Dividends Value » MCD

15 Dividend Stocks With A 15% Yield In 15 Years *

D4L — Wed, 13 Apr 2011 07:30:02 +0000

“I skate to where the puck is going to be, not where it has been.”
- Wayne Gretzky

I know very little about hockey, but I have always loved this quote. It can be applied to so many things in life, including investing. Just as Gretzky has a vision as to where the puck is going, investors need to have a similar vision, and not get caught up on short-sighted distractions. Investing in dividend growth stocks requires a long-term vision. It is easy to run a screen and find stocks that are paying a 15% yield today; but how long will they be able to sustain it? Instead you may want to skate to where the future 15% yielders are going to be. To do that, here are some things you need to know…

Tracking Yield On Cost

Yield-on-cost (YOC) is simply Current Annual Dividend dividend by Original Cost Per Share. YOC not a substitute for calculating an internal rate of return (IRR). The IRR calculation takes into account both capital appreciation and the timing of cash flows (purchases, sells and dividends). However, as a dividend growth investor, my primary focus is on dividend growth and since my desired holding period is forever, capital appreciation is little more than an interesting side note. YOC is much better suited for tracking dividend growth since it is individually tied to a stock and takes into account all the variations of growth rates over time, along with the timing of purchases. Also, it is useful when trying to explain to our income investor brethren why we chose the stock yielding 3% over ‘Amalgamated Risk’ at 8%.

My D4L-Data model includes projections of YOC after 5, 10, 15 and 20 years. These projections are derived by growing the current yield using the dividend growth rate. As for the dividend growth rate, I use the minimum of the 1, 3, 5, 7 or 10 year compound annual growth rates; or 15% if in every consecutive 4-year period dividends grew on average in excess of 15%.

15 Dividend Stocks With A 15% Yield In 15 Years

Sorting the stocks in my D4L-Data model by their 15 Year YOC and throwing out some bad apples, we are left with these 15 stocks that are projected to have a 15% YOC in 15 years:

T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund complexes in the United States.
Yield: 1.8% | Growth: 15.0% | 15 Year YOC: 15.0%

Cardinal Health Inc. (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.
Yield: 1.8% | Growth: 15.0% | 15 Year YOC: 15.0%

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.
Yield: 2.4% | Growth: 13.2% | 15 Year YOC: 15.6%

Praxair Inc. (PX) is the largest producer of industrial gases in North and South America, and the second largest worldwide. It also provides ceramic and metallic coatings.
Yield: 2.0% | Growth: 15.0% | 15 Year YOC: 15.9%

Aflac Incorporated (AFL) provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at worksites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.
Yield: 2.3% | Growth: 15.0% | 15 Year YOC: 18.2%

Stryker Corp. (SYK) makes specialty surgical and medical products such as orthopedic implants, endoscopic items, and hospital beds.
Yield: 1.2% | Growth: 20.0% | 15 Year YOC: 18.6%

Casey’s General Stores Inc. (CASY) has over 1,500 convenience stores in the Midwest, selling food, beverage, health and automotive products.
Yield: 1.3% | Growth: 19.8% | 15 Year YOC: 19.4%

Weyco Group, Inc. (WEYS) distributes, wholesale & retail, men’s branded footwear in the U.S., Canada, Europe; it offers casual footwear, dress shoes and accessories under Florsheim, other brands.
Yield: 2.6% | Growth: 15.0% | 15 Year YOC: 21.0%

Walgreen Co. (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.
Yield: 1.7% | Growth: 18.5% | 15 Year YOC: 21.7%

Nucor Corporation (NUE) is the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.
Yield: 3.1% | Growth: 15.0% | 15 Year YOC: 25.5%

McDonald’s Corporation (MCD) is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries.
Yield: 3.2% | Growth: 15.0% | 15 Year YOC: 26.1%

ConocoPhillips Co. (COP) is the fourth largest integrated oil company in the world, and the second largest in the U.S.
Yield: 3.3% | Growth: 15.0% | 15 Year YOC: 26.6%

People’s United Financial Inc. (PBCT) provides a full range of banking and financial service products to individuals, corporations and municipal customers in the U.S. Northeast.
Yield: 6.0% | Growth: 11.3% | 15 Year YOC: 30.0%

Southside Bancshares Inc. (SBSI) primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations.
Yield: 3.7% | Growth: 16.6% | 15 Year YOC: 36.9%

Old Republic Intl (ORI) writes property and liability, mortgage guaranty, title and life, and disability insurance.
Yield: 5.4% | Growth: 15.0% | 15 Year YOC: 43.6%

One key component of current yield is risk. If Treasuries (risk free) were paying 7%, 8% or 9%, many income investors and a significant number of dividend growth investors would divert a portion of their portfolios to them.

