Company Description: Medtronic Inc.is a global medical device manufacturer has leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management, and other medical markets.

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

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

MDT is trading at a discount to 1.) and 3.) above. The stock is trading at a slight premium to its calculated fair value of $37.99. MDT 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%

MDT earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1977 and has increased its dividend payments for 33 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

MDT earned a Star in this section for its NPV MMA Diff. of the $549. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as MDT has. If MDT grows its dividend at 9.4% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Memberships and Peers: MDT is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Becton, Dickinson and Company (BDX) with a 2.1% yield, Baxter International Inc. (BAX) with a 2.4% yield and CR Bard Inc. (BCR) with a 0.7% yield.

Conclusion: MDT did not earn any Stars 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 three Stars. This quantitatively ranks MDT as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $40.23 before MDT’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 33 years of consecutive dividend increases. At that price the stock would yield 2.24%.

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 9.2%. This dividend growth rate is slightly below the 9.2% used in this analysis, thus providing a small margin of safety. MDT has a risk rating of 1.00 which classifies it as a Low risk stock.

MDT owns a diversified portfolio with a strategy to develop products for a wide range of chronic diseases. Although it is exposed to the highly competitive areas of the medical equipment markets, MDT enjoys many competitive advantages including scale (operations and sales), product breadth and financial strength. The stock was a 5-Star buy back in September 2010 when it was last reviewed. It was trading in the low to med-30′s at that time. Since then, the price has seen a steady increase to where it is now trading at a slight premium to my fair value price of $37.99. I will continue to buy in moderation on dips 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 MDT (3.8% of my Income Portfolio). See a list of all my income holdings here.

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Linked here is a detailed quantitative analysis of Becton, Dickinson and Co. (BDX). Below are some highlights from the above linked analysis:

Company Description: Becton, Dickinson and Co provides a wide range of medical devices and diagnostic products used in hospitals, doctors’ offices, research labs and other settings.

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

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

BDX is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a slight discount to its calculated fair value of $86.55. BDX 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%

BDX earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1926 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

BDX earned a Star in this section for its NPV MMA Diff. of the $549. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as BDX has. If BDX grows its dividend at 10.8% per year, it will take 8 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Memberships and Peers: BDX is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Abbott Laboratories (ABT) with a 3.7% yield, Baxter International Inc. (BAX) with a 2.5% yield and Medtronic, Inc. (MDT) with a 2.4% yield.

Conclusion: BDX 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 BDX as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $85.23 before BDX’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 1.92%.

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 10.6%. This dividend growth rate is slightly below the 10.8% used in this analysis, thus providing only a minimal margin of safety. BDX has a risk rating of 1.00 which classifies it as a low risk stock.

Operating in the competitive medical equipment market, BDX generally has enjoyed more favorable demand and pricing than others in the medical equipment industry. The company’s needle and surgical business has provided investors with robust returns for years. As a result of BDX’s innovation and judicial deployment of capital, its business continued to prosper during the economic downturn. The stock is favorably priced below my buy price of $86.55. However, I hesitate to buy with its yield below 2.0%. For additional information, including the stock’s dividend history, please refer to its data page.

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

Full Disclosure: At the time of this writing, I held no position in BDX (0.0% of my Income Portfolio). I held positions in ABT and MDT. See a list of all my income holdings here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(Photo Credit)

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.

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Sources: Dallas News, Retire Early, passionsaving.com

(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)

The Allocation Dilemma

If your entire portfolio consists of income-based dividend stocks it would be very easy to end up over allocated in certain sectors.  Of the nearly 200 companies that I track, 15% of them are in the Consumer Goods sector. Furthermore, some of most well-known and very best dividend growth stocks are in this sector, including: Colgate-Palmolive (CL), Coca-Cola Company (KO), Pepsico, Inc. (PEP), Procter & Gamble (PG) and Kimberly-Clark Co. (KMB).

The relatively high yields of the Financial Services sector also make it appealing to dividend growth investors. The Financial Services sector is well represented in the stocks that I track, accounting for nearly 17%.With most banks falling out of favor, many higher-yielding insurance companies have filled the void, including: Erie Indemnity Co. (ERIE), Harleysville Group Inc. (HGIC), Cincinnati Financial Corp. (CINF) and  Mercury General Corp. (MCY).

