1. Declining Shares

Many companies sell stock to raise cash. The important question is what is the company going to do with the cash? Is it for an acquisition or “general corporate purposes?” The latter is code for the business is not generating enough cash to stay afloat on its own. I am wary of a company that consistently has more shares outstanding in the current year when compared to the prior year. As I enter updates to my database, equal or lower shares outstanding is a sign of a healthy business.

2. Declining Debt

When companies need to raise cash and selling shares is not a good option, they often will issue debt. Once again, the important question is what is the company going to do with the cash? Like issuing shares, debt for a strategic acquisition is much more palatable than for “general corporate purposes.” I am wary of a company that consistently has more debt outstanding than the year before. As I enter updates to my database, I make note of companies with a declining debt balance and see that as a sign of a healthy business.

3. Rising Equity

Changes in shareholder’s equity are a result of earnings, dividends paid, treasury stock purchased, stock options exercised and stock issued. If shares outstanding aren’t increasing, and equity is rising then the business is generating sufficient earnings to cover dividends and share repurchases. Increasing the value of the company by running the business well is a sign of a healthy company.

4. Rising Free Cash Flow/Share

Ultimately, we want our investments to generate more free cash flow so they can pay us higher dividends. Free cash flow is an important metric in that it excludes cash generated from issuing stock or issuing debt or selling off parts of the business. Free cash flow is limited to only the cash generated from running the business.

Dividend Stocks Headed In The Right Direction

Combining the equity and debt metrics, I looked for companies with a declining Debt to Total Capital ratio, and combining the free cash flow and shares outstanding metrics, I looked for a rising free cash flow per share. Below are several companies I noted that exhibited each of the above characteristics:

Automatic Data Processing Inc. (ADP) is one of the world’s largest independent computing services companies, providing a broad range of data processing services.
Debt to Total Capital | 2005: 1%, TTM: 1%
Free Cash Flow/Share | 2005: $2.10, TTM: $3.06
Yield: 2.84%

Cullen/Frost Bankers, Inc. (CFR) is one of the largest multi-bank holding company headquartered in Texas, has more than 110 offices in various cities in the state.
Debt to Total Capital | 2005: 30%, TTM: 15%
Free Cash Flow/Share | 2005: $2.13, TTM: $5.23
Yield: 2.98%

Erie Indemnity Co. (ERIE) provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States.
Debt to Total Capital | 2005: 0%, TTM: 0%
Free Cash Flow/Share | 2005: $4.33, TTM: $6.93
Yield: 2.77%

Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Debt to Total Capital | 2005: 16%, TTM: 15%
Free Cash Flow/Share | 2005: $2.03, TTM: $3.57
Yield: 2.97%

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.
Debt to Total Capital | 2005: 29%, TTM: 20%
Free Cash Flow/Share | 2005: $1.75, TTM: $3.08
Yield: 2.25%

The Procter & Gamble Company (PG) is a leading consumer products company that markets household and personal care products in more than 180 countries.
Debt to Total Capital | 2005: 38%, TTM: 33%
Free Cash Flow/Share | 2005: $2.65, TTM: $3.46
Yield: 3.00%

RPM International Inc. (RPM) makes specialty coatings and products for the structural waterproofing and corrosion control markets, as well as products for the consumer, do-it-yourself, and hobby markets.
Debt to Total Capital | 2005: 44%, TTM: 43%
Free Cash Flow/Share | 2005: $0.81, TTM: $1.34
Yield: 3.47%

J.M. Smucker Co.’s (SJM) 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.
Debt to Total Capital | 2005: 21%, TTM: 19%
Free Cash Flow/Share | 2005: $1.84, TTM: $3.69
Yield: 2.61%

Sonoco Products Co. (SON) makes paper and plastic packaging products serves various industries and markets in more than 85 countries.
Debt to Total Capital | 2005: 38%, TTM: 29%
Free Cash Flow/Share | 2005: $0.98, TTM: $1.68
Yield: 3.10%