You will note that most of the above stocks are yielding under 4%. It is also important to note that I do not believe that all the above stocks will achieve their 15 year YOC. In much the same way high-yielding stocks often end up cutting their dividends, many of the above stocks will end up cutting their dividend growth rate. Put another way, there is risk associated low-yield high-dividend-growth stocks. However, for the high dividend growth stocks that perform well over the next 15 years, the rewards are potentially much higher than those of a high-yield, low growth stock.

Full Disclosure: Long OMI, NUE, MCD, COP. See a list of all my income holdings here.

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Don’t Touch These 5 Dividend Stocks! *

D4L — Wed, 23 Mar 2011 07:30:23 +0000

Has someone near and dear to you responded with a ‘I was only trying to help’ after royally messing something up? Have you ever tinkered with a computer, smart phone or something else only to learn it no longer works and you are not sure how to fix it? Our dividend stock investments can suffer the same fate if we provide them with too much of the wrong type of attention. Here are some things to remember to keep your income investments on the straight and narrow…

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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List of 195 Dividend Stocks Every Income Investor Should Know About *

D4L — Wed, 09 Mar 2011 07:30:16 +0000

In 2009, I introduced the Stock Ideas list and it has proven to be immensely popular. The list consists of Dividend Aristocrats, US Broad Dividend Achievers and U.S. Dividend Champions. Duplications in the above lists are eliminated and stocks are crossed out when I learn that they have either cut their dividend or fail to raise it. Here is some information on each of the constituent lists and some highlights on this year’s changes:

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:

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:

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:

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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10 Stocks Expected to Grow Their Dividends in 2011 *

D4L — Fri, 31 Dec 2010 07:30:47 +0000

In this space we normally look at companies that have recently raised their dividends. However, as the year draws to a close there were very few companies of note increasing their dividends this week. With that, I thought it would be interesting to see who were the big dividend raisers in 2010 and what we might see in 2011. Here are ten companies for your consideration:

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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Dividend Stocks vs. a Safe Distribution Rate *

D4L — Wed, 29 Dec 2010 07:30:39 +0000

One of the most interesting questions that often comes up is “How much can you safely withdraw each year from your retirement portfolio?” In 1995, Peter Lynch wrote that a 7% annual withdrawal rate would be prudent for an all-stock portfolio. He later retracted his analysis when financial columnist Scott Burns proved that a 7% withdrawal rate could put you back into the work force just to make ends meet.

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.

Sources: Dallas News, Retire Early, passionsaving.com

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McDonald’s Corporation (MCD) Dividend Stock Analysis *

D4L — Mon, 20 Dec 2010 07:30:30 +0000

This article originally appeared on The DIV-Net December 13, 2010.

Linked here is a detailed quantitative analysis of McDonald’s Corporation (MCD). Below are some highlights from the above linked analysis:

Company Description: McDonald’s Corporation is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries.

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

MCD is trading at a discount to only 2.) above. The stock is trading at a 14.0% discount to its calculated fair value of $90.22. MCD 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%

MCD earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. MCD earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 34 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

MCD earned a Star in this section for its NPV MMA Diff. of the $7,077. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as MCD has. If MCD grows its dividend at 15.0% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.4%. MCD earned a check for the Key Metric ‘Years to >MMA’ since its 2 years is less than the 5 year target.

Memberships and Peers: MCD 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: Yum! Brands, Inc. (YUM) with a 2.0% yield, Starbucks Corp. (SBUX) with a 1.6% yield and Wendy’s/Arby’s Group, Inc. (WEN) with a 1.7% yield.

Conclusion: MCD earned one Star in the Fair Value section, earned two 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 MCD as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $205.31 before MCD’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 34 years of consecutive dividend increases. At that price the stock would yield 1.10%.

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 5.9%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a significant margin of safety. MCD has a risk rating of 1.50 which classifies it as a low risk stock.

