Below are ten dividend stocks that have out-performed the S&P 500 this year through May 15, 2009:

10. Coca-Cola Co (KO) – Return: 0.4% – Yield: 3.76%
The Coca-Cola Company engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates and syrups worldwide. Risk Rating: Low (1.50) – Analysis

9. Sysco Corp (SYY) – Return: 0.5% – Yield: 4.20%
SYSCO Corporation, 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. Risk Rating: Low (1.00) – Analysis

8. BP ADR (BP) – Return: 1.4% – Yield: 7.37%
This supermajor integrated oil company (formerly BP Amoco p.l.c.) is based in London and is the world’s second largest publicly owned oil company and the fourth largest U.S. refiner. Risk Rating: Medium (1.75) – Analysis

7. 3M Co (MMM) – Return: 1.8% – Yield: 3.52%
3M Co. is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications. Risk Rating: Low (1.50) – Analysis

6. Paychex Inc (PAYX) – Return: 4.1% – Yield: 4.63%
Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States. Risk Rating: Medium (1.75) – Analysis

5. Intel Corp (INTC) – Return: 5.6% – Yield: 3.69%
Intel Corporation engages in the manufacture and sale of semiconductor chips, as well as in the development of advanced integrated digital technology platforms for the computing and communications industries worldwide. Risk Rating: Medium (1.75) – Analysis

4. Canadian National Railway ADR (CNI) – Return: 7.0% – Yield: 2.24%
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. Risk Rating: Low (1.25) – Analysis

3. Manulife Financial Corp ADR (MFC) – Return: 8.0% – Yield: 4.78%
Manulife Financial Corporation is a life insurance company with customers in the United States, Canada and Asia. It is the holding company of The Manufacturers Life Insurance Company and John Hancock Financial Services. Risk Rating: Medium (1.75) – Analysis

2. CenturyTel Inc (CTL) – Return: 13.5% – Yield: 9.27%
CenturyTel Inc. provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin. Risk Rating: High (2.50) – Analysis

1. Royal Bank of Canada ADR (RY) – Return: 22.8% – Yield: 4.47%
Royal Bank of Canada (RBC) offers a range of banking and financial services in North America and internationally. Risk Rating: Low (1.50)

Over the same period the S&P 500 (VFINX) was down 1.2%. The returns were calculated using Yahoo’s dividend adjusted stock price for December 31, 2008 as the starting point. Some interesting items to note: The list contains four ADRs (3 Canadian, 1 British). RY’s dividend has been frozen since November 2007. CTL is the only High Risk stock to make the list based on my risk rating. The top five were less traditional dividend stocks that had been beaten down to low levels.

Short-term performance is never the sole reason for long-term investors to buy. What goes up significantly usually comes back down. Case in point, last years two dividend darlings, Wal-Mart (WMT) and McDonalds (MCD), found themselves in the bottom ten of this list, each down 13.2%.

Full Disclosure: Long in all the aforementioned securities. See a list of all my income holdings here.

The Dow was up 87 points in March, but even more surprising was just how long it had been since the Dow finished in the black. You have to go all the way back to August 2008 to find the last time the Dow finished up.  It wasn’t just the Dow that saw large increases, the Standard & Poor’s 500 Index finished March with its largest gain since October 2002, while the The Nasdaq was up 11.4% recording its best month since November 2002.

The good news carried into April with the release of better than expected housing news.  The National Association of Realtors (NAR) reported pending home sales rose a seasonally adjusted 2.1% in  February.  Economists expected the pending sales to remain unchanged. The NAR report, considered to be a leading indicator, is based on the number of contracts signed for sales for existing homes. “The sharp decline in prices is helping to improve affordability. There are small signs that the housing market is moving toward stability.” Joseph Brusuelas, a director at Moody’s Economy.com, told Bloomberg News.

The manufacturing sector, to a lesser degree, joined the party.  The Institute of Supply Management’s manufacturing index was 36.3 in March, up slightly from the reading of 35.8 in February.  In addition, construction spending fell 0.9% in February, less than the 1.9% drop economists had expected.

So, how did the dividend stocks fare? Quite well, with some of the more beaten down names making a robust recovery. Here are 10 dividend stocks along with their double-digit March performance:

• Royal Bank of Canada (RY) – Up 19.2% – Yield: 5.50%
• Intel Corporation (INTC) – Up 18.0% – Yield: 3.72%  (Analysis)
• Paychex Inc. (PAYX) – Up 16.4% – Yield: 4.83% (Analysis)
• AFLAC Inc. (AFL) – Up 15.5% – Yield: 5.79%
• Eli Lilly and Co. (LLY) – Up 13.7% – Yield: 5.87%
• Nucor Corp (NUE) – Up 13.4% – Yield:  3.67% (Analysis)
• Illinois Tool Works Inc. (ITW) – Up 11.0% – Yield: 4.02% (Analysis)
• Chevron Corporation (CVX) – Up 10.8% – Yield:  3.87%
• Manulife Financial Corp. (MFC) – Up 10.3% – Yield: 7.38%  (Analysis)
• Commercial Net Lease Realty, Inc. (NNN) – Up 10.2% – Yield: 9.47%

It is not surprising that most of the above stocks are ones that have recently suffered the most. This highlights what all successful investors know – when stocks are down, that is your opportunity to buy them on sale, sometimes at a discount.