Suburban Propane Partners LP (SPH) is a limited partnership that markets propane gas and other refined fuels to residential, commercial, industrial, and agricultural customers.
Debt to Total Capital | 2005: 88%, TTM: 44%
Free Cash Flow/Share | 2005: $0.33, TTM: $3.67
Yield: 5.88%

AT&T Inc. (T) provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.
Debt to Total Capital | 2005: 42%, TTM: 39%
Free Cash Flow/Share | 2005: $2.10, TTM: $2.50
Yield: 5.88%

V.F. Corp. (VFC) is a global apparel company, with leading shares in denim and daypacks. It is transforming itself into a designer and marketer of lifestyle apparel brands.
Debt to Total Capital | 2005: 22%, TTM: 20%
Free Cash Flow/Share | 2005: $4.11, TTM: $9.46
Yield: 2.71%

Verizon Communications Inc. (VZ) offers wireline, wireless and broadband services primarily in the northeastern United States. It acquired MCI Inc in 2006 and has since sold or spun off non-core assets. Alltel was acquired in early 2009.
Debt to Total Capital | 2005: 50%, TTM: 39%
Free Cash Flow/Share | 2005: $2.37, TTM: $6.07
Yield: 5.22%

Businesses can pay dividends with cash generated from many sources. They can generate cash by issuing shares, which dilutes our ownership. They can generate cash by issuing debt, which burdens the company with interest payments. Or, they can generate cash by running the business well, which neither dilutes the current shareholders’ interest or burdens them with future cash payments. Which would you rather have?

Full Disclosure: Long ADP, GPC, OMI, PG, T. See a list of all my income holdings here.

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Industrial Materials Attributes

The Industrial Materials Sector consists of companies that manufacture products or otherwise harvest a product, such as a mining company. The products are most often inputs or raw materials into another manufacturing process, such as steel producer. Many of these companies are often referred to as members of the “smokestack industry” and are classified as cyclical stocks – a stock that rises and falls in step with the economy.

Timing is important when buying an industrial stock. If you buy when business is booming you will likely pay too much, which means a very low yield. Most stocks in this sector are currently overpriced. The average yield on Industrial Sector stocks that I follow is only 1.7%. This includes only 3 stocks yielding in the 3% range., with all the others sub-3%.  Several of these sub-3% companies were yielding in excess of 4% in 2008 when the world looked bleak for Industrial stocks.

Industrial Materials Companies

Below are several leading Industrial Materials companies that I follow. The companies selected have a dividend yield of 2.00%, or higher, and have raised their dividends for at least 15 years.

RPM International Inc. (RPM)
Yield: 3.5% | Growth:2.5 % | Years: 38
RPM International Inc. makes specialty coatings and products for the structural waterproofing and corrosion control markets, as well as products for the consumer, do-it-yourself, and hobby markets.

MDU Resources Group Inc. (MDU)
Yield: 3.0% | Growth: 1.9% | Years: 20
MDU Resources Group Inc. is involved in electric and natural gas distribution, natural gas storage, gathering and transmission, construction materials and mining, and oil and natural gas production.

Nucor Corporation (NUE)
Yield: 3.0% | Growth: 0.8% | Years: 37
Nucor Corporation is the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.

PPG Industries, Inc. (PPG)
Yield: 2.5% | Growth: 1.9% | Years: 37
PPG is a leading manufacturer of coatings and resins, flat and fiber glass, and industrial and specialty chemicals.

Illinois Tool Works Inc. (ITW)
Yield: 2.3% | Growth: 4.8% | Years: 47
Illinois Tool Works Inc. is a diversified manufacturer that operates a portfolio of about 840 industrial and consumer businesses throughout the world.

3M Company (MMM)
Yield: 2.3% | Growth: 2.5% | Years: 52
3M Co. provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives, and other chemical additives.

Harsco Corporation (HSC)
Yield: 2.3% | Growth: 1.9% | Years: 20
Harsco Corp. is a global industrial service provider and manufacturer has operations in steel mill services and access services, as well as construction.

Emerson Electric Co. (EMR)
Yield: 2.2% | Growth: 2.2% | Years: 55
Emerson Electric Co. designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial, and consumer markets around the world.