MCD is the dominant brand in the global fast food industry. In addition, the company enjoys unrivaled scale advantages and substantial international growth opportunities. MCD notes on their website that since going public in 1965, it has paid twelve stock splits and an investment of $2,250 in 100 shares at that time, grew to 74,360 shares worth over $4.6 million as of year-end market close on December 31, 2009. This stock continues to be one of the great success stories for dividend growth investors and is found in virtually all dividend income based portfolios. I will continue to add to my position in MCD when it is trading below my buy price, currently $90.22, and as my allocation allows. 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 MCD (3.9% of my Income Portfolio). See a list of all my income holdings here.

Related Articles:

- Owens & Minor, Inc. (OMI) Dividend Stock Analysis
- Pepsico, Inc. (PEP) Dividend Stock Analysis
- The Procter & Gamble Company (PG) Dividend Stock Analysis
- Kimberly-Clark Co. (KMB) Dividend Stock Analysis
- More Stock Analysis

The 2011 Dividend Aristocrats *

D4L — Wed, 15 Dec 2010 07:30:21 +0000

The S&P 500 Dividend Aristocrats is the most prestigious list of dividend stocks. The Dividend Aristocrats index is designed to measure the performance of S&P 500 constituents that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. This index is a member of the S&P Dividend Aristocrats index series.

Dividend Aristocrats constituents exhibit the following characteristics:

- 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.

(Photo Credit)

6 Dividend Stocks That Will Make You Smile *

D4L — Wed, 24 Nov 2010 07:30:27 +0000

At the end of each month I do an evaluation to determine which dividend stocks I will purchase in the following month. There is always a warm feeling of joy that comes over me when when I buy one of my “favorite” dividend growth stocks. These are stocks that have earned a special place in my heart as a result of performing well over the decades and they are generally considered among the best managed companies in the world. Here are the six stocks that make me smile when it is time to buy…

Abbott Laboratiores (ABT) unlike many big pharmaceutical companies ABT is highly diversified. Its products include pharmaceuticals, medical devices, nutritional products and an emerging vascular group. This diversity provides ABT with a very wide customer base mitigating the company’s dependence on the pharmaceutical pipeline. The company has increased its dividend for 38 consecutive years, with a 10% increase last February. The company ended 2009 with $9.9 billion dollars of cash on its balance sheet and $3.9 billion at the end of Q3/2010, both more than enough to cover its annual $2.5 billion (TTM) dividend. ABT is a cash machine generating $7.3 billion dollars of free cash flow over the last 12 months. At 48%, its debt to total capital is slightly higher than the 45% I look for, but with the company’s ability to generate cash, this does not cause me concern. ABT is currently yielding 3.5%.

Johnson & Johnson (JNJ) is another well diversified health care company. The company is the world’s second largest manufacturer of health care products holding a significant shares in the consumer and pharmaceutical markets. In addition, JNJ is the world’s largest developer and manufacturer of medical treatment and diagnostic devices. Near-term results have been affected by patent losses on Risperdal and Topamax. The company ended 2009 with over $19 billion dollars of cash on the balance sheet – nearly $5 billion more than its $14.5 total debt. Generating over $15 billion of free cash flow over the last 12 months, JNJ is a cash generating machine. JNJ has increased its dividend for 48 years and its stock is currently yielding 3.4%.

Coca-Cola Company (KO) is the world’s largest manufacturer, distributor, and marketer of nonalcoholic beverages concentrates and syrups with over 400 brands. In addition, the company also sells a variety of non-carbonated drinks such as water, juices, and teas. Its core brands include household names such as Coca-Cola, Sprite, Dasani, Powerade and Minute Maid. An increased consumer preference for healthier drinks in its large North American market has resulted in slowing growth rates for sales of carbonated soft drinks. However, with almost three fourths of the company’s revenues generated outside of the United States and its unparalleled brand of the Coca-Cola trademark, KO will continue to be a dominate player in the world market. KO ended 2009 with $12.9 billion of debt and $9.6 billion of cash on its balance sheet. In the last 12 months it generated over $7 billion in free cash flow, more than enough to cover its $4.0 billion dividend. KO has increased its dividend for 48 years and its stock is currently yielding 2.8%.

