In 2009, I devised additional criteria to apply to the Stock Ideas list in an effort to eliminate all but the the Elite Dividend Stocks. Here is the additional criteria that I came up with, along with the companies that met the criteria:

A Long Track Record Of Consecutive Dividend Increases: Aristocrats and Champions have increased their dividends for 25 consecutive years, while Achievers have done so for 10 years. The quickest way to narrow the list down was only include companies with 35 or more years of consecutive dividend increases. This reduced the number of companies to 57.

Ability To Generate Positive Free Cash Flows: To have cash available for dividends, a company must have cash left over after paying the operating expenses and normal capital expenditures. For this I looked for companies that had positive free cash flow for the last 10 years.

Free Cash Flow Sufficient To Pay The Dividend: Free cash flow can be positive, but still not enough to cover an increasing dividend. To ensure adequate coverage, I screened for companies with a 60% or less Free Cash Flow payout ratio.

Low Debt: Dividends paid out of Free Cash Flow must compete for other needs of the business such as interest and debt payments. Lower debt and interest requirements make available more cash for dividend payments. For this item, I eliminated all companies that had a debt to total capital percent in excess of 35%.

Low Risk: An Elite Dividend company should provide a superior return without subjecting your investment to undue risk. For this item, I limited the companies to those with a risk # less than 1.5.

My Elite Dividends List that started with 218 companies, then after considering all the above, it is left with the following nine companies:

This is not a buy list. As noted above, the Elite Dividend List ignores valuation and other factors you must consider before purchasing one of these companies. As we build our dividend growth portfolios, it only makes sense to build its core with the very best stocks.

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

Related Posts
- Where To Find Great Dividend Stocks
- Five High-Yield Positive Return Investments
- Who is Irving Kahn and Why Should We Listen to Him?
- Five Stocks With A Low Dividend Payout Ratio
- 20 Dividend Stocks With A 20% Yield In 20 Years

(Photo Credit)

With time, you can wait for blue-chip stocks to build a high yield-on-cost by growing their dividends. Below are several companies building shareholder wealth by recently increasing their cash dividends:

Franklin Electric (FELE) designs, manufactures, and distributes groundwater and fuel pumping systems. April 30th the company increased its quarterly dividend to $0.13/share. The dividend is payable on May 13 to shareholders of record on May 27. The ex-dividend date is May 26. FELE is a Dividend Achiever and has paid a higher dividend for 18 consecutive years. The yield based on the new payout is 1.54%.

Fifth Street Finance (FSC) is a specialty finance company that lends to and invests in small and mid-sized companies. May 4th the company raised its quarterly dividend 6.7% to $0.32/share. The dividend is payable June 30, 2010, to shareholders of record as of May 20, 2010. The ex-dividend date is May 18, 2010. The yield based on the new payout is 10.05%.

Textainer Group (TGH) is engaged in the purchase, management, leasing, and resale of a fleet of marine cargo containers worldwide. May 5th the company increased its quarterly dividend 4.3% to $0.24/share. The dividend is payable on May 26, 2010 to all shareholders of record as of May 17, 2010. The ex-dividend date is May 13, 2010. The yield based on the new payout is 4.01%.

TECO Energy (TE) serves the Tampa Bay region in west central Florida and has significant diversified operations related to its core business. May 5th the company increased its quarterly dividend to $0.205/share. The dividend is payable May 28 to shareholders of record as of May 14, 2010. The ex-dividend date is May 12, 2010. The yield based on the new payout is 5.18%.

Cardinal Health (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies, and related products to a broad range of health care customers. May 5th the company raised its quarterly dividend 11% to $0.195/share. The dividend is payable on July 15 to shareholders of record on July 1. The ex-dividend date is June 29. CAH is a Dividend Achiever and has paid a higher dividend for 14 consecutive years. The yield based on the new payout is 2.26%.

