Consumer Goods Attributes

Demand for household and personal care products is generally stable and not affected by changes in the economy or other factors. There are certain things people will continue to purchase no matter how bad the economy gets. If you lose your job, you probably won’t stop bathing, washing your clothes, brushing your teeth or stop buying toilet paper. Given the relatively low price of most consumer goods, consumers often prefer to pay a few pennies more for a name brand that they are confident with.

Raw material costs is a primary driver of profitability, and the larger more established companies are in a better position to negotiate better terms. Growth comes from a growing population and expanding into emerging markets where the people are starting to earn a wage they can not only life on, but begin to buy things we consider necessities.

Consumer Goods Companies

Below are several leading Consumer Goods companies that I follow. The companies selected have a dividend yield in excess of 2.25% and have raised their dividends for at least 5 years (all but one are in excess of 10 years).

McCormick & Company (MKC) | Yield: 2.3% | Growth: 8.3% | Years: 24
McCormick & Company Inc. manufactures, markets and distributes flavor products and other specialty food products to the entire food industry.

J.M. Smucker Company (SJM) | Yield: 2.6% | Growth: 7.6% | Years: 12
J.M. Smucker Co.’s products include coffee, fruit spreads, peanut butter, shortening and oils, ice cream toppings, health and natural foods, and beverages. The Folgers coffee business was acquired in November 2008.

Colgate-Palmolive (CL) | Yield: 2.6% | Growth: 12.5% | Years: 47
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.

Weyco Group, Inc. (WEYS) | Yield: 2.7% | Growth: 15.0% | Years: 29
Weyco Group, Inc. distributes, wholesale & retail, men’s branded footwear in the U.S., Canada, Europe; offers casual footwear, dress shoes and accessories under Florsheim, other brands.

Coca-Cola Company (KO) | Yield: 2.8% | Growth: 7.3% | Years: 48
The Coca-Cola Company is the world’s largest soft drink company, KO also has a sizable fruit juice business.

Bemis Company, Inc. (BMS) | Yield: 2.8% | Growth: 2.2% | Years: 27
Bemis Company Inc. is a leading maker of a broad range of flexible packaging and pressure-sensitive materials.

Pepsico, Inc. (PEP) | Yield: 2.9% | Growth: 6.5% | Years: 38
PepsiCo, Inc. is a major international producer of branded beverage and snack food products.

V.F. Corporation (VFC) | Yield: 3.0% | Growth: 2.1% | Years: 36
V.F. Corp is global apparel company, with leading shares in denim and daypacks. It is transforming itself into a designer and marketer of lifestyle apparel brands.

Procter & Gamble (PG) | Yield: 3.0% | Growth: 7.0% | Years: 54
The Procter & Gamble Company is a leading consumer products company markets household and personal care products in more than 180 countries.

Sonoco Products Co. (SON) | Yield: 3.1% | Growth: 1.9% | Years: 27
Sonoco Products Co. makes paper and plastic packaging products serving various industries and markets in more than 85 countries.

Avon Products, Inc. (AVP) | Yield: 3.1% | Growth: 4.8% | Years: 20
Avon Products Inc. is the world’s leading direct marketer of cosmetics, toiletries, fashion jewelry, and fragrances and has more than 5 million sales representatives worldwide.

The Clorox Company (CLX) | Yield: 3.4% | Growth: 9.3% | Years: 35
The Clorox Company is a diversified producer of household cleaning, grocery and specialty food products and is also a leading producer of natural personal care products.

H.J. Heinz Company (HNZ) | Yield: 3.8% | Growth: 1.9% | Years: 7
The H.J. Heinz Company produces a wide variety of food products worldwide, primarily condiments, convenience meals and snacks.

Kimberly-Clark Co. (KMB) | Yield: 4.1% | Growth: 6.7% | Years: 38
Kimberly Clark Corp. is a global consumer products company that produces tissue, personal care and health care. Its brands include Huggies, Pull-Ups, Kotex, Depend, Kleenex, Scott and Kimberly-Clark.

Leggett & Platt, Inc. (LEG) | Yield: 4.7% | Growth: 3.0% | Years: 38
Leggett & Platt Inc makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets.