McDonald’s Corporation (MCD) is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries. It generates income through company-owned restaurants, franchise royalties and licensing pacts. Its unrivaled scale advantages, strong brand and international growth opportunities more than offset challenges from food costs, competitive discounting, and exchange rate volatility. At the end of 2009, MCD had $2.5 billion of cash and $11.4 billion on its balance sheet. In the last twelve months the company generated over $4 billion dollars of free cash flow and paid out nearly $2.4 billion dollars in dividends. MCD has increased its dividend for 34 years and its stock is currently yielding 3.1%.

Procter & Gamble Co. (PG) is the world’s largest producer of household and personal products by revenue, with its products reaching 4 billion people worldwide in more than 180 countries. The company’s size provides tremendous benefits in terms of distribution, brand reach and scale with suppliers. PG’s major competitors include The Clorox Company (CLX), Colgate-Palmolive Company (CL), Energizer Holdings (ENR) and Kimberly-Clark (KMB). PG ended its fiscal year on June 30, 2010 with $29.8 billion in debt and $2.9 billion in cash. Over the last twelve months the company generated $10.9 billion of free cash flow. PG has increased its dividend for an astonishing 54 years and its stock is currently yielding 3.0%.

Wal-Mart Stores Inc. (WMT) is the world’s largest retailer and grocery chain by sales. The firm is divided into three segments: Wal-Mart U.S. (63% of revenue, 3,700 stores), international (24%, 4,100), and Sam’s Club (12%, 600). As a result of its size and buying power, Wal-Mart can buy its products at rock-bottom prices, exchanging high purchase volumes for low cost while passing the savings onto its customers. Many suppliers give in to Wal-Mart’s pressure because they depend on the discount retailer for a majority of their sales. International expansion should continue to fuel WMT’s growth. With $37.8 billion of debt and $7.9 billion of cash on its January 2010 year end balance sheet, the company is well-positioned for future growth. Generating $14.4 billion dollars of free cash flow, WMT’s $4.3 billion dividend is covered more than three times over. WMT has increased its dividend for 36 years and its stock is currently yielding 2.2%.

We should never never fall in love with a stock, for one day you may have to send it packing. However, there is nothing wrong with admiring the long-term execution of well-run companies, and enjoying the fruits of their labor.

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

(Photo Credit)

Dividend Stocks vs. Dividend ETFs *

D4L — Wed, 17 Nov 2010 07:30:40 +0000

In 1993, State Street Global Advisors launched the first exchange-traded fund (ETF). Now there are literally hundreds of ETFs out there covering sectors, countries, popular indexes and various strategies, including income investing. A frequent question that I get is ‘Why do you invest in individual dividend stocks instead of income-based ETFs?’ On the surface this seems like a reasonable question since most ETFs are indexed, tax efficient, easily traded, passive and have low expense ratios. However, as we look beyond the ETFs luster, there are several significant reasons why many dividend investors prefer owning individual stocks…

I Tax Efficiency

ETFs tax efficiency is only in comparison to traditional mutual funds. Consider, when you redeem your mutual fund shares and the fund does not have cash on hand, it must sell some of the underlying securities for cash to pay you. The sale will generate a taxable event (positive of negative) for all shareholders, even if you didn’t redeem any shares. Since an ETF’s can be sold on the open market its liquidity is not tied to selling the underlying investments; thus, not creating a taxable event to those that own the fund, but didn’t sell. Individual dividend stocks are exactly the same – no taxable event until you sell your shares.

II Low Expenses

Again, compared to traditional mutual funds, ETFs generally have lower management fees. However, if you manage your own portfolio of dividend stock, there are no management fees.

III. Income Volatility

As an income investor, my primary goal is to create an ever-0increasing income stream from my income portfolio. To do this, I look for stocks with a long track record of increasing their dividends and the ability to sustain the dividend increases in the future. Indexed ETFs are forced to buy the bad stocks along with the good stocks. This will inherently increase the volatility of the fund’s dividend payments as underlying companies that are poor performers are forced to cut or eliminate their dividends.

IV. Performance

Not surprising, individually selected dividend growth stocks will out perform an indexed ETF over the long-term. Again, since Indexed ETFs are forced to buy the bad stocks along with the good stocks often the yield and the performance suffers.