Finally, with this much good news, surely someone would call a bottom, and that is just what MSN Money author Tim Middleton did (sort of) in his article “Dig in: Market won’t get much worse“. He said “We may not have seen the absolute bottom of the bear market, but we’re close enough that we can be comfortable having a lot of our money in stocks. The rally has confirmed the optimistic bent of my portfolio, and I’m going to stay this course. I expect it to blossom with the spring.”

Full Disclosure: Long in all the aforementioned stocks.

References:
- Surprising data on housing, manufacturing
- Dow up 87, sees first monthly gain since August
- Dig in: Market won’t get much worse

(Photo Credit)

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The “%” column is the percentage decrease between the “Sell Price” and “Recent Price”.  As you can see, each of the stocks continued to fall after it was sold. That adds substantive evidence that my sell after a dividend cut rule is the correct thing to do. With that said, I have begun to question if there were other indicators that should have led me to an earlier sale. Four of the above stocks have one other thing in common – they froze their dividend before cutting it. The table below shows those stocks and the price on the dividend freeze date (declaration date), along with the three stocks I currently hold with a frozen dividend:

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The “Freeze Price” is the closing price the first trading day after the dividend freeze was announced. The “Sell Price” for the first four (those that I have already sold), is the actual price I sold it for and for the three I still hold it is a recent price. Based on the above, it appears the prudent thing to do would be to sell a stock after it freezes its dividend. Like a dividend cut, an investment with a froze dividend is no longer aligned with my dividend portfolio’s goal of building an ever-increasing source of dividend income.

Care should be taken in considering that not only have the above stocks fell over the last year or so, but virtually every other stock has fell. So what appears to be hard and fast rules in this market, will need to be evaluated under different phases of the cycle. But for now, selling after a dividend cut or a dividend freeze appears to be a prudent rule to follow. However, I do not see the dividend freeze rule as stringent as the dividend cut rule. Each situation needs to be evaluated and sometimes an immediate sale is not warranted. Considering all this, I would phrase my dividend rule as such:

When an individual stock held as a dividend investment freezes its dividend, this is a strong sell indicator. The specific facts and circumstances should be immediately evaluated and continuously monitored until the stock is either sold or it increases its dividend.

If it is decided not to sell the stock, the pressure to sell should increase as time passes.  Another strong indicator to sell would be if the dividend freeze persists long enough to incur a flat dividend year-over-year. Dividend freezes need to be monitored closely. In many instances they are the first step to a dividend cut.

Full Disclosure: Long HD, MTB, RY

1. Number of Dividend Payments per Year
Most international countries pay dividends only once or twice a year – far less than the quarterly dividends that we Americans have grown accustomed to. For me dividends are one form of feedback as to how well the company is performing. I prefer more feedback to less.

2. The Amount of the Dividend Payments
It is the custom in many international countries to payout dividends as a fixed percentage of earnings each year. This will often result in larger overall payouts, but the payouts are irregular. In America we are accustomed to steady growing dividends, valuing consistency over maximum payout.

3. The Amount and Timing of Taxes on Foreign Dividends
Most foreign countries will deduct their tax before sending you the dividend. Fortunately, most have treaties with the U.S. where you can claim a credit for the tax withheld.

4. Currency Risk
Recently as the U.S. dollar has strengthen vs. other currencies, I have seen a steady decline in the dividends received, even though none of the securities have lowered their local currency dividend.

5. Risk of Political Unrest
That wonderful dividend company you found may be located in a not so wonderful country. An unstable geopolitical environment can potentially destroy a company that is under its control.

International Income Exchange-Traded Funds (ETF)/Closed-End Funds (CEF)
I have tried to increase my international exposure by purchasing ETF/CEFs with a high percentage of international stocks. Below are three that I currently own:

• Alpine Total Dynamic Dividend Fund (AOD)
• Eaton Vance Tax-Advantaged Glbl Div Opp (ETO)
• PowerShares Intnl Dividend Achievers Ptf (PID)

The problem with this route is the investment quality, or lack thereof. These funds have woefully underperformed my individual dividend stocks.

Individual International Income Stocks
If individual stocks are out-performing the above ETF/CEFs then why not focus on individual international dividend stocks? I currently hold the following ADRs:

• BP Plc (BP)
• Canadian National Railway Company (CNI)
• Manulife Financial Corp (MFC)
• Royal Bank of Canada (RY)

That is three Canadian and one British company. Not much diversification there. It shouldn’t be surprising that the two countries represented above are those whose culture, government and financial markets are most similar to the U.S. Most international companies that meet my financial criteria are disqualified based on one of the five issues listed above – generally #1. I refuse to buy a dividend stock that pays less frequently than semi-annual.