Conclusion

The Consumer Goods is the third largest sector in my database of dividend stocks. Of the 198 stocks that I track, it currently is represented by 30 stocks (15%). As noted above this is a very important sector for dividend growth investors. It it brings yield stability and potential growth to an income portfolio. Many income and value portfolios are over-weighted in Consumer Goods, including Warren Buffett’s Berkshire Hathaway (BRK.A) at 42%. Keep the soap and toilet paper coming!

Full Disclosure: Long CL, KO, PEP, PG, CLX, KMB, LEG. See a list of all my income holdings here.

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- Five Stocks With A Low Dividend Payout Ratio

(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.

Related Posts
- To Infinity and Beyond!
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(Photo: Steve Woods)

Start With a High-Quality List of Stocks

If you are looking for a higher-quality dividend growth stock, you have to go where they can be found. For me this is my Stock Ideas page. It consists of:

S&P 500 Dividend Aristocrats: is designed to measure the performance of S&P 500 index constituents that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. These stocks are the best of the best – the blue blood stocks.

Broad Dividend Achievers: is comprised of select US companies with at least ten consecutive years of increasing regular dividends. US companies must be listed on the NYSE, AMEX or NASDAQ. US Companies must have a minimum average daily cash volume of US$500,000 per day for the November and December prior to each Annual Reconstitution Date.

U.S. Dividend Champions: includes companies that had paid higher dividends for at least 25 consecutive years. The list includes some smaller companies not found on the other lists. This list is maintained by The Drip Investing Resource Center and is available on their website in an Excel spreadsheet.

Look For Sustainability

High-yield isn’t free. There is usually a reason one stock’s yield is higher than another and it is normally tied to risk. With all things being equal, the income investor would always select the higher yield stock, but all things are not equal. It is our job to identify what is driving a stocks yield up and determine if we are willing to accept the additional risk. When making this decision some of the things I consider are free cash flow, debt level, business model, among others.

Higher-Yielding Stocks To Consider

Putting it all together, I have identified 11 stocks that yield at least 5% and have grown their dividends for at least 5 years. They are:

Leggett & Platt, Inc. (LEG) makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets.
- 5.16% Yield
- 36.76% Debt To Total Capital
- 57.89% FCF Payout
- 38 Years of Dividend Growth

Urstadt Biddle Properties (UBA) is a real estate investment trust that acquires, owns and manages commercial real estate properties primarily in the northeastern United States.
- 5.17% Yield
- 30.87% Debt To Total Capital
- 58.27% FCF Payout
- 16 Years of Dividend Growth

Hudson City Bancorp Inc. (HCBK) operates over 100 branches in the New York metropolitan area. It caters to high median household income counties and focuses on jumbo mortgage loan funding, largely through time deposits.
- 5.26% Yield
- 72.57% Debt To Total Capital
- 52.23% FCF Payout
- 10 Years of Dividend Growth

Cincinnati Financial Corp. (CINF) markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.
- 5.31% Yield
- 15.05% Debt To Total Capital
- 46.87% FCF Payout
- 50 Years of Dividend Growth

PP&L Corporation (PPL) is a holding company for PPL Utilities and a utility in the U.K.
- 5.53% Yield
- 37.55% Debt To Total Capital
- 99.92% FCF Payout
- 9 Years of Dividend Growth

National Retail Properties, Inc. (NNN) invests in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants.
- 5.74% Yield
- 1.92% Debt To Total Capital
- 82.18% FCF Payout
- 19 Years of Dividend Growth

Verizon Communications Inc. (VZ) offers wireline, wireless and broadband services primarily in the northeastern United States. It acquired MCI Inc in 2006 and has since sold or spun off non-core assets. Alltel was acquired in early 2009.
- 5.94% Yield
- 38.59% Debt To Total Capital
- 31.49% FCF Payout
- 6 Years of Dividend Growth

AT&T Inc. (T) provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.
- 6.02% Yield
- 41.67% Debt To Total Capital
- 61.14% FCF Payout
- 27 Years of Dividend Growth