Air Products And Chemicals Inc. (APD)
Yield: 2.2% | Growth: 2.1% | Years: 29
Air Products and Chemicals Inc. is a major producer of industrial gases and electronics and specialty chemicals and also has interests in environmental and energy-related businesses.

General Dynamics (GD)
Yield: 2.1% | Growth: 10.1% | Years: 19
General Dynamics is the world’s fifth largest military contractor and also one of the world’s biggest makers of corporate jets.

United Technologies Corp. (UTX)
Yield: 2.0% | Growth: 10.4% | Years: 18
United Technologies Corp. portfolio includes Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.

Pentair, Inc. (PNR)
Yield: 2.0% | Growth: 5.6% | Years: 34
Pentair Inc. makes and markets water and fluid control devices, and electrical and electronic enclosures.

Conclusion

The Industrial Materials Sector is the largest sector in my database of dividend stocks. Of the 198 stocks that I track, it currently is represented by 34 stocks (17%). As noted above, this is not a sector I am in a position to buy often, but when the time is right, I plan on taking full advantage of the opportunity. Two of my largest annualized returns (IRR) come from industrial stocks: 3M (MMM) at 46.5% and Emerson Electric Co. (EMR) at 49.7%. I wouldn’t buy them at their current valuation, but based on where they were when I purchased them, I am enjoying a healthy yield-on-cost.

Full Disclosure: Long NUE, ITW, MMM, EMR, GD, UTX. See a list of all my income holdings here.

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Below are several companies enriching their shareholders by raising their cash dividends:

MFA Financial (MFA) is a real estate investment trust that invests in ARM-MBS, which are primarily secured by pools of mortgages on single family residences. October 1st the trust increased its quarterly quarterly dividend 18% to $0.225/share. The dividend is payable on October 29, 2010 to stockholders of record on October 12, 2010. The ex-dividend date is October 7, 2010. The yield based on the new payout is 11.39%.

American Financial Group (AFG) provides specialty and multi-line property and casualty insurance, and sells tax-deferred annuities. October 1st the company raised its quarterly dividend 18% to $0.1625/share. The dividend is payable on October 25, 2010 to holders of record on October 15, 2010. The ex-dividend date is October 13, 2010. The yield based on the new payout is 2.15%.

Thor Industries (THO) is engaged in manufacturing and selling a range of recreation vehicles, and small and mid-size buses. October 1st the company increased its quarterly dividend 43% to $0.10/share. The dividend is payable on October 29, 2010 to shareholders of record on October 18, 2010. The ex-dividend date is October 14, 2010. The yield based on the new payout is 1.15%.

WD-40 Company (WDFC) produces WD-40 and 3-IN-ONE Oil lubricants; Lava and Solvol heavy-duty hand cleaners; and X-14, 2000 Flushes, Carpet Fresh and Spot Shot household cleaning products. October 1st the company raised its quarterly dividend 8% to $0.27/share. The yield based on the new payout is 2.76%.

Northwest Natural Gas (NWN) provides service to some 590,000 residential, 61,000 commercial and 900 industrial sales customers in Oregon and southwestern Washington. October 4th the company increased its quarterly dividend 5% to $0.435/share. The dividend will be paid November 15, 2010, to shareholders of record on October 29, 2010. The ex-dividend date is October 27, 2010. NWN is a Dividend Achiever and has raised its dividend for 38 consecutive years. The yield based on the new payout is 3.59%.

Senior Housing Properties (SNH) is a real estate investment trust (REIT) with 298 properties located in 35 states and Washington, D.C. October 4th the trust raised its quarterly dividend to $0.37/share. The dividend is payable on Oct. 15 to shareholders of record on Nov. 12. The ex-dividend date is Nov. 10. The yield based on the new payout is 6.11%.

West Pharmaceutical (WST) manufactures components and systems for injectable drug delivery and plastic packaging and delivery system components. October 4th the company increased its quarterly dividend 6.25% to $0.17/share. The dividend will be paid on November 3, 2010 to shareholders of record on October 20, 2010. WST is a Dividend Achiever and has raised its dividend for 18 consecutive years. The yield based on the new payout is 1.99%.