Talisman Energy (TLM) explores, develops, produces, transports, and markets crude oil, natural gas and natural gas liquids, mainly in North America, the North Sea and Southeast Asia. May 5th the company increases its semi-annual dividend 11% to C$0.125/share. The dividend will be paid on June 30, 2010 to shareholders of record at the close of business on June 4, 2010. The ex-dividend date is June 2, 2010. The yield based on the new payout is 1.5%.

Microchip (MCHP) supplies microcontrollers and analog and other semiconductor products for a wide variety of high-volume embedded control applications. May 5th the company raised its quarterly dividend to $0.342/share. The dividend is payable on June 2, 2010, to stockholders of record on May 19, 2010. The yield based on the new payout is 4.90%.

Cognex Corp. (CGNX) is a provider of machine vision products that capture and analyze visual information used to automate tasks where vision is required. May 5th the company increased its quarterly dividend 20% to $0.06/share. The dividend announced today is payable on June 18, 2010, to all shareholders of record at the close of business on June 4, 2010. The ex-dividend date is June 2, 2010. The yield based on the new payout is 4.90%.

Cablevision (CVC) is the fifth largest cable multiple system operator (MSO) in the U.S. May 6th the company raised its quarterly dividend to $0.125/share. Cablevision President and CEO James L. Dolan commented: “Given our strong performance, we have increased our dividend by 25 percent, enabling us to provide even more value to our shareholders.” The yield based on the new payout is 2.01%.

Biovail Corp. (BVF) is engaged in the formulation, clinical testing, registration and manufacture of drug products using advanced drug delivery technologies. May 6th the company increased its quarterly dividend to $0.095/share. The dividend is payable on July 5, 2010 to shareholders of record at the close of business June 2, 2010. The ex-dividend date is May 31, 2010. The yield based on the new payout is 2.39%.

Union Pacific Corp. (UNP) operates the largest U.S. railroad, with over 32,000 miles of rail serving the western two-thirds of the country. May 6th the company raised its quarterly dividend 22% to $0.33/share. The dividend is payable July 1, 2010, to stockholders of record on May 28, 2010. The ex-dividend date is May 26, 2010. The yield based on the new payout is 1.83%.

Occidental Petroleum (OXY) is one of the largest oil and gas companies in the U.S., OXY has global operations in exploration and production. Its subsidiary OxyChem is the largest U.S. merchant marketer of chlorine and caustic soda. May 6th the company increased its quarterly dividend 15% to $0.38/share. The dividend is payable on July 15, 2010, to stockholders of record as of June 10, 2010. The ex-dividend date is June 8, 2010. The yield based on the new payout is 1.89%.

RLI Corp. (RLI) provides selected property, casualty and surety insurance. May 6th the company raised its quarterly dividend to $0.29/share. The dividend is payable on July 15, 2010, to shareholders of record as of June 30, 2010. RLI is a Dividend Achiever and has paid a higher dividend for 35 consecutive years. The yield based on the new payout is 2.06%.

Public Storage (PSA) invests primarily in self-service storage facilities (mini-warehouses), but also in commercial and industrial properties. May 6th the company raised its quarterly dividend to $0.80/share. The yield based on the new payout is 2.06%.

To maximize long-term wealth we must find companies that will grow their dividends well into the future. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

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

(Photo Credit)

Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a less risky money market account? When I look for worthy dividend investments, one of my first tests is to determine if the investment will perform better than a MMA over time. I use the NPV MMA Diff. calculation to help make this determination.

The basis of the NPV MMA Diff. calculation is a hypothetical $1,000 investment in a dividend stock a Money Market Account. The value calculated is the net present value (NPV) of the differences between the dividend earnings of this investment and the interest income from the MMA over 20 years. Other assumptions include: 1.) dividends grow at a consistent dividend growth rate, 2.) dividends are reinvested, 3.) share price appreciation is not considered, 4.) interest income is reinvested in the MMA. Once calculated, The NPV MMA Diff. is compared to a target amount.

The target is based on the number of consecutive years of dividend increases. The formula is: Target = Base – (Years x Increment) + Minimum where Base=3,000, Increment=100, Minimum=500. Thus 0 years yields a $3,500 target and 30 years yields a $500 target. The MMA rate is an estimate of the average rate earned over a 20 year period. This rate is periodically validated by looking at a 20 year Treasury rate. For more information on calculating the NPV MMA Diff, see the D4L-PreScreen spreadsheet.

