Friday, September 9, 2011

Dividends: It's Payback Time!

SmartMoney by Ben Levisohn

Slow economic growth. Whipsawing volatility. In an environment like this, it is little wonder investors are piling into stocks with steady dividend payments.

Mutual funds specializing in dividend stocks have seen inflows of $12.6 billion so far this year, four times as much as in all of 2010 -- even as stock funds as a whole have posted outflows of nearly $25 billion, according to fund tracker Lipper.

The key to dividend investing, say strategists, is to be selective. That means avoiding the juiciest dividends and concentrating instead on companies that are boosting their payouts -- and have the growth potential to keep those payments coming.

"You should never be taking shortcuts," says Ben Inker, director of asset allocation at money manager GMO LLC in Boston. "Just because a stock pays a dividend doesn't mean you don't have to worry about the rest of the company."

At the same time, a low yield might not be a problem if the company seems poised to raise its payment. Take UnitedHealth Group (UNH: 45.73, -1.29, -2.74%) Inc., a favorite of Richard Helm, manager of the Cohen & Steers Dividend Value Fund. It has a yield of just 1.2%, but it raised its dividend payment from three cents per share to 50 cents in 2010, and then raised it again in May 2011 to 65 cents.

"We favor those that have lower payout ratios, but higher rates of dividend growth," says Mr. Helm, whose fund is down 6.7% so far this year, better than the S&P 500's 7.8% decline through Thursday.

Of course, a fat yield does no good if a company can't make its payments in the future. How do you tell if a dividend may be unsustainable? First, look at a company's payout ratio -- the dividend payment per share divided by earnings per share. A common rule of thumb: If the number is more than 50%, the dividend may be too high, especially for companies where earnings fluctuate with the economy.

In stable sectors, such as utilities and telecommunication companies, higher payout ratios might not be a sign of trouble because companies' income fluctuates less.

Financial planner Emily Sanders, chief investment officer of Sanders Financial Management in Norcross, GA passed on buying Frontier Communications recently, choosing Verizon, PepsiCo (PEP: 63.30, -0.85, -1.33%) Inc. and Abbott Laboratories (ABT: 51.04, -0.90, -1.73%) instead.

"We decided that the stability of the dividend wasn't ensured enough to buy the stock," Ms. Sanders says.

A high-yield, low-beta strategy would steer you toward consumer staples like General Mills (GIS: 37.41, -0.30, -0.80%) Inc., which pays a dividend yield of 3.3% and has a three-year beta of just 0.2. Utility PG&E (PCG: 41.34, -0.75, -1.78%) Corp. yields 4.4% and carries a beta of 0.2; and health-care company Abbott Laboratories yields 3.8% and has a beta of 0.3.

Several mutual funds and exchange-traded funds generated fatter yields than the S&P 500 and provided more safety. The SPDR S&P Dividend (SDY: 50.19, -1.10, -2.14%) ETF, which tracks the S&P High Yield Dividend Aristocrats index of S&P 500 companies that have raised dividends every year for 25 consecutive years, has dropped 8.6% in August, compared with a 13.1% fall for the S&P. It yields 3.3% and has a beta of 0.88.

Other investors might prefer more upside potential alongside a fat yield. One strategy: build a portfolio that pays a high dividend but tracks the S&P 500. By leaning toward stocks with above-average yields, but higher betas, investors can match the S&P's price gains while beating it on a yield basis.

Joe Wolfe, director of quantitative research at Northern Trust (NTRS: 36.53, -1.49, -3.92%) Corp., recommends higher-beta dividend payers like Microsoft (MSFT: 25.80, -0.41, -1.56%) Corp., which has a dividend yield of 2.6% and a beta of 0.98, and Intel (INTC: 19.64, -0.35, -1.75%) Corp., which has a dividend yield of 4.3% and a beta of 1.1.

Among the higher-beta dividend payers that Jeff Layman, chief Investment Officer at BKD Wealth Advisors LLC in St. Louis, has been accumulating for his clients are ConocoPhillips (COP: 66.44, -1.53, -2.25%), which yields 4% and has a beta of 1.2, and Aflac (AFL: 34.99, -1.70, -4.63%) Inc., which yields 3.4% and has a beta of 2.0.

High-beta income ETFs include First Trust Morningstar Dividend Leaders (FDL: 16.06, -0.27, -1.65%), which yields 3.7% and has a beta of 0.9, WisdomTree Equity Income (DHS: 39.23, -0.73, -1.83%), which yields 3.6% and has a beta of 1.1, and the Vanguard High Dividend Yield (VYM: 41.36, -0.85, -2.01%), which yields 2.82% and has a beta of 1.