Conclusion
If the numbers do not work, you should never force-buy any security just to meet an allocation. I will continue to look for promising international income ETF/CEFs and individual stocks, but I will not buy any securities below my minimum standards. I will rely on my 401(k) and capital appreciation portfolio to meet the majority of my international allocation.

Disclosure: Long AOD, ETO, PID, BP, CNI, MFC, RY

The following stocks in my portfolio have froze their dividends at the current rate per share (yields as of 10/24/08):

General Electric Co. (GE) – 6.95%
Current Dividend: $0.31/share (last 5 quarters)
Previous amount: $0.28/share (September 2007)
2007 Dividend: $1.15
2008 Estimated: $1.24
Last Chance to raise: Q4/2009

The Home Depot, Inc (HD) – 4.86%
Current Dividend: $0.225/share (last 8 quarters)
Previous amount: $0.15/share (September 2006)
2007 Dividend: $0.90
2008 Estimated: $0.90
Last Chance to raise: Q4/2008

RBC Royal Bank (RY) – 4.41%
Current Dividend: C$0.50/share (last 5 quarters)
Previous amount: C$0.46/share (August 2007)
2007 Dividend: C$1.88
2008 Estimated: C$2.00
Last Chance to raise: Q4/2009

Bank of America (BAC) was also in this group until it decided to cut it dividend earlier this month, at which point I sold it.

When a company decides to freeze its dividend at the current rate per share, the first thing I do is put the stock “On The Shelf“. This is a place I can set the security aside within my income portfolio with no additional purchases made until its outlook improves and it comes off the shelf, or deteriorates to the point it should be sold.

I look at dividends on an annual basis. This adds a degree of flexibility and opportunities for the company to hold the dividend flat for a period of time yet continue its string of annual increases. For example, if HD were to declare a dividend of $0.235/share in the fourth quarter of this year, it would show a year-over-year increase from 2007 ($0.91 vs. $0.90). I would then pull it off the shelf and move forward. I have listed above the last chance each stock has to increase its dividend and continue its year-over-year string.

If a company leaves its dividend flat year over year, the decision is not as clear-cut as a company that cuts its dividend. I will look at alternative investments, along with the company’s current yield and future outlook. There is something to be said for a company that would not cut its dividend during difficult times.

Disclosure: Long in HD, GE and RY.

Case in point, my income portfolio currently consist of 8 ETFs and 27 individual stocks. Of the 27 individual stocks, only 7 of them would I consider purchasing today based on their valuation. They are listed below along with their buy below price and other information as of 9/12/2008:

AFLAC Inc (AFL) – Yield: 1.65%
Buy Below: $66.75
9/12 Close: $58.60
NPV MMA Diff: $13,075
Concern: The above data assumes a very aggressive dividend growth rate of 20%. With a low yield of 1.65%, AFL needs the high growth rate to be viable. From 1998-2007 the dividend growth rate averaged 22.3% with a low of 11.8% in 2001 to a high of 45.5% in 2007. Another concern is AFL’s currency exposure in Japan, where roughly 75% of the company’s earnings are derived.

BB&T Corporation (BBT) – Yield: 5.72%
Buy Below: $35.79
9/12 Close: $34.05
NPV MMA Diff: $10,573
Concern: BBT’s exposure to the banking industry’s current issues with funding and credit quality.

BP Plc (BP) – Yield: 6.29%
Buy Below: $83.28
9/12 Close: $54.79
NPV MMA Diff: $34,463
Concern: Failure to come to an understanding with Russia over its operations in the region (TNK-BP), inability to diversify away from Russia and terrorism could adversely affect BP’s future performance.

General Electric (GE) – Yield: 4.40%
Buy Below: $32.69
9/12 Close: $26.75
NPV MMA Diff: $8,103
Concern: Slower-than-expected global economic growth, as well as manufacturing and regulatory problems and the potential for higher delinquency rates in GE’s financial services segment.

Paychex Inc (PAYX) – Yield: 3.65%
Buy Below: $49.88
9/12 Close: $34.01
NPV MMA Diff: $149,426
Concern: The highly competitive nature of the outsourcing industry as well as the threat of new entrants into the human resources segment could pose problems for PAYX in the future.

Pfizer Inc. (PFE) – Yield: 6.96%
Buy Below: $27.72
9/12 Close: $18.62
NPV MMA Diff: $56,099
Concern: Patent expirations and pipeline uncertainties could cause PFE significant problems in the future if left unresolved.

Royal Bank of Canada (RY) – Yield: 3.99%
Buy Below: $49.08
9/12 Close: $46.46
NPV MMA Diff: $250,334
Concern: A further weakening of the Canadian economy, which grew at only 0.3% in the June quarter, a prolonged housing-related downturn in the United States economy, and unexpected sharp currency fluctuations.

The buy below price is the minimum of the Mid-2 (as described in Fair Value Data) and price needed to generate the minimum NPV MMA Diff. (as described in Measure What’s Important). As always, you will need to do your own research and reach your on conclusion as to appropriateness of adding any of these securities to your portfolio.

Disclosure: Long in all the aforementioned securities.