Understand Your Goal

What is your portfolio trying to accomplish? As odd is it may seem, many investors never define this and their overall goal. Are you buying stocks like First Industrial Realty Trust, Inc (FR) with a 22% yield, Capstead Mortgage Corporation (CMO) with a 17% yield, Annaly Capital Management, Inc. (NLY) with a 16% yield or Apollo Investment Corp. (AINV) with a 12% yield? If your goal is short-term income these might work, and then again they might not.

Before buying buying any stock you should write down your investing goal and determine if purchasing that stock will bring you closer to your goal or take you further away. My goal is to generate an ever-increasing income stream from dividends. Thus, I will sacrifice some current income in favor of future growth and income stability.

Understand and Measure the Risk

No stock is 100% safe. Each stock has its own set of risks that need to be considered. The stocks listed above are considered high risk. In exchange for above average current income, you may encounter above average dividend cuts and/or loss of capital.

Gauging the relative risk of one stock compared to another is important when deciding which stock to buy or how much to weight a stock within your portfolio. I prefer lower risk stocks such as Johnson & Johnson (JNJ) [Analysis], Procter & Gamble Co. (PG) [Analysis]and Wal-Mart Stores, Inc. (WMT) [Analysis].

A Disciplined Approach

For me and my income portfolio, I have have chosen to follow a conservative and disciplined approach. This means I will seek out dividend stocks with a proven track record and good future prospects. These stocks will have a long history (10 or more years) of consecutive dividend increases, low debt, low free cash flow payout and excellent other dividend metrics. In addition, I will follow time proven valuation techniques to select an entry point that will provide a good value.

Stay The Coarse

There is always a temptation to stray from a disciplined approach of selecting good dividend stocks. Often I receive questions like, ‘AT&T Inc. (T) is making a fortune off the iPhone, why aren’t you buying it?’ or ‘Kraft Foods Inc. (K) is a great consumer staple, why aren’t you buying it?’ The short answer is that neither currently can pass the entry exam to gain access to my income portfolio.

It is easy to become caught up with the current hot stock that everyone loves. The key to success is to buy before everyone else falls in love with it. Selecting good dividend growth stocks is not difficult, being disciplined enough to do it is difficult for many investors.

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

(Photo Credit)

Below are several companies rewarding their shareholders with higher cash dividends:

Brady Corp. (BRC) is an international manufacturer and marketer of solutions that identify and protect premises, products and people. Products include labels and signs, safety devices, printing systems and software, and precision die-cut materials. Recently, the company increased its quarterly dividend 2.9% to $0.17/share. The dividend will be paid on October 30, 2009, to shareholders of record at the close of business on October 9, 2009. BRC is a Dividend Achiever and has increased its dividend for 24 consecutive years. The current yield based on the new dividend is 2.33%.

Village Super Market (VLGEA) operates a chain of 23 ShopRite supermarkets in New Jersey and Pennsylvania. This past week, the company raised its dividend 7% to $0.23/share. The dividend is payable on October 22, 2009 to shareholders of record at the close of business on October 1, 2009. The ex-dividend date is September 29th. The current yield based on the new dividend is 3.14%.

Agree Realty (ADC) is a real estate investment trust that engages in the development, acquisition, and management of retail properties leased to national and regional retail companies in the U.S. Monday, the company bumped its quarterly dividend 2% to $0.51/share. The dividend is payable October 15, 2009 to shareholders of record at the close of business on September 30, 2009. The current yield based on the new dividend is 8.59%.

Philip Morris Int’l (PM) increased its quarterly dividend 7% to $0.58/share. The current yield based on the new dividend is 4.88%.

Kroger (KR) a supermarket operator, with about 2,500 stores in 31 states, also operates convenience stores, jewelry stores, supermarket fuel centers, and food processing plants. Thursday, the company raised its quarterly dividend 5.5% to $0.095/share. The dividend will be paid on December 1, 2009 to shareholders of record as of the close of business on November 16, 2009. The current yield based on the new dividend is 1.83%.

W. P. Carey (WPC) owns and manages a diversified portfolio of net leased corporate real estate. Yesterday, the company raised its quarterly dividend to $0.50/share. This is the company’s 34th consecutive distribution increase. The current yield based on the new dividend is 7.01%.

Corporate Office Properties (OFC) owns, manages, leases, acquires and develops suburban office properties located in Mid-Atlantic region of the U.S. and other select markets. Thursday the company bumped its quarterly dividend 5.4% to $0.3925/share. The dividend will be paid on October 15, 2009 to shareholders of record on September 30, 2009. OFC is a Dividend Achiever and has increased its dividend for 12 consecutive years. The current yield based on the new dividend is 4.10%.

