Dividend Stocks Empowers People

By starting early in life and building a portfolio of dividend growth stocks, people are empowering themselves and taking charge of their future. At first blush, this may not sound like a bad thing but consider the consequences. Lord Acton saw the problem more than a century ago when he stated “All power tends to corrupt; absolute power corrupts absolutely.” Power is meant for the government, not people. The government has a much more experience with corruption than individuals.

Dividend Stocks Weakens The Need For Government

Power is like mass, it can not be created or destroyed. Any gains in power in one area must be offset by a loss in another. When people make wise financial decisions and are empowered with a secure and independent future, this power must come from somewhere, and in this case it is to the detriment of our beloved government. The foundation of our modern government is a needy society beholden to its benevolent hand. If the masses aren’t relying on the government to sustain their meager existence in retirement, how can we continue to justify our current behemoth governmental infrastructure and expenditures. And even worse, a shift of power to the people could go to their heads and eventually lead to them demanding accountability from their elected officials. This is sacrilege!

Dividend Stocks Will Destroy The World Economy

If individuals start making wise financial decisions and investing in dividend stocks instead of buying “stuff” produced around the world. The world economy could collapse. Imagine what would happen if we stopped buying plastic stuff made in China – their government would not be able to fund all their military endeavors. This would leave them open to another student up rising in Tiananmen Square, and this time the government may not be able to silence the people.

7 Dividend Stocks To Bring Down Financial System

The financial system does not like radical change. Responsible behavior and fewer imports could lead to lead to smaller government and less debt. Less debt would keep interest rates low as buyers bid up the price of the remaining debt. Perpetually low interest rates would stimulate the economy and cause stress on the financial institutions as they tried in vain to keep up with a robust economy.

You’ve been warned. You will set in motion a cataclysmic chain of events if act responsibly and buy good dividend stocks such as these:

Abbott Laboratories (ABT) | Yield: 4.0%
Abbott Laboratories is a diversified life science company and is a leading maker of drugs, nutritional products, diabetes monitoring devices, and diagnostics.

Cincinnati Financial Corp. (CINF) | Yield: 4.9%
Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.

Colgate-Palmolive Co. (CL) | Yield: 3.0%
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.

ConocoPhillips (COP) | Yield: 3.5%
ConocoPhillips Co. is the fourth largest integrated oil company in the world, and the second largest in the U.S.

Kimberly-Clark Corporation (KMB) | Yield: 4.3%
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.

Pepsico, Inc. (PEP) | Yield: 3.0%
PepsiCo, Inc. is a major international producer of branded beverage and snack food products.

AT&T, Inc. (T) | Yield: 6.1%
AT&T Inc. 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.

Now that the secret is out, what are you going to do? Will you continue to buy these evil stocks and build an independently secure future and allow our government and world economy to fail? As for me, I plan on spending the next couple of days digging my tongue out of my cheek and preparing for Friday’s holiday!

Full Disclosure: Long ABT, CINF, CL, COP, KMB, PEP, T. See a list of all my income holdings here.

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

The Bengen Study

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

The Harvard Study

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

The Trinity Study

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

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

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

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

Dividend Growth Stocks: A Better Way

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

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

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

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

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

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

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

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

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

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

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

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

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

Related Posts
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Sources: Dallas News, Retire Early, passionsaving.com

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Linked here is a detailed quantitative analysis of Pepsico, Inc. (PEP). Below are some highlights from the above linked analysis:

Company Description: PepsiCo, Inc. is a major international producer of branded beverage and snack food products.

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

PEP is trading at a discount to 1.) and 3.) above. The stock is trading at a slight discount to its calculated fair value of $64.84. PEP 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%

PEP earned two Stars in this section for 1.) 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. PEP 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 1952 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

PEP earned a Star in this section for its NPV MMA Diff. of the $605. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PEP has. If PEP grows its dividend at 6.5% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.4%. PEP earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.

Memberships and Peers: PEP 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: The Coca-Cola Company (KO) with a 2.8% yield, Dr Pepper Snapple Group, Inc (DPS) with a 2.7% yield and Fomento Econ (FMX) with a 1.2% yield.

Conclusion: PEP 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 PEP as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $68.49 before PEP’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 2.76%.

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 below the 6.5% used in this analysis, thus providing a margin of safety. PEP has a risk rating of 1.25 which classifies it as a low risk stock.

PEP enjoys stable end markets, strong cash flows and leading global market positions. Unlike KO, the majority of PEP’s revenues come from non-carbonated soft drinks with beverages accounting for less than 50% of total revenue. Additionally, over 60% of the company’s beverage sales come from non-carbonated brands like Gatorade and Tropicana. PEP’s diverse portfolio can mitigate the impact of poor conditions in any one of its markets. In addition, its exposure to strong international markets should offset to any domestic short-falls. I will continue to add to my PEP position when it is trading below my fair value price of $64.84 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 PEP (1.7% of my Income Portfolio), and also long in KO. See a list of all my income holdings here.