"In the future, dividends will be a stronger portion of returns," Mr. Wolfe says. "But we want market exposure too."

Thursday, September 8, 2011

Top 20 Stock Holdings

Here are the top 20 stocks in my Dividend Portfolio as of 8/31/11 ranked by size of holdings.

1. Kinder Morgan Energy (KMP) USA
2. DCP Midstream Partners (DPM) USA
3. Johnson & Johnson (JNJ) USA
4. Abbott Labs (ABT) USA
5. ONEOK, Inc. (OKE) USA
6. Procter & Gamble (PG) USA
7. PepsiCo (PEP) USA
8. General Electric Company (GE) USA
9. Becton, Dickinson and Co (BDX) USA
10. Unilever NV (UN) Netherlands
11. Exxon Mobil (XOM) USA
12. GlaxoSmithKline (GSK) UK
13. CommonWealth REIT (CWH) USA
14. Aircastle Limited (AYR) USA
15. Barclays PLC (BCS) UK
16. Novartis (NVS) Switzerland
17. Pfizer (PFE) USA
18. Intel (INTC) USA
19. Newell Rubbermaid (NWL) USA
20. Banco Santander (STD) Spain

Here are the top 20 holdings of the Vanguard High Dividend Yield ETF (VYM) as of June 30, 2011. The Fund consists of stocks that are characterized by higher-than-average dividend yields, and is based on the U.S. component of the FTSE Global Equity Index Series (GEIS). Real estate investment trusts (REITs), whose income generally do not qualify for favorable tax treatment as qualified dividend income (QDI) are removed, as are stocks that have not paid a dividend during the previous 12 months.

1. Exxon Mobil Corporation (XOM) USA
2. Microsoft (MSFT) USA
3. Chevron (CVX) USA
4. General Electric Company (GE) USA
5. AT&T (T) USA
6. Johnson & Johnson (JNJ) USA
7. Procter & Gamble (PG) USA
8. Pfizer (PFE) USA
9. Coca-Cola (KO) USA
10. Walmart (WMT) USA
11. Philip Morris International (PM) USA
12. Intel (INTC) USA
13. Pepsico (PEP) USA
14. Merck (MRK) USA
15. ConocoPhillips (COP) USA
16. Verizon (VZ) USA
17. McDonald's (MCD) USA
18. United Technologies (UTX) USA
19. Abbott Labs (ABT) USA
20. Caterpillar (CAT) USA

Wednesday, September 7, 2011

August Dividend Income Update

I have been building a stock portfolio of dividend stocks outside of my retirement accounts that I will use to help produce income in retirement. This portfolio was valued at $125,382 as of the end of August.

My Annualized Dividend Income as of the end of August decreased to $6,224 from $6,511 over the past couple of months. I sold off a couple of stocks to pay for some extra costs the past couple of months. This means my dividend stocks will pay $6,224 in dividends over the next 12 months. This portfolio of stocks has a current yield of 4.96%.

All my dividend distributions from the month went toward paying down debt. The stock market was down for the month but we continue to see companies increasing their dividends this year.

Most of my stocks are held in my new Vanguard Brokerage account and the rest are DRIPs. I am keeping track of the amount of income I could receive once I retire or choose to receive the dividends in cash.

I will post my Top 20 Stock Holdings on Thursday.

Tuesday, September 6, 2011

August Net Worth

As of the end of August our Net Worth decreased to $894,761 from $965,562 which I last calculated in May.. The decrease in net worth is tied to the decrease in the stock market for the past few months.

The breakout is as follows:
Retirement Accounts $465,928
Taxable Accounts $125,382
Cash $26,286
Home $205,000
Other Real Estate $137,500
Cars $6,300
Personal Property $3,000
Kids 529 Accounts $39,804

Other Mortgage $111,439
Credit Card $3,000


Here is the summary for this month:

The stock market was down for the past few months which accounted for most of the decline in our net worth.

We have $3,000 in credit card debt that is interest free for 12 months. The money was used to furnish our new investment condo. We will continue to use our other credit cards for rewards but payoff the balances each month. All dividends received this month went toward paying down debt.

We will be paying down debt and trying to building up our cash over the next few months to increase our cash reserves. You can click on my Net Worth graph on the right to see the changes in each category from the previous month. We continue to fund our Roth IRA's each month.

I will post my Dividend Income Update on Wednesday.