Collectors Universe (CLCT) provides value-added grading, authentication and information services and products to dealers and collectors of high-end collectibles. October 6th the company raised its quarterly dividend 8% to $0.325/share. The dividend is payable on November 19, 2010 to stockholders of record on November 5, 2010. The ex-dividend date is November 1, 2010. The yield based on the new payout is 9.3%.

Artesian Resources (ARTNA) distributes and sells water to residential, commercial, industrial, governmental, municipal, and utility customers in the state of Delaware. October 6th the company increased its quarterly dividend to $0.1892/share. The dividend is payable on November 19, 2010 to shareholders of record at the close of business on November 8, 2010. The ex-dividend date is November 4, 2010. The yield based on the new payout is 4%.

RPM International Inc. (RPM) makes specialty coatings and products for the structural waterproofing and corrosion control markets, as well as products for the consumer, do-it-yourself, and hobby markets. October 7th the company raised its quarterly dividend 2.4% to $0.21/share. The dividend is payable on October 29, 2010, to stockholders of record as of October 18, 2010. The ex-dividend date is October 14, 2010. RPM is a Dividend Achiever and has raised its dividend for 38 consecutive years. The yield based on the new payout is 4.1%.

Selecting stocks with increasing dividends is critical for an income growth strategy. The above list contains stocks that recently raised their dividends; it is not a list of recommend buys. As always, due diligence should be performed before buying or selling any stock. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

Full Disclosure: No position in the aforementioned securities. 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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Revenue Growth

The top line drives the bottom line. You can only cut costs so far, for a business to grow and thrive it must find ways to grow sales. This can be done through acquisitions, expanding markets, developing new production or entering a new line of business. For a company to sustain a growing dividend over the long-term, it must find ways to continuously grow its business. For some companies it easier and less risky to cut costs and many will stop there.

Earnings Growth

Many companies have learned the hard way that growth for the sake of growth is not always a good thing. If growth is not managed effectively and efficiently, it will be detrimental to long-term viability of the business. Management must ensure growth projects are monitored, controlled and well-run to ensure a profit is generated. Many great ideas have failed as a result of poor execution. Sometimes competitors will watch and correct the execution problems and turn your failed growth idea into their success.

Cash Flow Growth

Revenue and earnings growth are good, but ultimately they must convert to increased cash flow to provide the means for sustained dividend growth. Having the cash on hand is not enough. There must be a commitment on management’s part to grow the dividend. Ideally, this commitment will eventually grow into a culture of dividend growth that the company takes great pride in.

Business Outlook

One of the most difficult things to judge are the future prospects of a company. Certain questions have to be answered. Is the company in a declining industry? Will it be able to reinvent itself in a way that will allow it to sustain growth? What external force could radically change the prospects of the company? These same questions are being asked by the company’s board, and they are equally hard for management to answer even with full access to insider information.

Below are ten companies with an average 10-year free cash flow growth rate exceeding their average 10-year dividend growth rate:

		Current	Average 10-yr Growth Rates
Company	Analysis	Yield	Dividend	Revenue	FCF
Abbott Labs (ABT)	Link	3.40%	9.01%	9.02%	14.38%
Becton, Dickinson (BDX)	Link	2.06%	15.22%	7.74%	31.25%
Cardinal Health (CAH)	Link	2.18%	25.90%	15.96%	138.39%
Colgate (CL)	Link	2.65%	11.42%	5.43%	15.42%
CenturyLink, Inc. (CTL)	-	7.97%	61.07%	13.92%	73.94%
J&J (JNJ)	Link	3.52%	13.52%	9.51%	14.99%
Procter & Gamble (PG)	Link	3.00%	11.16%	7.84%	20.92%
RPM International (RPM)	Link	4.40%	5.45%	7.25%	58.62%
AT&T, Inc. (T)	Link	6.33%	5.47%	12.51%	29.50%
Wal-Mart Stores (WMT)	Link	2.34%	18.93%	9.57%	33.71%

It is important to note that only three of the above stocks (ABT, RPM and T) have revenue growth in excess of dividend growth. Needless, to say before buying you must consider the future prospects for each company and determine if the growth rates are sustainable in the future. As with yield, dividend growth carries its own risk. If the rate is too high, the company will have a hard time maintaining it going forward. If the rate is too low, it will not keep up with inflation and the shareholder will lose purchasing power.