Related Articles:

- Kimberly-Clark Co. (KMB) Dividend Stock Analysis
- Abbott Laboratories (ABT) Dividend Stock Analysis
- Colgate-Palmolive Co. (CL) Dividend Stock Analysis
- Wal-Mart Stores, Inc. (WMT) Dividend Stock Analysis
- More Stock Analysis

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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As a child most of heard (or watched) Aesop’s fable The Tortoise and the Hare. The story is about confident hare that brags about how fast he can run while poking fun at a slow-moving tortoise. The tortoise having tired of the hare’s fodder challenges him to a race. The hare jumps out to an early lead and decides to take a nap midway through the race. When he awakes, he finds that the tortoise made steady progress and beat him to the finish line.

Have you ever stopped to ponder just where are all these get-rich-now infomercial millionaires? I know several people who have purchased one or more of these get-rich-now kits, but I don’t know of anyone who actually got rich from purchasing the kit. Warren Buffett and Bill Gates didn’t build their fortunes with a get-rich-now kit. They worked hard built it steadily over time.

In much the same way, a disciplined approach to investing, such as dividend growth stocks, can be highly effective. Though it may seem boring to many, I find it exciting to see my income growing as the finish line approaches. Consider these slow and steady growers:

There are really no shortcuts to long-term wealth. Many of those that win the lottery end up losing the money through mismanagement (or worse.) Dividend growth stocks may be slow, but they are also steady; and slow and steady wins the race.

Full Disclosure: Long WMT, PEP, SYY, CL, ITW, JNJ, KO, MMM, EMR, GPC, PG. 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.

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Linked here is a detailed quantitative analysis of Coca-Cola Company (KO). Below are some highlights from the above linked analysis:

Company Description: The Coca-Cola Company 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.

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

KO is trading at a discount to only 3.) above. The stock is trading at a slight discount to its calculated fair value of $57.92. KO 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%

KO 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%. KO 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 1893 and has increased its dividend payments for 48 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

KO earned a Star in this section for its NPV MMA Diff. of the $840. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as KO has. If KO grows its dividend at 7.3% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. KO earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.

Memberships and Competitors: KO is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. KO’s peer group includes: Dr. Pepper Snapple Group (DPS) with a 2.7% yield, Fomento Economico ADR (FMX) with a 1.3% yield and Pepsico, Inc (PEP) with a 3.0% yield.

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

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $65.57 before KO’s NPV MMA Differential increased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price the stock would yield 2.68%.

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 5.8%. This dividend growth rate is well below the 7.3% used in this analysis, thus providing a margin of safety. KO has a risk rating of 1.00 which classifies it as a low risk stock.

Coca-Cola is one of the most recognizable names in the world. KO is able to deliver products to nearly all points on the globe through an extensive direct distribution network that has few peers. Its world presence will be relied on to compensated for declining consumption of carbonated beverages in the North American market. The company’s pristine balance sheet and strong free cash flow will keep me buying when the stock trades below my fair value price of $57.92, 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 KO (3.6% of my Income Portfolio). See a list of all my income holdings here.

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As a benchmark, the S&P 500 (SPY) was down 6.93% on a dividend adjusted basis. The following dividend growth stocks were able to best the S&P and provide a positive return:

Procter & Gamble Co. (PG) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
- YTD Dividend Adjusted Return: 0.40%
- Current Yield: 3.10%

Pepsico, Inc. (PEP) is a global snack and beverage company. The Company manufactures, markets and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.
- YTD Dividend Adjusted Return: 1.74%
- Current Yield: 3.00%

Clorox Corporation (CLX) is a diversified producer of household cleaning, grocery and specialty food products and is also a leading producer of natural personal care products.
- YTD Dividend Adjusted Return: 3.55%
- Current Yield: 3.40%

Sysco Corp. (SYY) engages in the marketing and distribution of a range of food and related products primarily for foodservice industry in the United States and Canada.
- YTD Dividend Adjusted Return: 4.00%
- Current Yield: 3.40%

Genuine Parts Company (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
- YTD Dividend Adjusted Return: 6.08%
- Current Yield: 4.00%

Canadian National Railway Company (CNI) operates Canada’s largest railroad, linking customers in Canada, the U.S., and Mexico through approximately 20,400 miles of track.
- YTD Dividend Adjusted Return: 6.54%
- Current Yield: 1.80%

McDonald’s Corp. (MCD) is the largest fast-food restaurant company in the world. Its restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world.
- YTD Dividend Adjusted Return: 7.28%
- Current Yield: 3.20%