Below are 10 high-rated stocks that have a NPV MMA Diff. above their target:

The Procter & Gamble Company (PG) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
NPV MMA Diff. % Above Target: 29.7% | 4 Star | Yield: 2.89% | [Analysis]

Johnson & Johnson (JNJ) engages in the manufacture and sale of various products in the health care field worldwide.
NPV MMA Diff. % Above Target: 54.2% | 4 Star | Yield: 2.99% | [Analysis]

AT&T Inc. (T) provides telephone and broadband service, and the company holds full ownership of AT&T Mobility (formerly Cingular Wireless).
NPV MMA Diff. % Above Target: 78.4% | 4 Star | Yield: 6.36% | [Analysis]

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.
NPV MMA Diff. % Above Target: 20.11% | 4 Star | Yield: 3.48% | [Analysis]

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.
NPV MMA Diff. % Above Target: 83.7% | 4 Star | Yield: 2.88% | [Analysis]

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.
NPV MMA Diff. % Above Target: 218.4% | 4 Star | Yield: 2.16% | [Analysis]

RLI Corp. (RLI), based in Peoria, IL, provides selected property, casualty and surety insurance.
NPV MMA Diff. % Above Target: 401.3% | 4 Star | Yield: 2.03% | [Analysis]

Aflac Incorporated (AFL) engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
NPV MMA Diff. % Above Target: 534.6% | 4 Star | Yield: 2.19% | [Analysis]

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.
NPV MMA Diff. % Above Target: 1273.9% | 4 Star | Yield: 2.95% | [Analysis]

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.
NPV MMA Diff. % Above Target: 345.7% | 5 Star | Yield: 1.94% | [Analysis]

Some might question why not just target yields that are higher than the MMA Rate? That ignores the most powerful concept of Dividend Income Investing – Dividend Growth. Compound interest (interest on interest) is a powerful concept, but growing, compound dividends is the income investor’s most powerful ally.

Full Disclosure: Long NUE, AFL, ABT, SYY, JNJ, PG. See a list of all my income holdings here.

(Photo: Steve Woods)

One of the largest uses for cash is to repay debt and its associated interest. Prior to the most recent downturn many companies took on enormous levels of debt, usually for one of these two reasons:

1. Fund An Acquisition:  Debt has been relatively cheap for some time and easy to access. When sellers thought the buyers stock was overpriced, they would demand significant levels of cash to close the deal. Debt was often used to raise the cash.
2. Restructuring: Analysts that follow companies have a target debt to total capital they are looking for. If they consider it is too low, management is encouraged to issue debt and use the proceeds to purchase their stock. (As an aside, I own a company that was encouraged to do this and eventually issued debt and purchased their stock close to its high. Then when the economy turned down they had to raise operating cash by, you guessed it, issuing stock well below where they purchased it.)

One of the key metrics I look for when evaluating a company is a debt to total capital ratio of 45% or less. Below are seven dividend companies with a debt to total capital less than 30%:

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. [Analysis]

• Debt to Total Capital: 29%
• Current Rating: 4-Stars

Aflac Incorporated (AFL) engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan. [Analysis]

• Debt to Total Capital: 29%
• Current Rating: 4-Stars

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. [Analysis]

• Debt to Total Capital: 27%
• Current Rating: 5-Stars

Johnson & Johnson (JNJ) engages in the manufacture and sale of various products in the health care field worldwide. [Analysis]

• Debt to Total Capital: 25%
• Current Rating: 4-Stars

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.

• Debt to Total Capital: 13%
• Current Rating: 4-Stars

RLI Corp (RLI), based in Peoria, IL, provides selected property, casualty and surety insurance. [Analysis]

• Debt to Total Capital: 12%
• Current Rating: 4-Stars

Raven Industries Inc. (RAVN) manufacturer provides electronic precision-agriculture products, reinforced plastic sheeting, electronics manufacturing services, specialty aeronautics, and sewn products.