In addition, the Healthcare sector produces several desirable dividend growth stock. These include: Abbott Laboratories (ABT), Cardinal Health, Inc. (CAH), Johnson & Johnson (JNJ) and Medtronic Inc. (MDT).

Judge Allocation Based On Your Total Portfolio

Instead of trying to preserve my allocation at the individual portfolio level (income, 401(k), IRA, etc.), I measuring asset allocation across my entire portfolio. You can’t truly determine your overall risk, unless you consider your entire portfolio. The first time I calculated my allocation across all my holdings, I was surprised at the outcome. Some of the areas I thought would be over-allocated were not, while other areas came up short.

Needless to say, the first time you look at allocation across your portfolio, there is fair amount of set-up work.  I have made available my DFL-Calc-Asset-Allocation.xls Excel spreadsheet to those interested in short-cutting some of the effort.

Set Limits On Individual Holdings

In addition to my overall asset allocation, I have set limits on individual stocks, Exchange-Traded-Funds (ETFs) and Closed-End Funds (CEFs). In setting these limits, you have to ask yourself, ‘What is the most I would be willing to lose, if a company went belly-up over night?’ For me and my risk tolerance, 5% was the amount I was comfortable with. I doubled the amount to 10% for funds (ETFs and CEFs) since they are invested in many different stocks. I did limit exchange traded notes to 5%, since your risk is effectively in the company issuing the security.

Sector-Basted ETFs

As a result of being over-allocated in two sectors and close on others, I began to investigate how I could target specific sectors where I was significantly under-allocated. I looked at two fund companies that offered sector-based ETFs, iShares and Vanguard. Their offerings were similar, and included: Consumer, Energy, Financial, Healthcare, Industrials, Materials, Real Estate, Technology, Telecomm and Utilities. In many instances the funds tracked the same indexes. As you might suspect, the Vanguard fund expenses are about half of the iShares funds. Most of the Vanguard sector ETFs charge a 0.25% management fee.

For some time, I have looked for appropriate income investments in the Utilities and Real Estate sectors. Unfortunately, they have been hard to come by. The Vanguard Sector ETFs just may help me increase my allocation in these areas, and few others. Here are three that I am currently evaluating:

Vanguard Utilities ETF (VPU) | Expenses: 0.25% | Yield:  3.76% : The fund employs a passive management investment approach designed to track the performance of the MSCI U.S. Investable Market Utilities 25/50 index. This index consists of all capitalization companies within the utilities sector. The sector includes electric, gas, and water utility companies, as well as companies that operate as independent producers and/or distributors of power. The sector includes both nuclear and nonnuclear facilities.

Vanguard REIT Index ETF (VNQ) | Expenses: 0.13% | Yield:  3.60% : The fund employs a passive management investment approach designed to track the performance of the MSCI® US REIT index. The index is composed of stocks of publicly traded equity real estate investment trusts (known as REITs).

Vanguard Telecom Services ETF (VOX) | Expenses: 0.25% | Yield:  2.61%:  The fund employs a passive management investment approach to track the performance of the MSCI U.S. Investable Market Telecommunication Services 25/50 index. The index is made up of stocks of large, medium-size, and small U.S. companies within the telecommunication services sector. The sector includes companies that provide communication services primarily through fixed-line, cellular, wireless, high-bandwidth, and/or fiber-optic cable networks.

In the past I owned VNQ in my income portfolio. After a period of time, I determined its erratic dividends were not appropriate for my income portfolio. After a quick look at VPU and VOX, I found that their dividends were not consistent and thus also not appropriate for my income portfolio. However, I will continue to give consideration to holding these ETFs outside my income portfolio – not as income investments but for allocation purposes.

Full Disclosure: Long CL, KO, PEP, PG, KMB, HGIC, CINF, ABT, JNJ, MDT. See a list of all my income holdings here.

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(Photo Credit)

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

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

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

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

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(Photo Credit)

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)

Have A Plan

If you suddenly found yourself unemployed and were unable to immediately replace the lost income, do you know what you would do? I suspect there are few families that have given a lot of thought to this. It is like buying a cemetery plot – it is not high on the list to things to consider. The drive home after receiving a pink slip is too late to start planning; at this point you should be in a position to start executing your plan.