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

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I. Consumer Goods (13%)

Consumer goods are items purchased for personal or household use. These would include items such as soap, detergent, cleaning supplies, toilet paper, toothpaste, candies, sodas, etc. These tend to be non-cyclical and many of the products are low cost. Since the demand for these products are less affected by the economic cycle and the industries are mature, the companies tend to generate relatively stable and predictable cash flows. These characteristics are exactly what you look for in a great dividend company. Below are some examples of companies in the consumer goods sector:

Colgate-Palmolive (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.
Analysis | Years of Dividend Growth: 47 | Yield: 2.44%

McCormick & Company (MKC) primarily produces spices, seasonings and flavorings for the retail food, food service and industrial markets. Trademarks include McCormick and Schilling.
Years of Dividend Growth: 24 | Yield: 2.70%

Procter & Gamble (PG ) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
Analysis | Years of Dividend Growth: 53 | Yield: 2.90%

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.
Analysis | Years of Dividend Growth: 48 | Yield: 3.35%

Kimberly-Clark Co (KMB) is a global consumer products company produces tissue, personal care and health care. Its brands include Huggies, Pull-Ups, Kotex, Depend, Kleenex, Scott and Kimberly-Clark.
Analysis | Years of Dividend Growth: 38 | Yield: 4.22%

II. Financial Services (17%)

Have you ever had to pay a bank fee, origination point on a loan, or have you ever filed an insurance claim and were not satisfied with the amount of money you received? Financial stocks are cash cows – they generate large cash flows with minimal capital and ongoing expenses. Historically, these have been some of the best dividend growth stocks, at least until the industry became overly aggressive and made bad operating and investing decisions. Here are several financial companies that survived the last downturn:

Eaton Vance Corp. (EV) is a Boston-based holding company that is primarily engaged in investment management.
Years of Dividend Growth: 30 | Yield: 2.23%

T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund complexes in the United States.
Analysis | Years of Dividend Growth: 30 | Yield: 2.30%

Chubb Corporation (CB) is one of the largest U.S. property-casualty insurers, Chubb has carved out a number of niches, including high-end personal lines and specialty liability lines coverage.
Years of Dividend Growth: 46 | Yield: 2.86%

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.
Analysis | Years of Dividend Growth: 23 | Yield: 4.29%

Cincinnati Financial Corp. (CINF) markets primarily property and casualty coverage; it also conducts life insurance and asset management operations.
Analysis | Years of Dividend Growth: 50 | Yield: 5.92%

III. Industrial Materials (18%)

Companies classified as industrial materials are those engaged in the manufacturing or production of machinery, raw materials or component parts for use or consumption by other industries or firms. These companies don’t make the consumer goods, but they make the machinery and supply the raw materials that are used to manufacture them. Many of these companies are mature with established markets, strong customer relationships and often hold an exclusive right to their proprietary manufacturing process. Below are some companies in the industrial materials sector:

United Technologies Corp. (UTX) is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.
Analysis | Years of Dividend Growth: 18 | Yield: 2.55%

Dover Corporation Corp. (DOV) manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.
Years of Dividend Growth: 55 | Yield: 2.42%

Emerson Electric (EMR) primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.
Years of Dividend Growth: 53 | Yield: 2.95%

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 | Years of Dividend Growth: 37 | Yield: 3.73%

RPM International Inc. (RPM) makes specialty coatings and products for the structural waterproofing and corrosion control markets, as well as products for the consumer, do-it-yourself and hobby markets.
Analysis | Years of Dividend Growth: 37 | Yield: 4.60%

It is no surprise the above three sectors carry the highest allocation in my income portfolio. To keep my asset allocation balanced, I must overweight other sectors in my non-income portfolios. In the same way that too many deserts will expose you to unnecessary health risks, being over-allocated in any sector put your portfolio at risk.