• Debt to Total Capital: 0%
• Current Rating: 4-Stars

Having low levels of debt provides companies with greater financial flexibility. Of coarse, we must look at more than just debt as we evaluate a company, but the above can serve as a good starting point for your review.

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

(Photo Credit)

When many investors think of dividend growth stocks, large-caps like Johnson & Johnson (JNJ) [Analysis], The Procter & Gamble Company (PG) [Analysis], The Coca-Cola Company (KO) [Analysis] and 3M Co. (MMM) [Analysis] come to mind first.  Often small/mid-cap stocks are associated with growth stocks, and since the underlying companies are looking to grow there is little or no cash available for dividends. Not all small/mid-cap stocks fall under the growth category, many are considered value stocks and quite a few of these consistently increase their dividends.

For a stock to be included on my Stock Ideas list it must have increased its dividend for at least 10 consecutive years (10 years for Achievers, 25 years for Aristocrats and Champions).  Below is a representative sample of several small/mid-cap dividend stocks included on the list, along with the number of years of consecutive dividend increases:

Genuine Parts Co. (GPC) Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. This company has increased its dividend for 53 consecutive years and is currently yielding 4.43%. [Analysis]

The Clorox Company (CLX) is a manufacturer and marketer of consumer products. The Company markets brand names, including Clorox bleach, Armor All, STP, Fresh Step/Scoop Away, Kingsford, Hidden Valley, KC Masterpiece, Brita , Glad, etc. This company has increased its dividend for 32 consecutive years and is currently yielding 3.20%.

Integrys Energy Group, Inc. (TEG) operates as a regulated electric and natural gas utility company in the United States and Canada. It purchases, generates, and distributes electric power; and purchases and distributes natural gas. This company has increased its dividend for 51 consecutive years and is currently yielding 7.13%.

Courier Corporation (CRRC) publishes, prints and sells books. Founded in 1824, Courier has two lines of business: full-service book manufacturing and specialty publishing. This company has increased its dividend for 16 consecutive years and is currently yielding 6.34%.

Community Trust Bank Corp. (CTBI) owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company. This company has increased its dividend for 29 consecutive years and is currently yielding 5.22%. [Analysis]

HCC Insurance Holdings Inc. (HCC) is a multi-line insurer that specializes in aviation, marine, medical stop-loss, offshore energy and property and casualty insurance in the U.S. and the U.K. This company has increased its dividend for 13 consecutive years and is currently yielding 1.99%.

Cincinnati Financial Corp. (CINF) markets primarily property and casualty coverage; it also conducts life insurance and asset management operations. This company has increased its dividend for 49 consecutive years and is currently yielding 6.23%

Leggett & Platt Inc. (LEG) makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets. This company has increased its dividend for 37 consecutive years and is currently yielding 5.21%. [Analysis]

RLI Corp. (RLI) provides selected property, casualty and surety insurance. This company has increased its dividend for 35 consecutive years and is currently yielding 2.12%. [Analysis]

The above is not a buy list, but does demonstrate the availability of small/mid-cap dividend growth stocks to potentially help meet this portion of your asset allocation. Sometimes smaller companies are still run my the original founders’ or their families and there is a pride in these companies that is not always found in those run by “professional managers”.

Full Disclosure: Long JNJ, PG, KO, MMM, GPC, CLX, TEG. See a list of all my income holdings here.

(Photo Credit)

Dividend payout is expressed as a percentage and is calculated by dividing annual dividend per share by annual earnings per share (EPS). This tells the investor what percentage of earning the company is paying out as a dividend. At first blush this may seem to make a lot of sense, but it suffers from the following potential problems:

I. Earnings Does Not Equal Cash

As an accountant, I can tell you our profession in its pursuit of theoretical perfection has adulterated the financial statements to the point that it has become very difficult for non-accountants to understand what’s behind the numbers.  Accounting pronouncements such as SFAS No. 143 “Accounting for Asset Retirement Obligations” (ARO) that requires a company to recognize expenses today for cash payments that may not occur for decades or even centuries widens the gap between earnings and cash. Applying “fair value” principles allowed under GAAP, financial institutions (and others) can mark to market debt on their books and create non-cash income or expense, depending on the direction of interest rates. Many point to mark to market accounting as one of the major contributors to the 2008 financial melt-down.