Suburban Propane Partners LP (SPH) markets propane gas and other refined fuels to residential, commercial, industrial, and agricultural customers.
- 6.08% Yield
- 43.49% Debt To Total Capital
- 88.83% FCF Payout
- 11 Years of Dividend Growth

Kinder Morgan Energy Partners LP (KMP) is one of the largest pipeline master limited partnerships (MLPs) in the U.S.
- 6.14% Yield
- 63.92% Debt To Total Capital
- 76.11% FCF Payout
- 14 Years of Dividend Growth

CenturyLink, Inc. (CTL) acquired larger telecom peer Embarq in a stock deal in July 2009. Combined, the company provides voice service to 6.7 million customers and Internet service to 2.4 million customers in rural towns as well as larger cities such as Las Vegas.
- 6.74% Yield
- 44.56% Debt To Total Capital
- 75.39% FCF Payout
- 37 Years of Dividend Growth

As note earlier, yield comes with a cost. Each of the above stocks carries some level of additional risk higher than the average Aristocrat, Achiever or Champion. Ideally, we will start building our income portfolios years before we need the income, but if that is not possible, diversifying and focusing on higher quality stocks should help reduce our overall portfolio risk.

Full Disclosure: Long LEG, NNN, CTL, T, CINF. See a list of all my income holdings here.

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(Photo Credit)

Dividends Received

Total dividends received during the month were $218.33, consisting of:

• $29.04 The Coca-Cola Company (KO)
• $7.57 Vanguard Intermediate-Term Bond ETF (BIV)
• $11.48 Genuine Parts Company (GPC)
• $14.96 Automatic Data Processing, Inc. (ADP)
• $31.68 Kimberly-Clark Corporation (KMB)
• $27.00 Leggett & Platt, Incorporated (LEG)
• $24.00 Cincinnati Financial Corp. (CINF)
• $38.00 Sysco Corp. (SYY)
• $4.90 PowerShares Emerging Mkt Debt (PCY)
• $29.70 Medtronic, Inc. (MDT)

Dividend Stock Purchases

The following securities were purchased during the month:

• 30 Shares Johnson & Johnson (JNJ) providing $64.80 in annual dividend income
• 50 Shares Harleysville Group Inc. (HGIC) providing $72.00 in annual dividend income
• 58 Shares AT&T, Inc. (T) providing $97.44 in annual dividend income
• 40 Shares Automatic Data Processing, Inc. (ADP) providing $54.44 in annual dividend income

Also, I liquidated my position in Vanguard Intermediate-Term Bond ETF (BIV).

Annualized Dividend Income

Including the above purchases, my annual PCP dividend income is now $2,494.16 at the current dividend rates. This is up $293.84 from last month’s $2,200.32 amount. The PCP has never had a monthly decline in annualized dividend income.

Portfolio Returns

• Month: 2.31%
• Year-to-date: 11.98%
• Life-to-date: 15.30% (annualized)

My PCP holdings are always available by selecting the Holdings option from the menu in the header. The next PCP update will be mid-December.

(Photo: sanja gjenero)

Linked here is a detailed quantitative analysis of Leggett & Platt, Inc. (LEG). Below are some highlights from the above linked analysis:

Company Description: Leggett & Platt Inc makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets.

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

LEG is trading at a discount to only 3.) above. The stock is trading at a 35.0% premium to its calculated fair value of $17.59. LEG did not earn any Stars in this section.

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%

LEG 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%. LEG 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 1939 and has increased its dividend payments for 38 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

LEG earned a Star in this section for its NPV MMA Diff. of the $769. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LEG has. The stock’s current yield of 4.46% exceeds the 3.4% estimated 20-year average MMA rate.

Memberships and Peers: LEG 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: Ethan Allen Interiors (ETH) with a 1.1% yield, Tempur Pedic International Inc (TPX), La-Z-Boy Inc (LZB) and Bassett Furniture Industries Inc (BSET).

Conclusion: LEG did not earn any Stars 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 four Stars. This quantitatively ranks LEG as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $27.20 before LEG’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 38 years of consecutive dividend increases. At that price the stock would yield 3.90%.