Full Disclosure: Long CL, CINF, PG, KO, KMB, HGIC, CINF, UTX, EMR, NUE. See a list of all my income holdings here.

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This week only one stock rewarded their shareholders with higher cash dividends:

Computer Services (CSVI) provides service and software solutions for financial institutions. July 6th the company increased its quarterly dividend 15.8% to $0.1/share. The dividend is payable on September 24, 2010, to shareholders of record as of the close of business on September 1, 2010. The ex-dividend date is August 30, 2010. The yield based on the new payout is 2.2%.

Members of the Dividend Achievers Index are comprised of companies incorporated in the United States or its territories, trade on the NYSE, NASDAQ or AMEX, and have increased their annual regular dividend payments for the last ten or more consecutive years. Several of these companies declared cash dividends this past week including:

Bank of the Ozarks (OZRK) provides retail & commercial banking products and services via 70 banking and two loan production offices in AR, TX, NC. July 2nd the company declares a $0.15/share quarterly dividend. The dividend is payable July 23, 2010 to shareholders of record as of July 16, 2010. The ex-dividend date is July 14, 2010. Yield on the dividend is 1.7%. OZRK has paid a higher dividend for the last 12 consecutive years.

RPM Int’l (RPM) makes specialty coatings and products for the structural waterproofing and corrosion control markets, as well as products for the consumer, do-it-yourself, and hobby markets. July 6th the company declared a $0.205/share quarterly dividend. The dividend is payable on July 30, 2010, to stockholders of record as of July 16, 2010. The ex-dividend date is July 13, 2010. Yield on the dividend is 4.6%. RPM has paid a higher dividend for the last 37 consecutive years.

Northwest Natural Gas (NWN) is a U.S. gas distribution utility serving Oregon and southwest Washington. July 6th the company declared a $0.415/share quarterly dividend. The dividend will be paid August 13, 2010, to shareholders of record on July 30, 2010. The ex-dividend date is July 28, 2010. Yield on the dividend is 3.7%. NWN has paid a higher dividend for the last 38 consecutive years.

H.B. Fuller (FUL) is an international manufacturer of adhesives, sealants, paints and specialty construction products. July 7th the company declared a $0.07/share quarterly dividend. The dividend is payable on August 5, 2010 to shareholders of record at the close of business on July 22, 2010. The ex-dividend date is July 20, 2010. Yield on the dividend is 1.4%. FUL has paid a higher dividend for the last 41 consecutive years.

Eaton Vance Corp. (EV) is a Boston-based holding company is primarily engaged in investment management. July 7th the company declares a $0.16/share quarterly dividend. The dividend is payable August 13, 2010 to shareholders of record on July 30, 2010. The ex-dividend date is July 28, 2010. Yield on the dividend is 2.2%. EV has paid a higher dividend for the last 30 consecutive years.

Colgate-Palmolive (CL) is a major consumer products company markets oral, personal and household care, and pet nutrition products in more than 200 countries and territories. July 8th the company declared a $0.53/share quarterly dividend. The dividend is payable on August 13, 2010, to shareholders of record on July 26, 2010. The ex-dividend date is July 22, 2010. Yield on the dividend is 2.6%. CL has paid a higher dividend for the last 47 consecutive years.

Tanger Factory Outlet (SKT) develops, acquires, owns, operates and manages factory outlet shopping centers in the United States. July 8th the company declared a $0.3875/share quarterly dividend. The dividend is payable to holders of record on July 30, 2010. The ex-dividend date is July 28, 2010. Yield on the dividend is 3.6%. SKY has paid a higher dividend for the last 17 consecutive years.

Selecting stocks with increasing dividends is critical for an income growth strategy. The above list contains stocks that recently raised or maintained their dividends, it is not a list of recommend buys. As always, due diligence should be performed before buying or selling any stock. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

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

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

Company Description: RPM International Inc. makes specialty coatings and products for the structural waterproofing and corrosion control markets, as well as products for the consumer, do-it-yourself and hobby markets.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

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

RPM is trading at a discount to only 3.) above. Since RPM’s tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 21.8% premium to its calculated fair value of $15.33. RPM 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%

RPM 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%. RPM 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 1969 and has increased its dividend payments for 37 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

RPM earned a Star in this section for its NPV MMA Diff. of the $548. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as RPM has. The stock’s current yield of 4.37% exceeds the 4.02% estimated 20-year average MMA rate.