II. Quality of Earnings

Would you rather a company that you are invested in to increase its earnings by 1.) increasing sales and holding cost down or 2.) sell a fully depreciated plant. Obviously, you would rather have the former since it has the possibility of being duplicated over and over again. You can only sell a specific asset once. In addition to cash and non-cash earnings, a statement of earnings also contains operating and non-operating earnings.

A Better Dividend Payout Calculation

A dividend payout ratio is supposed to provide the investor with an indication of how much cash as a percent of earnings the company is paying its investors. As you can see from the above discussion, a payout ratio based on GAAP net earnings could potentially have a lot of noise in it and not provide a clear picture of the economic condition of the business.

What the investor is really wanting to know is what percentage of cash is the company paying as a percentage of cash generated from running the business. The irony here is that operating cash is readily available on the Statement Of Cash Flows in the Operating section. This section focuses on the cash generated by running the business. It excludes cash generated by selling pieces of the business – these are shown in the investing section. It also excludes cash generated from selling stock or issuing debt – these are shown in the financing section.

In calculating a payout ratio, I prefer Free Cash Flow over Operating Cash Flow. Free Cash Flow is Operating Cash Flow less normal capital expenditures (normally the first line in the investing section). For a business to remain viable, it must replace capital assets when they wear out.

The formula for Free Cash Flow Payout is simply Annual Dividend Per Share divided by Free Cash Flow Per Share. I like to see a percentage of 70% or less. The 70% is somewhat higher than many people look for with a traditional payout ratio. I am comfortable with the higher number since we are talking about real cash generated from running the business vs. accounting earnings that may or may not be there. So how do the two ratios compare?

Needless to say, the variances are all over the place. In many companies I looked at the traditional dividend payout ratio was within 10 percentage points higher than a free cash flow payout. This means the GAAP earnings was lower than the calculated Free Cash Flow. Here are some example of this situation:

• Chubb Corp (CB) – Traditional: 28% – FCF Payout: 21% – Analysis
• Clorox Company (CLX) – Traditional: 50% – FCF Payout: 50%
• Emerson Electric Co. (EMR) – Traditional: 53% – FCF Payout: 45% – Analysis
• Family Dollar Stores Inc. (FDO) – Traditional: 25% – FCF Payout: 22%
• Hormel Foods Corp. (HRL) – Traditional: 34% – FCF Payout: 33%
• International Business Machines (IBM) – Traditional: 23% – FCF Payout: 18%
• 3M Co. (MMM) – Traditional: 50% – FCF Payout: 45% – Analysis
• Microsoft Corp. (MSFT) – Traditional: 32% – FCF Payout: 29%
• SYSCO Corporation (SYY) – Traditional: 52% – FCF Payout: 48% – Analysis
• United Technologies Corp. (UTX) – Traditional: 35% – FCF Payout: 30% – Analysis

Sometime the gap is much larger. This could have resulted from significant non-cash charges on the income statement.  Companies with large gaps include:

• Aflac Incorporated (AFL) – Traditional: 44% – FCF Payout: 10% – Analysis
• CenturyLink Inc. (CTL) – Traditional: 87% – FCF Payout: 46%
• Diebold Inc (DBD) – Traditional: 74% – FCF Payout: 30%
• Illinois ToolWorks Inc. (ITW) – Traditional: 76% – FCF Payout: 31% – Analysis
• Leggett & Platt Inc. (LEG) – Traditional: 262% – FCF Payout: 34% – Analysis
• Nucor Corporation (NUE) – Traditional: 88% – FCF Payout: 29% – Analysis
• Pitney Bowes Inc. (PBI) – Traditional: 73% – FCF Payout: 38%
• PPG Inds Inc (PPG) – Traditional: 158% – FCF Payout: 48%
• RLI Corp (RLI) – Traditional: 158% – FCF Payout: 48% – Analysis
• RPM International Inc (RPM) – Traditional: 84% – FCF Payout: 49% – Analysis
• AT&T Inc. (T) – Traditional: 81% – FCF Payout: 49%