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 1.5%. This dividend growth rate is below the 3.0% used in this analysis, thus providing a margin of safety. LEG has a risk rating of 1.50 which classifies it as a low risk stock.

In spite of being a highly cyclical company, LEG has a long history of profitability and generating strong free cash flow. In addition, its low debt to total capital of 38% provides additional flexibility. With its high yield the stock is appealing. However, with the stock trading 35% above my calculated fair value of $17.59, I will wait for a more favorable time to add to my position. 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 LEG (1.0% of my Income Portfolio). See a list of all my income holdings here.

Related Articles:

- HCC Insurance Holdings Inc. (HCC) Dividend Stock Analysis
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How Managed Distribution Policies Work

Since many funds distribute most of their income to shareholders in order to avoid taxation, funds with a managed distribution policy sometimes have cash left over at year-end that needs to be distributed. This is is normally done as a “special” one-time dividend.  However, if the fund generates insufficient cash to cover the dividend, the fund is forced to sell some investments to cover the cash short-fall.  In turn, this portion of the short-fall is treated as a return of capital and the fund now has lower assets to generate future income.

Advantages of Managed Distribution Policies

According to a Gabelli Funds report, managed distribution policies offer several advantages, including:

1. Lower difference between the fund’s market price and its NAV per share.
2. Provides support during periods when the stock market is in a decline.
3. Provides a measurable performance target for the investment adviser.

Below are several high-yield funds from CEFA that have a managed distribution policy (yields as of August 31):

Aberdeen Australia Eqty (IAF)
- Distribution Yield: 9.25%
- Income Yield: 3.41%

BlackRock En Capital&Inc (CII)
- Distribution Yield: 13.50%
- Income Yield: 2.16%

Chartwell Div & Inc (CWF)
- Distribution Yield: 10.62%
- Income Yield: 4.71%

Cornerstone Strat Value (CLM)
- Distribution Yield: 17.09%
- Income Yield: 0.79%

Cornerstone Total Return (CRF)
- Distribution Yield: 16.81%
- Income Yield: 0.00%

Delaware Inv Gl Div & Inc (DGF)
- Distribution Yield: 10.00%
- Income Yield: 4.17%

Gabelli Equity Trust (GAB)
- Distribution Yield: 11.95%
- Income Yield: 1.53%

Gabelli Utility Trust (GUT)
- Distribution Yield: 12.90%
- Income Yield: 3.68%

Zweig Fund (ZF)
- Distribution Yield: 12.47%
- Income Yield: 0.66%

As noted in the Gabelli report,  a managed distribution policy may create confusion regarding the true current yield since the reported yield includes the return of capital portion.  You can see the disparity above between the income yield and the distribution (reported) yield.

If you are looking for a sustainable and growing dividend, you may want to consider some blue-chip dividend stocks such as these with a Free Cash Flow Payout less than 50%:

When investing in a fund with a managed distribution policy, it is important not to confuse predictable cash flows with assured cash flows. A managed distribution policy means that the funds management is making an attempt to smooth out cash flows, but there is no guarantee they will be successful.

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

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Jeremy Siegel certainty thinks so based on his recent Wall Street Journal article The Great American Bond Bubble. In the article, he opined that the bond bubble may have far more serious consequences for investors than the internet and technology bubble that burst some 10 years ago. The Nasdaq has yet to recover those losses as it is currently selling at less than half the peak it reached a decade ago.

The longer a bond’s maturity, the more volatile its price. Thus, long and intermediate bonds stand to lose substantially when rates reverse, as noted in the aforementioned article:

If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield. Is there any doubt that interest rates will rise over the next two decades as the baby boomers retire and the enormous government entitlement programs kick into gear?

Long-Bond Alternatives

Over the next several months I plan to move my bond allocation to those with shorter duration and redeploy excess allocations into quality blue-chip dividend stocks that are yielding in excess of my bond holdings. Consider these dividend stocks that have a current yield in excess of 2.8%:

Let me be clear, I am not predicting the imminent collapse of long-term bonds. As an investor (not a trader), I am not in the prediction business. However, I believe we have reached a point where there is much more to lose than gain by holding long-bonds. Interest rates will eventually rise and for those holding long-term bonds, it will have painful implications.