Texas Instruments (TXN) is one of the world’s largest manufacturers of semiconductors, and also produces hand-held graphing and scientific calculator products. The company yesterday increased its quarterly dividend 9% $0.12/share. The dividend will be payable November 16, 2009, to stockholders of record on October 30, 2009. The current yield based on the new dividend is 2.03%.

NYMAGIC, INC. (NYM) specializes in ocean marine, inland marine and non-marine liability insurance. Thursday, the company increased its dividend to $0.06/share. The dividend is payable on October 6, 2009 to shareholders of record on September 30, 2009. The current yield based on the new dividend is 1.44%.

This year many companies have increased their dividends and there will be more to do so before the year end. For stocks with a long string of consecutive dividend increases, see this list.

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

(Photo Credit)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

First, a short primer for those fortunate enough not to be involved in pension accounting.  There are two basic types of company sponsored retirement plans – defined contributions (DC) and defined benefits (DB) plans.  As the names imply, a DC plan defines what the company will contribute to the plan on behalf of the employee. An example of a DC plan is a 401(k) where the company will match the first 5% contributed by the employee. There is no guarantee of what the employee will get out of the plan. The DB plan in contrast defines the benefit the employee will receive upon retirement, such as a salary of 80%  of his or her highest earnings year, weighted by years of service.  In the DC plan the employee assumes the risk of under-performance, while in the DB plan the employer assumes the risk.

For DB plans, actuaries will look at the number of employees, their ages, their income and other factors to determine what the company’s future liability will be. The actuaries will then look at the invested assets, estimate a future return and determine if the assets will be sufficient to cover the future liability. When the market is spiraling up, assets are usually greater than the liabilities and the company does not have to put any money in the plan, thus it does not have recognize an expense.  But when the market is down, as it has been lately, the liability is greater than the assets on hand. This is referred to as underfunded, and over time the company has to come up with cash and recognize an expense.

One of the biggest pension plans in the world is General Motors (GM). A recent New York Times article looked at GM, which hasn’t been doing so well lately, and the effect of its underfunded pension plan. As of last November the estimated shortfall in GM pension plan was $20 billion. So what happens if it fails?

If GM’s pension plan collapses, the Pension Benefit Guaranty Corporation (PBGC) will pick up part of the tab. However, most of that shortfall would be made up by workers in the form of smaller benefits — not by GM or the PBGC. Unfortunately, this will likely set other pension funds into play. Since GM’s plan is so large, its failure will result in the PBGC losing a big source of the premium revenue. But more importantly, other automakers such as Ford, Toyota and Honda will be looking to rid themselves of their DB plans to cut costs and stay stay competitive.

The Pension Protection Act (PPA) and IRS regulations impose restrictions on accelerated payments (e.g. lump sum distributions) when the funding level falls below 80%. This is not just a problem with companies in struggling industries. Tyler Durden in a March 7, 2009 article cites data from a Merrill Lynch Pension Database showing several well-known companies with a projected (data as of 10/22/08) funded status below 80%. Here is a sampling of some traditional dividend companies:

• Johnson & Johnson (JNJ) Deficit: $3.5 billion Funding Status: 70%
• Exxon  (XOM) Deficit: $3.4 billion Funding Status: 69%
• Chevron (CVX) Deficit: $2.6 billion Funding Status: 69%
• General Dynamics (GD) Deficit: $2.3 billion Funding Status: 68%
• PepsiCo (PEP) Deficit: $1.8 billion Funding Status: 72%
• Kimberly-Clark (KMB) Deficit: $1.4 billion Funding Status: 72%
• Kraft Foods (KFT) Deficit: $1.1 billion Funding Status: 83%

Generations before us relied on defined benefit pension plans to ensure their lifestyle in retirement.  Our generation may not have the same luxury. There is one thing this economic and financial downturn has taught us – there are no sure things in life. We must take responsibility for our financial future and mange it.

Full Disclosure: Long JNJ, CVX, PEP, KMB (my income holdings)

During the week several big name companies declared dividends, including:

• Safeway (SWY) $0.0828/share – yield 1.87%
• General Mills (GIS) $0.43/share – yield 3.46%
• Microsoft (MSFT) $0.13/share – yield 3.43% – (Analysis)
  
• Heinz (HNZ) $0.415/share – yield 5.40%
  
• Target (TGT) $0.16/share – yielding 2.35% - (Analysis)
• Kraft (KFT) $0.29/share – yield 5.25% - (Analysis)

It is great when companies, like those above, follow through and pay their regular dividends at the appointed time. But it is even more important for companies to follow through and raise their dividend at the appropriate time.  Unfortunately, fewer companies are increasing their dividends. This week there were only two to note:

Piedmont Natural Gas Company Inc. (PNY) is an energy services company that distributes natural gas to 1,016,000 residential, commercial and industrial customers in portions of North Carolina, South Carolina and Tennessee. On March 6th, the company declared a 3.8% increase in its quarterly dividend of $0.27/share. The dividend is payable April 15, 2009, to shareholders of record at the close of business on March 25, 2009. The stock now yields 4.85%. This is the 31st consecutive year PNY has raised its dividend. The company is a dividend Achiever and a dividend Champion.