Realty Income Corp. (O) engages in the acquisition and ownership of commercial retail real estate properties in United States.
- YTD Dividend Adjusted Return: 20.45%
- Current Yield: 5.50%

Obviously, not all dividend stocks outperformed the S&P. Below are some high-profile under-performers during the first 6-months of 2010:

Chevron Corp. (CVX) is a global integrated oil company that has interests in exploration, production, refining and marketing, and petrochemicals.
- YTD Dividend Adjusted Return: Down (10.18%)
- Current Yield: 4.00%

The Coca-Cola Company (KO) The Coca-Cola Company 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.
- YTD Dividend Adjusted Return: Down (10.60%)
- Current Yield: 3.40%

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.
- YTD Dividend Adjusted Return: Down (11.99%)
- Current Yield: 3.70%

Nucor Corporation (NUE) is engaged in the manufacture and sale of steel and steel products. As the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.
- YTD Dividend Adjusted Return: Down (16.56%)
- Current Yield: 3.60%

So what does all this mean? For me, the more relevant list is the latter. When a stock under performs the market (assuming there is not a fundamental reason for doing so), two important things are happening: 1.) it is becoming relatively cheaper and 2.) its dividend is becoming more attractive relative to the market. The opposite is occurring for the stocks listed in the first group.

Full Disclosure: Long PG, PEP, CLX, SYY, GPC, MCD, O, CVX, KO, ABT, NUE. See a list of all my income holdings here.

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(Photo Credit)

In my dividend database I track over 180 stocks, with each having a minimum of 10 years of historical information. This data is gathered from various sources deemed reliable. Most data is generic and can be pulled from various internet sites. I then combine this information into metrics that I consider relevant in determining the stocks ability to sustain and grow its dividend.

Risk is one of the key factors I look at. Risk can have as many definitions as the number of people you ask to define it. Ultimately, we are trying to access how likely is it that something bad will or will not happen. As a quantitative first pass, I consider the following factors:

Dividend Increase Risk (R)

One important metric in accessing the likelihood of future dividend increases is past performance. The logic here is the longer a company raises its divided, the more committed it is to dividend increases and is less likely to stop unless dire financial circumstances dictate it. I use the following criteria to assign the A, B or C risk rating:

• A is assigned to companies that have increased their dividends for more than 25 years (numeric value of 1).
• B is assigned to companies that have increased their dividends for 15-25 years (numeric value of 2).
• C is assigned to companies that have increased their dividends for less than 15 years (numeric value of 3).

Quality of Dividend Increases  (Q)

In determining the quality of the dividend, I look at the company’s financial quality by focusing on Free Cash Flow payout and Debt to Total Capital. I assign a 1, 2 or 3 Quality Rating based on:

• 1 is assigned to companies if their Free Cash Flow Payout % is less than 60% and if their Debt to Total Capital is less than 45%.
• 2 is assigned to companies if the sum of their Free Cash Flow Payout % plus their Debt to Total Capital is less than 100%.
• 3 is assigned to companies if the sum of their Free Cash Flow Payout % plus their Debt to Total Capital is greater than 100%.

Current Price vs. Calculated Price (P)

As part of my quantitative analysis, I calculate a “Buy Below” price. If the current price is within plus or minus 10% of the calculated price then this portion of the calculation is assigned a value of 1 (low risk). Results between plus or minus 10% but less than 20% is assigned a value 2 (medium risk), while anything plus or minus 20% or greater is assigned a 3 (high risk).

Dividend Yield (Y)

Dividend yield is an indication of market sediment, and often an early warning for a troubled stock. In this portion of the calculation, the current yield is compared to predetermined levels and a risk value is assigned. Currently, I am assigning a 1 (low risk) to yields less than 5%, a 2 (medium risk) to values from 5% to less than 8% and a 3 (high risk) for values 8% and greater. The predetermined levels are purely arbitrary and subject to future calibration.

Some might argue that it is “normal” for certain industries to pay out a higher yield, such as 10%. However, I think that “normal” higher yield could be indicative of the implicit higher risk of that industry. Blue water shipping (ocean going) would be an example of this. Also, certain industries, such as utilities, tend to sustain a higher yield due to their lack of growth opportunities.

Putting It All Together

My Risk Rating is calculated by averaging the four numeric values above, as such:

(R + Q +P +Y)/4 = Risk Rating

This calculation will yield values between 1 and 3. I divided this range into thirds and assigned an overall rating based on this table:

• 1.00 to less than 1.67 = Low Risk
• 1.67 to less than 2.34 = Medium Risk
• 2.34 to 3.00 = High Risk

Stock Stats

Based on calculations from this past weekend, below are ten stocks with a low risk rating:

There are other factors that can affect the risk of an individual stock such as industry, geopolitical factors, technology, et. al. Needless to say, all these must be considered as we make our decision to buy or sell a stock.

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

(Photo: sean carpenter)