Full Disclosure: Long PEP, MCD, PG, ADP, JNJ, CVX, KMB, HGIC, LEG, T. See a list of all my income holdings here.

Related Posts
- The 2010 Dividend Aristocrats
- Bogle Still Believes In Buy And Hold
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- Bonds: The Next Bubble to Burst?
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1.) An abrupt or permanent shift in a company’s business model as a result of business conditions.
2.) A dividend yield that is higher than average and/or higher than others in the industry.
3.) Diminishing cash available to pay dividends.

Ultimately, the ability of a company to pay its dividend is determined by its cash position – both cash on its balance sheet and its ability to generate cash flow. Below are several companies that are NOT cutting their dividends, but instead raising them:

BreitBurn Energy (BBEP) explores and develops oil & gas properties in U.S. July 30th the company increased its quarterly distribution 2% to $0.3825/unit. The distribution is payable on August 13, 2010 to the record holders of common units at the close of business on August 9, 2010. The ex-distribution date is August 5, 2010. The yield based on the new payout is 9.40%.

American Water (AWK) provides water, wastewater and other water-related services to residential, commercial, and industrial customers in the United States and Canada. July 30th the company raised its quarterly dividend 5% to $0.22/share. The quarterly dividend is payable on September 1, 2010 to all shareholders of record as of August 18, 2010. The ex-dividend date is August 16, 2010. The yield based on the new payout is 4.08%.

Donaldson Co. (DCI) operates as a worldwide manufacturer of filtration systems and replacement parts. July 30th the company increased its quarterly dividend 4% to $0.125/share. The dividend is payable September 10th to shareholders of record as of August 20, 2010. The ex-dividend date is August 18, 2010. DCI is a Dividend Achiever and has raised its dividend for 23 consecutive years. The yield based on the new payout is 1.07%.

NuStar GP Holdings, LLC (NSH) owns the 2% general partner interest, a 16.7% limited partner interest, and the incentive distribution rights in NuStar Energy L.P. August 2nd the partnership raised its quarterly distribution 2% to $0.46/unit. The distribution is payable on August 18, 2010, to holders of record as of August 6, 2010. The ex-distribution date is August 16, 2010. The yield based on the new payout is 5.98%.

PetMed Express (PETS) markets prescription and non-prescription pet medications and other health products for dogs, cats, and horses directly to the consumer. August 2nd the company raised its quarterly dividend 25% to $0.125/share. The dividend is payable on August 27, 2010, to shareholders of record at the close of business on August 13, 2010. The ex-dividend date is August 11, 2010. The yield based on the new payout is 3.11%.

Herbalife (HLF) sells weight-management, nutritional supplement, and personal care products. August 2nd the company increased its quarterly dividend to $0.25/share. The yield based on the new payout is 1.91%.

W&T Offshore (WTI) is focused on exploring and developing hydrocarbon resources in the Gulf of Mexico, primarily in the deep shelf and deepwater. August 2nd the company raised its quarterly dividend to $0.04/share. The dividend is payable on September 10, 2010, to the shareholders of record on August 20, 2010. The yield based on the new payout is 1.68%.

Steris (STE) develops, manufactures and markets infection prevention, contamination control, microbial reduction, and surgical and critical care support products and services. August 3rd the company increased its quarterly dividend 36% to $0.15/share. The dividend is payable September 21, 2010 to shareholders of record at the close of business on August 24, 2010. The ex-dividend date is August 20, 2010. The yield based on the new payout is 1.88%.

Euroseas (ESEA) provides ocean-going transportation services worldwide. It owns and operates drybulk carriers that transport iron ore, coal, grains, bauxite, phosphate and fertilizers. August 3rd the company raised its quarterly dividend 20% to $0.06/share. The dividend is payable on September 03, 2010 to all shareholders of record as of August 25, 2010. The ex-dividend date is August 23, 2010. The yield based on the new payout is 5.60%.

Nationwide Health Properties (NHP) invests in senior housing facilities, long-term care facilities and medical office buildings. August 3rd the company increased its quarterly dividend 2.2% to $0.46/share. The dividend is payable on September 3, 2010 to stockholders of record on August 20, 2010, with an ex-dividend date of August 18, 2010. The yield based on the new payout is 4.81%.