Prepare to Execute Your Plan

Schools and businesses have fire drills for a reason. We all know we need to get out of a burning building, but do we really know how until we practice. Recently, my employer had a fire drill and too many people were going down the stairs on one side of the building and this created a traffic jam. If it had been a real fire many would have lost their lives.

In the same regard, it would make sense to take your plan and play “what if I lost my job today. ” You need to understand the answers to these questions: How long can I go without finding a replacement job? Will my plan permanently damage my financial position? What adverse effect will this have on my family (kids’ college, braces, house payments, etc.)? What is the worse case scenario? How will we fare in the worse case scenario?

Develop Alternative Income Streams

One of the best ways to ensure financial success is to develop alternative income steams. If one stream dries up, you have others to fall back on. We all have things we are good at, most can be packaged in a way to provide alternative income. Again, this is not something you can quickly develop the day you are terminated.

Dividend Growth Stocks

One of the best alternative income sources are dividend growth stocks. Just like a regular job they can provide you a steady AND growing income. With advance planning, your income portfolio can become the foundation of your contingency plan. Here are several dividend stalwarts to consider when building your income portfolio:

General Dynamics (GD) is the world’s fifth largest military contractor and also one of the world’s biggest makers of corporate jets. The company has paid dividends since 1979 and has increased them the last 19 years. Current yield: 2.61%

Colgate-Palmolive Company (CL) is a consumer products company, whose products are marketed throughout the world. Colgate’s Oral Care products include toothpaste, toothbrushes, oral rinses, dental floss and pharmaceutical products. The company has paid dividends since 1895 and has increased them the last 47 years. Current yield: 2.64%

Medtronic Inc. (MDT) is a global medical device manufacturer has leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets. The company has paid dividends since 1977 and has increased them the last 33 years. Current yield: 2.68%

The Coca-Cola Company (KO) is the world’s largest soft drink company. It engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates, fruit juices and syrups worldwide. The company has paid dividends since 1893 and has increased them the last 48 years. Current yield: 3.01%

McDonald’s Corporation (MCD) is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries. The company has paid dividends since 1976 and has increased them the last 34 years. Current yield: 3.03%

The Procter & Gamble Company (PG) is a leading consumer products company markets household and personal care products in more than 180 countries. The company has paid dividends since 1891 and has increased them the last 54 years. Current yield: 3.21%

Abbott Laboratories (ABT) is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products including: drugs, nutritional products, diabetes monitoring devices and diagnostics. The company has paid dividends since 1926 and has increased them the last 38 years. Current yield: 3.29%

The Clorox Company (CLX) is a diversified producer of household cleaning, grocery and specialty food products is also a leading producer of natural personal care products. The company has paid dividends since 1968 and has increased them the last 35 years. Current yield: 3.30%

Johnson & Johnson (JNJ) engages in the manufacture and sale of various products in the health care field worldwide. The company has paid dividends since 1944 and has increased them the last 48 years. Current yield: 3.41%

Sysco Corporation (SYY), through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily for foodservice industry in the United States and Canada. The company has paid dividends since 1970 and has increased them the last 39 years. Current yield: 3.44%

Harleysville Group Inc. (HGIC) is a regional holding company for property and casualty insurance companies that operates in 32 states, primarily in the eastern half of the U.S. The company has paid dividends since 1986 and has increased them the last 24 years. Current yield: 4.12%

AT&T Inc. (T) provides telephone and broadband service, and the company holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006. The company has paid dividends since 1984 and has increased them the last 27 years. Current yield: 5.87%

The Bottom Line

Even if you never lose your job, one day you will retire and will face a very similar situation. Your salary will go away, replaced by much smaller Social Security payment, and possibly a pension payment (for a shrinking group of employees). More and more retirees have to manage their nest egg to ensure you don’t run out of money. A good plan, the ability to execute and multiple revenue streams including blue-chip dividend growth stocks will make the transition much easier.

Full Disclosure: Long GD, CL, MDT, KO, MCD, PG, ABT, CLX, JNJ, SYY, HGIC, T. See a list of all my income holdings here.

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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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