Sometimes the gap is not only large, but goes the other way. This is potentially the most dangerous since focusing on the traditional dividend payout may lead you to believe the dividend is covered better than it actually is. Examples of this situation would include:

• Air Products and Chemicals Inc. (APD) – Traditional: 56% – FCF Payout: 172%
• Franklin Resources Inc. (BEN) – Traditional: 23% – FCF Payout: 48%
• BP Plc (BP) – Traditional: 50% – FCF Payout: 114% – Analysis
• Lowe’s Companies, Inc. (LOW) – Traditional: 27% – FCF Payout: 57% – Analysis
• Exxon Mobil Corp (XOM) – Traditional: 27% – FCF Payout: 54%

Although Free Cash Flow Payout is a better payout ratio than the traditional dividend ratio, the investor should look at both and understand the differences. Taking an expense for impairing goodwill is much different than recognizing an expense for losing a lawsuit. The former will not directly involve cash out the door, but the latter will if the company loses on appeal.

Full Disclosure: Long CLX, EMR, MMM, SYY, UTX, AFL, CTL, ITW, NUE, BP. See a list of all my income holdings here.

(Photo Credit)

Linked here is a detailed quantitative analysis of RLI Corp. (RLI). Below are some highlights from the above linked analysis:

Company Description: RLI Corp, based in Peoria, IL, provides selected property, casualty and surety insurance.

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

RLI is trading at a discount to only 1.) above. The stock is trading at a 23.2% premium to its calculated fair value of $40.26. RLI 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%

RLI earned three Stars in this section for 1.), 2.) and 3.) above. One Star was earned for a Free Cash Flow payout ratio was less than 60% and not having any negative Free Cash Flows over the last 10 years. The stock earned another Star as a result of its most recent Debt to Total Capital being less than 45%. RLI 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 (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. RLI has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 35 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

RLI earned a Star in this section for its NPV MMA Diff. of the $2,796. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as RLI has. If RLI grows its dividend at 15.0% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.82%.

Other: RLI is a member of the Broad Dividend Achievers™ Index. 442 institutions own 79.2% of the 20 million common shares outstanding. This is higher than the average institutional ownership of the Insurance (Prop. & Casualty) Industry at 65.4%. In the last 6 months, there have been 8 insider purchases for a total of 2,000 shares, and there has been 1 insider sale of 9,000 shares.

Conclusion: RLI did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks RLI as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $88.72 before RLI’s NPV MMA Differential fell to the $500 that I like to see for a stock with 35 consecutive years of dividend increases. At that price the stock would yield 1.19%.

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 9.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. RLI has a risk rating of 2.00 which classifies it as a medium risk stock.

What is better than a company that raises its dividend every year? A company that raises its dividend twice a year, and that is what RLI has done since 2003.  RLI is a well-managed company with a strong balance sheet. Two things keep me from purchasing RLI 1.) The company’s current yield at 2.14% is below the 3% minimum I look for and 2.) RLI is trading well above its buy price of $40.26. I will continue to watch the stock for a more favorable entry point. 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 RLI (0.0% of my Income Portfolio).

What are your thoughts on RLI?