Other: RPM is a member of the Broad Dividend Achievers™ Index.

Conclusion: RPM 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 RPM as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $19.12 before RPM’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 37 years of consecutive dividend increases. At that price the stock would yield 4.26%.

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 2.9%. This dividend growth rate is less than the 3.2% used in this analysis, thus providing a significant margin of safety. RPM has a risk rating of 1.50 which classifies it as a low risk stock.

Historically, RPM has relied on its diverse product offerings to generate consistent free cash flow over the economic cycle. The company has competitive advantages in its coatings markets based on its strong brand identity, high entry barriers, patents and reputation. However, I have concerns about outstanding asbestos-related lawsuits and its current valuation. RPM is trading well above my buy price of $15.33, so for now I will remain on the sidelines. 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 RPM (0.00% of my Income Portfolio). See a list of all my income holdings here.

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Years Of Consecutive Dividend Increases

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

Strong Financial Condition

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

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

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

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

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

9 Stocks With a Sustainable Dividend

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

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

Below are several stocks that meet the above criteria:

Bonus: Look For A Favorable Industry

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

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

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Below are several companies looking to provide their share holders with superior long-term returns by increasing their cash dividends:

Entergy Corp. (ETR) is an electric utility holding company serves 2.6 million customers in Arkansas, Louisiana, Mississippi and Texas. April 5th the company increased its quarterly dividend to $0.83/share. The dividend is payable June 1 to stockholders of record on May 12, reflecting the first increase in its quarterly common stock dividend since July 2007. The ex-dividend date is May 10, 2010. Yield on the dividend is 4%. The yield based on the new payout is 4.04%.

Bank of the Ozarks (OZRK) provides retail & commercial banking products and services via 70 banking and two loan production offices in AR, TX, NC. April 6th the company raised its quarterly dividend 7% to $0.15/share. The dividend is payable April 23, 2010 to shareholders of record as of April 16, 2010. The ex-dividend date is April 14, 2010. OZRK is a Dividend Achiever and has raised its dividend for 11 consecutive years. The yield based on the new payout is 1.62%.

TJX (TJX) operates eight chains of off-price apparel and home fashion specialty stores in the U.S., Canada, Germany, Ireland and the U.K. April 6th the company increased its quarterly dividend 25% to $0.15/share. TJX is a Dividend Achiever and has raised its dividend for 11 consecutive years. The yield based on the new payout is 1.34%.

IDEX (IEX) designs, makes and markets a broad range of pump products, dispensing equipment and other engineered products, serving a diverse customer base worldwide. April 6th the company increased its quarterly dividend 25% to $0.15/share. The dividend is payable on April 30 to shareholders of record on April 15. The ex-dividend date is April 13. The yield based on the new payout is 1.79%.

Tanger Factory Outlet (SKT) is a real estate investment trust develops, acquires, owns, operates and manages factory outlet shopping centers in the United States. April 8th the company raised its quarterly dividend to $0.3875/share. The dividend will be payable on May 14, 2010 to holders of record on April 30, 2010. The ex-dividend date is April 28, 2010. Yield on the dividend is 3.6%. SKT is a Dividend Achiever and has raised its dividend for 17 consecutive years. The yield based on the new payout is 3.55%.

In addition to the above dividend raisers, two Dividend Achievers declared regular quarterly cash dividends. April 6th RPM International (RPM) declared a quarterly dividend of $0.205/share with a 3.70% yield. The dividend is payable on April 30, 2010 to stockholders of record as of April 16, 2010. The ex-dividend date is April 14, 2010. Also, Murphy Oil (MUR) on April 7th declared a quarterly dividend of $0.25/share with a 1.70% yield. The dividend is payable June 1, 2010 to holders of record May 14, 2010. The ex-dividend date is May 12, 2010.

To provide superior long-term returns a companies need to increase their dividends on a consistent basis. 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.

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