Broadridge Financial (BR) provides technology-based outsourcing solutions to the financial services industry. August 3rd the REIT raised its quarterly dividend 7% to $0.15/share. The dividend is payable on October 1, 2010, to stockholders of record at the close of business on September 15, 2010. The ex-dividend date is September 13, 2010. The yield based on the new payout is 2.92%.

Atrion Corp. (ATRI) designs, develops, manufactures, markets, sells and distributes various products and components, primarily for the medical and health care industry. August 3rd the company increased its quarterly dividend 16.7% to $0.42/share. The dividend is payable on September 30, 2010 to stockholders of record at the close of business on September 15, 2010. The ex-dividend is September 13, 2010. The yield based on the new payout is 1.68%.

Acme United (ACU) supplies cutting, measuring, and safety products to the school, home, office, and industrial markets in the United States, Canada, Europe, and Asia. August 4th the company raised its quarterly dividend 20% to $0.06/share. The dividend is payable on October 21, 2010 to stockholders of record on the close of business on October 1, 2010, with an ex-dividend date of September 30, 2010. The yield based on the new payout is 2.30%.

Murphy Oil (MUR) has exploration and production interests worldwide, and refining and marketing operations in the U.S. August 4th the company increased its quarterly dividend 10% to $0.275/share. The dividend is payable on Sept. 1 to shareholders of record on August 16. The ex-dividend date is August 12. MUR is a Dividend Achiever and has raised its dividend for 14 consecutive years. The yield based on the new payout is 1.94%.

Leggett & Platt (LEG) makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets. August 4th the company raised its quarterly dividend 3.8% to $0.27/share. The dividend is payable on October 15 to shareholders of record on September 15. The ex-dividend date is September 13. LEG is a Dividend Aristocrat and has raised its dividend for 39 consecutive years. The yield based on the new payout is 5.08%.

Monsanto (MON) is a global provider of agricultural products and integrated solutions for farmers. August 4th the company raised its quarterly dividend 5.7% to $0.28/share. The dividend is payable on October 29, 2010 to shareholders of record on October 8, 2010. The ex-dividend date is October 6, 2010. The yield based on the new payout is 1.88%.

Delphi Financial Group (DFG) provides a diverse portfolio of employee benefit products to customers across the U.S. August 5th the company increased its quarterly dividend 10% to $0.11/share. The dividend is payable on September 1, 2010 to shareholders of record at the close of business on August 18, 2010, with an ex-dividend date of August 16, 2010. The yield based on the new payout is 1.71%.

Dover Corp. (DOV) manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment. August 5th the company raised its quarterly dividend 6% to $0.275/share. The dividend is payable September 15, 2010 to shareholders of record as of August 31, 2010. The ex-dividend date is August 7, 2010. DOV is a Dividend Aristocrat and has raised its dividend for 55 consecutive years. The yield based on the new payout is 2.24%.

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 LEG. See a list of all my income holdings here.

Related Posts
- Dividend Stocks: Confident and Secure
- Increasing Dividend Yield Part VI: Time
- 10 Dividend Stocks With Above Target Returns
- How To Buy Dividend Stocks At The Bottom
- The 2010 Dividend Stock Ideas List

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Years Of Consecutive Dividend Increases

Inertia is powerful force. Once a company has established a track record of growing its dividend over the decades and developed a shareholder base that expects higher dividends each year, it becomes increasing difficult for management to cut or fail to raise their dividend. No CEO of this type of company wants a dividend cut to occur on his or her watch. There are precious few Dividend Aristocrats remaining and those left enjoy their elite status.

Strong Financial Condition

Dividends are paid with cash, not earnings. The distinction is subtle, but very real. In its pursuit of theoretical perfection, the accounting profession has adulterated the financial statements to the point that it has become very difficult for non-accountants to interpret them. For example, 2009 was a tough year for Nucor (NUE). Its consolidated statement of earnings showed a loss of $237 million, down from 2008′s earnings of $1.8 billion. This decrease in earnings of $2 billion looks devastating until you consider flip over to the consolidated statements of cash flows and realize NUE’s management ran the business to maximize cash generation. The $2 billion decrease in earnings only equated to $688 million dollar decrease in free cash flow and while earnings were negative, free cash flow remained positive at $792 million, more than enough to cover the $443 million dividend payments.