On May 6th, PEP extended its string of dividend increases to 37 consecutive years by announcing a 6% increase in the annual dividend to $1.80/share.  The quarterly dividend of $0.45 is payable June 30, 2009, to shareholders of record on June 5, 2009.   PepsiCo Chairman and CEO Indra Nooyi said, “We are pleased to announce our thirty-seventh annual dividend increase, reflecting the strength of our cash flow and balance sheet. Even in this difficult economy, we are committed to return cash to our shareholders while continuing to invest in the long-term growth of our business.” Based on the new rate, PEP is currently yielding 3.64%. (Analysis)

Below are several other companies, like PEP, that are returning cash to their shareholders with higher cash dividends:

• Alcon (ACL) increases its annual dividend 39% to $3.49, yielding 3.63%
• Spectra Energy Partners (SEP) raises its quarterly dividend 11.4% to $0.39/share, yielding 6.90%
• Tower Group (TWGP) boosts it quarterly dividend 40% to $0.07/share, yielding 1.04%
• Avista (AVA) bumps its quarterly dividend 16.7% to $0.21/share, yielding 5.04%
• RLI (RLI) increases its quarterly dividend 3.8% to $0.27/share, yielding 2.30%
• Expeditors Int’l of Washington (EXPD) raises quarterly dividend 19% to $0.19/share, yielding 2.26%

It is great to see a substantial number of companies raising their dividends and keeping alive the momentum that was started last week. For more companies with a long string of consecutive dividend increases, see this list.

Full Disclosure: Long PEP. See a list of all my income holdings here.

(Photo: Steve Woods)

Company Description: RLI Corp, based in Peoria, IL, provides selected property, casualty and surety insurance.

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

RLI is trading at a discount to 1.), 2.) and 4.) above. If I exclude the high and low valuations and average the remaining two, RLI is trading at a 7.1% discount. RLI earned a Star in this section since it is trading at a fair value.

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

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

RLI earned three Stars in this section for 1.), 2.) and 3.) above. 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 (1998-2001, 1999-2002, 2000-2003, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. RLI 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

RLI earned one Star in this section for 1.) above. The NPV MMA Diff. of the $4,814 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as RLI has. If RLI grows its dividend at 15.0% per year, it will take 11 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%. The 11 years is more than the 10 years maximum I like to see.

Other: RLI is a member of the Broad Dividend Achievers™ Index. In the third quarter, RLI was honored as one of the industry’s top performing companies by theWard’s Top 50 list. Among the 3,000 property and casualty insurers, RLI is one of only five to be recognized for 18 straight years since the award’s inception for excellence.

Conclusion: RLI 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 net total of five Stars. This quantitatively ranks RLI as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could decrease to $52.62 and RLI’s NPV MMA Differential would still be around the $3,000 that I like to see. At that price the stock would yield 1.82%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $3,000 NPV MMA Differential I’m looking for, the calculated rate is 13.9%. This dividend growth rate is below the 15.0% used in this analysis.

If RLI was a stock that I wanted to add to add to my income portfolio, I would wait for it to dip below $52.62, my buy below price.

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 RLI (0.0% of my Income Portfolio) .

What are your thoughts on RLI?

Here are several stocks that are trying to stay in good favor with their shareholders by raising their cash dividends:

• RLI Corp. (RLI) Boosts Qtr. Dividend by 4% to $0.26/Share (1.87%)
• Lancaster Colony (LANC) Increases Qtr. Dividend by 1.7% to $0.285/Share (3.96%)
• SkyWest (SKYW) Raises Dividend Qtr. Dividend by 33% to $0.04/Share (1.24%)
• DHT Maritime (DHT) Raises Qtr. Dividend by % 20 to $0.30/Share (25.21%)
• Roper Industries (ROP) Boosts Qtr. Dividend 13.8% to $0.0825/Share (0.86%)
• Sysco (SYY) Raises Qtr. Dividend by 9% to $0.24/Share (3.91%)
• NSTAR (NST) Increases Qtr. Dividend by 7% to $0.35/Share (4.29%)
• The Laclede Group (LG) Increases Qtr. Dividend by 2.7% to $0.385/Share (3.08%)

After running these companies through my D4L-PreScreen.xls model, RLI with a NPV of MMA Differential of $3,404 and 33 consecutive year record of raising dividends certainly qualifies for a more complete evaluation. DHT has only paid a dividend since 2006. NST had positive NPV of MMA Differentials, but below the level that would warrant a more detailed evaluation. SYY was reviewed on Wednesday.

Disclosure: Long SYY.

(Photo: Steve Woods)