Consider the SPDR S&P Dividend ETF (SDY). The fund uses a passive management strategy designed to track the price and yield performance of the S&P High Yield Dividend Aristocrats index. Dividend aristocrats are generally considered the best blue-chip, large-cap, dividend growth stocks available. To be a constituent of this list the company must be a member of the S&P 500 and have raised its dividend for 25 consecutive years. See SDY’s performance data below, along with some popular dividend growth stocks:

SPDR S&P Dividend ETF (SDY)
- Current Yield: 3.4%
- Annual Dividends: 2009 $1.73, 2008 $2.21, 2007 $1.97
- Dividend Adjusted Return: 2009 19.2%, 2008 (24.0%), 2007 (6.7%)
- Value of $100 invested in 2007: $84.52

Johnson & Johnson (JNJ)
- Current Yield: 3.4%
- Annual Dividends: 2009 $1.93, 2008 $1.795, 2007 $1.62
- Dividend Adjusted Return: 2009 11.3%, 2008 (7.7%), 2007 3.61%
- Value of $100 invested in 2007: $106.44

The Coca-Cola Company (KO)
- Current Yield: 2.8%
- Annual Dividends: 2009 $1.64, 2008 $1.52, 2007 $1.36
- Dividend Adjusted Return: 2009 30.3%, 2008 (24.1%), 2007 30.4%
- Value of $100 invested in 2007: $128.96

Procter & Gamble Co. (PG)
- Current Yield: 3.0%
- Annual Dividends: 2009 $1.802, 2008 $1.64, 2007 $1.45
- Dividend Adjusted Return: 2009 1.2%, 2008 (13.8%), 2007 16.6%
- Value of $100 invested in 2007: $101.72

McDonald’s Corp. (MCD)
- Current Yield: 3.1%
- Annual Dividends: 2009 $2.05, 2008 $1.625, 2007 $1.50
- Dividend Adjusted Return: 2009 4.0%, 2008 8.6%, 2007 36.38%
- Value of $100 invested in 2007: $154.03

Wal-Mart Stores Inc. (WMT)
- Current Yield: 2.2%
- Annual Dividends: 2009 $0.952, 2008 $0.88, 2007 $0.67
- Dividend Adjusted Return: 2009 (2.6%), 2008 20.0%, 2007 4.9%
- Value of $100 invested in 2007: $129.15

Conclusion

Good dividend stocks raise their dividends each and every year. SDY, an ETF tracking a subset of the Dividend Aristocrats, lowered its dividend in 2009 to a level below its 2007 dividend. It also suffered losses in two of the three years listed. Granted the last 3 full years is a short period of time to look at, but it was one of the most volatile in the market’s history. I want investments that will not only meet my goals in good times, but also in the bad. ETFs have their place in my overall portfolio as strategic investments, but not a prominent place in my income portfolio.

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

(Photo: Steve Woods)

Pocket Change Portfolio – September 2010 *

D4L — Sat, 16 Oct 2010 07:30:34 +0000

The Pocket Change Portfolio (PCP) was first introduced on September 13, 2008 as a real money dividend income portfolio funded by the “pocket change” earned from my various online endeavors. Each month I report on the portfolio’s progress and update its holdings.

Dividends Received

Total dividends received during the month were $166.53, consisting of:

$24.81 Wal-Mart (WMT)
$7.78 Vanguard Intermediate-Term Bond ETF (BIV)
$12.01 Vanguard Long-Term Bond ETF (BLV)
$16.15 United Technologies Corp. (UTX)
$8.71 Emerson Electric Co. (EMR)
$18.36 Johnson & Johnson (JNJ)
$15.47 Consolidated Edison Inc. (ED)
$4.94 PowerShares Emerging Mkt Debt (PCY)
$18.70 McDonald’s Corp. (MCD)
$39.60 Harleysville Group Inc. (HGIC)

Dividend Stock Purchases

The following securities were purchased during the month:

34 Shares Colgate-Palmolive Co. (CL) providing $72.08 in annual dividend income
30 Shares Abbott Laboratories (ABT) providing $59.84 in annual dividend income
132 Shares Medtronic, Inc. (MDT) providing $118.80 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 $2,200.32 at the current dividend rates. This is up $13.66 from last month’s $2,186.66 amount. The PCP has never had a monthly decline in annualized dividend income.

Portfolio Returns

Month: 4.57%
Year-to-date: 8.49%
Life-to-date: 13.00% (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-November.

(Photo: sanja gjenero)

The Coca-Cola Company