Warwick Valley Telephone Company (WWVY) provides telephone, Internet and video services to customers in the towns of Warwick, Goshen and Wallkill, New York and West Milford and Vernon townships, New Jersey. On March 10th, the company increased its quarterly cash dividend by 10% to $0.22/share up from $0.20/share. The dividend will be paid on March 31, 2009 to shareholders of record as of March 20, 2009.  Wisner H. Buckbee, Chairman of the Board, said “This dividend increase demonstrates the Board’s confidence in the continued strong performance of WVT’s business, our cash generation capabilities, and our firm commitment to our shareholders.” The stock now yields 9.78%.

For more companies around the world with a long string of consecutive dividend increases, see Dividends Value’s Stock Ideas page.

Full Disclosure: No position in any of the aforementioned securities.

(Photo: Steve Woods)

Linked here is a PDF copy of my detailed analysis of Kraft Foods Inc (KFT). Below are some highlights from the above linked analysis:

Company Description: Kraft Foods is the largest U.S. branded food and beverage company, and the second largest in the world.
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

KFT is trading at a discount to 1.) and 3.) above. Since KFT’s tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, KFT is trading at a slight discount. KFT earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

KFT earned no Stars in this section. KFT has paid a cash dividend to shareholders every year since 2001 and has increased its dividend payments for 7 consecutive years. Last year’s dividend payout was 64%, up from 52% in 2006. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of zero Stars in this section.

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

KFT earned one Star in this section for 2.) above. The NPV MMA Diff. of the $7,218 is below the $10,000 minimum I look for in a stock that has increased dividends as long as KFT has. If KFT grows its dividend at 7.7% per year, it will take 2 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%. KFT earned a Star since its Years to >MMA of 2 is less than 5 years.

Other: KFT is a member of the S&P 500. Its leading global market position has allowed it to build a strong balance sheet and cash flows. The company has used its cash flow to pay increasing dividends and currently has a generous yield in excess of 4%. Due to the relatively stable nature of the company’s end markets, the stock should benefit from investors looking for defensive or lower-risk investments. Risks include execution of internal restructuring, competitive conditions, higher input costs and possible disappointing consumer acceptance of new product introductions.

Conclusion: KFT earned one Star in the Fair Value section, lost one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of one Star. This quantitatively ranks KFT as a 1 Star-Very Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $23.49 for KFT’s NPV MMA Differential to increase to the $10,000 that I like to see. At that price the stock would yield 4.77%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $10,000 NPV MMA Differential, the calculated rate is 8.9%. This dividend growth rate is above the 7.7% used in this analysis.

KFT is a strong international brand and has a lot working in its favor. Before purchasing KFT, I would like to see a higher NPV MMA Differential and lower payout ratio (64% in 2007). My buy price for KFT is $23.49.

For additional information on KFT, including its 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 KFT (0.0% of my Income Portfolio) .

What are your thoughts on KFT?

Below are several select companies that recently decided to help their shareholders beat inflation by boosting their cash dividends:

• Verizon (VZ) Boosts Qtr. Dividend 7% to $0.46/Share (5.24% yield)
  
• Friedman Industries (FRD) Raises Qtr. Dividend 50% to $0.12/Share (5.99% yield)
  
• Supertel Hospitality (SPPR) Increases Qtr. Dividend 2% to $0.1275/Share (11.11% yield)
• Tyco International (TYC) Boosts Qtr. Dividend 33% to $0.20/Share (1.98% yield)
• Kraft Foods (KFT) Increases Quarterly Dividend by 7.4% to $0.29/Share (3.54% yield)

After running these companies through my D4L-PreScreen.xls model, none achieved the necessary NPV of MMA Differential to justify a full evaluation. Though they were short of my target, VZ ($2,136) had a positive NPV of MMA Differential and shows future potential.

Disclosure: No position in any of the aforementioned stocks.

(Photo: Steve Woods)

Quantitative Stock Analysis: Updated: 12-22-2008
KFT-Analysis.PDF (alt.1, alt.2)

Share Data:

Click here for full page view.
Click the Dividends tab above to see historical dividend information.

Comments: Updated: 12-22-2008
KFT’s leading global market position has allowed it to build a strong balance sheet and cash flows. The company has used its cash flow to pay increasing dividends and currently has a generous yield in excess of 4%. Due to the relatively stable nature of the company’s end markets, the stock should benefit from investors looking for defensive or lower-risk investments. Risks include execution of internal restructuring, competitive conditions, higher input costs and possible disappointing consumer acceptance of new product introductions.
More…

Other Resources:
Dividends4Life Articles
Yahoo Finance
Google Finance
MSN Recent News