawal rate.

You must also consider is that these studies are based on investment returns before expenses. If you’re paying an investment advisor an annual fee of 2% of assets and he has you invested in no-load mutual funds with a 0.5% expense ratio, your annual expenses are 2.5%. Your “safe” withdrawal rate is is now 2.5% lower than what you previously thought.

Dividend Growth Stocks: A Better Way

When I retire, I want a high degree of assurance that I won’t run out of money, have to start a second career or develop a taste for cheap dog food. I plan on achieving my goal of an ever growing income with a diversified portfolio of high-quality dividend stocks. Why would I settle for trying to live on as little as 1.5% to 4% of my portfolio, when I can build a portfolio of dividend paying stocks that will provide for my needs without depleting the principle. Here are several stocks that I plan to rely on for decades to come:

Abbott Laboratories (ABT) | Dividend Growth: 8.3%| Yield: 3.6%
ABT is a diversified life science company and is a leading maker of drugs, nutritional products, diabetes monitoring devices, and diagnostics.

Genuine Parts Co. (GPC) | Dividend Growth: 2.5%| Yield: 3.2%
GPC is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.

Harleysville Group Inc. (HGIC) | Dividend Growth: 8.0%| Yield: 3.7%
HGIC underwrites a broad array of personal and commercial coverages. These insurance coverages are marketed primarily in the Eastern and Midwestern United States.

Johnson & Johnson (JNJ) | Dividend Growth: 8.4%| Yield: 3.4%
JNJ is a leader in the pharmaceutical, medical device and consumer products industries.

The Coca-Cola Company (KO) | Dividend Growth: 7.3%| Yield: 2.7%
KO is the world’s largest soft drink company, KO also has a sizable fruit juice business. Its bottling interests include a 34% stake in NYSE-listed Coca-Cola Enterprises (CCE).

McDonald’s Corporation (MCD) | Dividend Growth: 15.0%| Yield: 2.9%
MCD is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries.

Medtronic Inc. (MDT) | Dividend Growth: 9.4%| Yield: 2.4%
MDT is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management, and other medical markets.

PepsiCo, Inc. (PEP) | Dividend Growth: 6.5%| Yield: 2.9%
PepsiCo, Inc. is a major international producer of branded beverage and snack food products.

The Procter & Gamble Company (PG) | Dividend Growth: 7.0%| Yield: 3.0%
PG is a leading consumer products company markets household and personal care products in more than 180 countries.

Wal-Mart Stores, Inc. (WMT) | Dividend Growth: 11.0%| Yield: 2.3%
WMT is the largest retailer in North America. The company operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam’s Club, and International.

Not all of these stocks are a buy today, but they are ones you will eventually want to add to your dividend portfolio. Retirement planning doesn’t have to be difficult. A financially successful retirement requires planning, discipline and execution. The sooner you start, the easier it is. Don’t risk running out of money before you run out of life.

Full Disclosure: Long ABT, GPC, HGIC, JNJ, KO, MCD, MDT, PEP, PG, WMT. See a list of all my income holdings here.

Related Posts
- What Determines A Dividend Stock’s Yield
- Archive | Dividends Value
- 10 Stocks With Sustainable Dividend Growth
- 20 Dividend Stocks With A 20% Yield In 20 Years
- When Is A Lot of Cash A Bad Thing?

Sources: Dallas News, Retire Early, passionsaving.com

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- Underlying Indices – S&P 500
- Weighting – Equally weighted; Constituents re-weighted quarterly
- Reconstitution – Reviewed annually in December

Among others, Dividend Aristocrats include these highly recognizable names, with years of consecutive dividend increases shown:

- 3M Co. (MMM) – 52 years
- Abbott Laboratories (ABT) – 38 years
- Clorox Co (CLX) – 35 years
- Coca-Cola Co (KO) – 48 years
- Exxon (XOM) – 28 years
- Johnson & Johnson (JNJ) – 48 years
- McDonald’s Corp (MCD) – 34 years
- Procter & Gamble (PG) – 54 years
- Wal-Mart Stores (WMT) – 36 years

Members may be deleted during the December rebalance if calendar-year dividends did not increase from the previous year, or intra-year if the stock is removed from the underlying S&P 500.

On December 2nd, S&P announced changes to the Dividend Aristocrats Index. Standard & Poor’s will perform the annual reconstitution of the S&P 500 Dividend Aristocrats Index after the close of trading on Friday, December 17, 2010.

The following stocks will be added to the Dividend Aristocrats:

- McCormick & Company (MKC)
- Hormel Foods Corp. (HRL)
- Ecolab Inc. (ECL)

The following stocks will be dropped from the Dividend Aristocrats:

- Eli Lilly And Company (LLY)
- SUPERVALU Inc. (SVU)
- Integrys Energy Group, Inc. (TEG)

After last year’s significant decline, it is good see the membership number level off. The previous two years were difficult for dividend stocks, but that is not necessarily a bad thing. During good times it is easy for companies to increase dividends, and many companies were added to the index. It is during times of adversity that we learn who the real aristocrats are.

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

Related Posts
- When To Sell A Dividend Stock
- Six Great Dividend Stocks, But…
- 10 Stocks With Sustainable Dividend Growth
- Dividend Investing in a Bear Market
- Are Defense Stocks Good Defensive Stocks?

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Linked here is a detailed quantitative analysis of Johnson & Johnson (JNJ). Below are some highlights from the above linked analysis:

Company Description: Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

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

JNJ is trading at a discount to 1.) and 3.) above. The stock is trading at a 10.9% discount to its calculated fair value of $70.24. JNJ 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%

JNJ earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. JNJ earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 48 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

JNJ earned a Star in this section for its NPV MMA Diff. of the $1,588. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as JNJ has. If JNJ grows its dividend at 8.4% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 3.4%. JNJ earned a check for the Key Metric ‘Years to >MMA’ since its 1 years is less than the 5 year target.

Memberships and Peers: JNJ is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Abbott Laboratories (ABT) with a 3.7% yield, Eli Lilly & Co. (LLY) with a 5.7% yield and Bristol-Myers Squibb Company (BMY) with a 5.0% yield.

Conclusion: JNJ earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks JNJ as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $93.41 before JNJ’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price the stock would yield 2.26%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.5%. This dividend growth rate is well below the 8.4% used in this analysis, thus providing a margin of safety. JNJ has a risk rating of 1.25 which classifies it as a low risk stock.

The company enjoys a diverse revenue base, an excellent research pipeline, a pristine balance sheet and exceptional free cash-flows to cover its dividend. This diversity and strength will help the company overcome near-term results from patent losses on Risperdal and Topamax. JNJ’s recent product quality issues, could stagnate its share price for a period of time, but for long-term investors, this could create a buying opportunity. I will continue to add to my position as my allocation allows and when JNJ is trading below my buy price of $70.24. 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 was long in JNJ (3.9% of my Income Portfolio). I also held position in ABT and LLY. See a list of all my income holdings here.

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- Kimberly-Clark Co. (KMB) Dividend Stock Analysis
- Abbott Laboratories (ABT) Dividend Stock Analysis
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