Consider another example. In 2009 Eli Lilly’s (LLY) net earnings improved $6.4 billion, but its free cash flow decreased $2.8 billion. This oddity was primarily the result of how in-process research and development was accounted for. Here is an excerpt from their 2009 10-k describing the accounting:

Most of these acquisitions included IPR&D, which represented compounds, new indications, or line extensions under development that had not yet achieved regulatory approval for marketing. There are several methods that can be used to determine the estimated fair value of the IPR&D acquired in a business combination. We utilized the “income method”, which applies a probability weighting to the estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each project independently. Pursuant to the existing rules, these acquired IPR&D intangible assets totaling $4.71 billion and $340.5 million in 2008 and 2007, respectively, were expensed immediately subsequent to the acquisition because the products had no alternative future use. The ongoing expenses with respect to each of these products in development are not material to our total research and development expense currently and are not expected to be material to our total research and development expense on an annual basis in the future.

In effect LLY realized a $4.7 billion dollar non-cash charge in 2008, which was an add-back to operating cash flow. There was no similar charge in 2009, thus the substantial increase in earnings.

When evaluating a company’s financial you must also consider competing uses for the free cash flow generated. Many companies generate significant free cash flow, but often that cash is already spoken for in the form of debt obligations. One of the key metrics I look for when evaluating a company is a debt to total capital ratio of 45% or less.

9 Stocks With a Sustainable Dividend

Using my D4L-Data spreadsheet to screen the 170+ stocks that I follow, I limited my search to stocks with the following characteristics:

- Years of consecutive dividend increases > 30 years
- Yield > 3.0%
- Debt to total capital < 45%
- Free Cash Flow Payout < 60%

Below are several stocks that meet the above criteria:

Bonus: Look For A Favorable Industry

Some industries are more stable than others. When the economy turns down and we are concerned about our job, we may discontinue our pest control or lawn service, but we will likely not stop taking our blood pressure medicine. Non-cyclical industries typically include pharmaceuticals,  utilities, defense and certain consumer goods. A company’s ability to grow its dividend is directly related to its ability to grow free cash flow.

Full Disclosure: Long ABT, ADP, GPC, JNJ, LEG, LLY, NUE, NWN. See a list of all my income holdings here.

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Linked here is a detailed quantitative analysis of Leggett & Platt Inc. (LEG). Below are some highlights from the above linked analysis:

Company Description: Leggett & Platt Inc makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets.

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

LEG is trading at a discount to only 3.) above. Since LEG’s tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 62.8% premium to its calculated fair value of $13.08. LEG did not earn any Stars in this section.

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%

LEG 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%. LEG 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 1939 and has increased its dividend payments for 38 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

LEG earned a Star in this section for its NPV MMA Diff. of the $563. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LEG has. The stock’s current yield of 4.88% exceeds the 3.98% estimated 20-year average MMA rate.

Other: LEG is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.

Conclusion: LEG did not earn any Stars 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 four Stars. This quantitatively ranks LEG as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $21.97 before LEG’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 38 years of consecutive dividend increases. At that price the stock would yield 4.73%.

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 1.6%. This dividend growth rate is less than the 2.0% used in this analysis, thus providing a margin of safety. LEG has a risk rating of 1.50 which classifies it as a low risk stock.

A sign of a well managed company is the ability to increase cash flow in the face of falling sales and earnings. LEG’s sales and earnings peaked in 2006. However, free cash flow per share has doubled since that time.  2010 should not be any different with S&P forcasting LEG’s customer markets recovering late this year and moving to positive sales growth. Earlier this month I initiated position in LEG in spite of the fact it was trading well in excess of my $17.94 fair value price. Since then, LEG has appreciated an additional 5%. 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 LEG (1.2% of my Income Portfolio). See a list of all my income holdings here.