Understand What Your ETFs Hold

I personally hold a number of ETFs as part of my core index portfolio in addition my dividend growth holdings. More and more investors are using ETFs to ensure they have adequate diversification. However, as ETFs become more popular the sheer number of available ETFs goes up every day. I think there is one very important step when examining ETFs, and it simply involves understanding what that ETF holds in its portfolio.

All an ETF really is is a portfolio of assets that you are buying into. That can be anything from a bond portfolio to a dividend growth portfolio. As an ETF investor, you are buying into a piece of those holdings along with thousands of other investors. The most important thing to understand about that ETF you decide to buy is what exactly is in that portfolio.

Luckily, this is very easy to figure out. All you need to do is visit the website of the ETF provider and click on a link that is called something like, "Top 10 Holdings". In that section you will see exactly what assets that ETF holds. For example, in an oil and gas focused ETF you will see a number of the largest oil and gas companies in the world such as ExxonMobil and BP. What I always look for is something that does not seem to fit. Financial managers can play tricks in ETFs to boost returns and can include assets that perform better than the underlying index the fund is supposed to track. If you see anything that does not make sense in that top 10 list, then you need to dig into the reason why. If you can't figure it out, I would suggest you move on to another ETF.


Just like investing in individual stocks, an investor should do some due diligence on the ETFs they place in their portfolio. As a do-it-yourself investor you cannot blindly go into an ETF thinking that because it is an ETF it is diversified and right for you. Be sure to understand exactly what that ETF holds and why. Doing this will protect you from buying a wayward ETF that does not achieve your desired objective.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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Stock Analysis: Federal Realty Investment Trust (FRT)

Linked here is a detailed quantitative analysis of Federal Realty Investment Trust (FRT). Below are some highlights from the above linked analysis:

Company Description: Federal Realty Investment Trust is an equity real estate investment trust that specializes in the ownership, management and redevelopment of community and neighborhood shopping centers.

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
   

FRT is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, FRT is trading at a 18.2% discount. FRT 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.
   

FRT earned one Star in this section for 3.) above. FRT has paid a cash dividend to shareholders every year since 1962 and has increased its dividend payments for 41 consecutive years. Last year's dividend payout was 114%, up from 92% in 2007. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of zero Stars in this section. The payout ratio is high because U.S. REITs are required to distribute at least 90% of their taxable income to their shareholders under §857 of the Internal Revenue Code.

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
   

FRT earned both of the available Stars in this section. The NPV MMA Diff. of the $10,693 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as FRT has. FRT's current yield of 5.95% exceeds the 3.39% estimated 20-year average MMA rate.

Other: FRT is a member of the Broad Dividend Achievers™ Index. FRT should continue to see healthy operating results and benefit from its geographic, customer and property-type diversity. As an owner of shopping centers in relatively affluent metropolitan markets, FRT's position is somehat protected with barriers to entry. FRT should see solid growth from planning and managing its mixed-use communities. Risks include declining retail expansion, condominium sales and an interest rate increase.

Conclusion: FRT earned one Star in the Fair Value section, did not earn any Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks FRT as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $67.93 before FRT's NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 3.83%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is -3.7%. This negative dividend growth rate is well below the 3.2% used in this analysis, thus providing a margin of safety. FRT has a risk rating of 1.75 which classifies it as a medium risk stock.

FRT is an interesting stock. I am impressed with its long string of dividend increases and seven consecutive years of positive free cash flow. Most REITs tend to generate negative free cash flow in a number of years. However, its debt to equity of 51% is a little higher than I like to see. Although FRT is trading below my buy price of $53.47, my real estate allocation is well covered at this time. 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 FRT (0.0% of my Income Portfolio).

What are your thoughts on FRT?

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Weekend Reading Links - March 29, 2009

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network (DIV-Net) over the past week:

Articles From DIV-Net Members

• Dividends Value presented Early Warning Signs of a Dividend Cut
  
• The Dividend Guy presented 8 Ways to Deal with Volatile Markets
• Dividend Growth Investor presented Variable Annuities: The Fee Factor
• Stock Market Prognosticator presented Origins of Value Investing
• the moneygardener presented foster & a frugal bachelor
• Disciplined Approach to Investing presented S&P 500 Market Cycle And Gold
• Living Off Dividends & Passive Income presented 30 Year Mortgages At 4.85%!
• Old School Value presented Visualizing One Trillion Dollars
• Triaging My Way To Financial Success presented The Importance of Business Fundamentals
• Barel Karsan presented Signs That Mr. Market Is Offering Great Prices
• Everyday Finance presented 20% in 3 Weeks...Anyone say Capitulation?
• Contrarian Value Investing presented The Evolution of A Value Investor
• Dividend Tree presented Demise of Dollar – Does it Affect Dividend Growth?

There are some really good articles here, please take time and read a few of them.

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Dividend Increases - March 28, 2009

Similar to the last couple of weeks, this week's dividend increases are few in number, but there are some familiar names. Dividend investors always welcome seeing companies treating their shareholders to increased cash dividends. This week's dividend increases include:

Hatteras Financial Corp. (HTS) increased its quarterly dividend to $1.05/share for the first quarter of 2009. (Yield 17.84%)
HTS is an externally managed mortgage real estate investment trust (REIT) formed to invest in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by a United States Government agency.

Raytheon (RTN) raised its quarterly dividend by 11% to $0.31/share. (Yield over 3%)
RTN is the world's fifth largest military contractor, specializes in making high-tech missiles and electronics.

Pepsi Bottling Group (PBG) increased its quarterly dividend by 5.8% to $0.18/share. (Yield over 3%)
PBG is the world's largest manufacturer, seller and distributor of carbonated and non-carbonated Pepsi-Cola beverages.

The dividend raisers continue to be outnumbered by the slashers, but raisers are still there, if you look for them. For more companies around the world with a long string of consecutive dividend increases, see my updated Stock Ideas page.

Full Disclosure: No position in any of the aforementioned securities.

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3M (MMM) Dividend Stock Analysis

3M Company, together with its subsidiaries, operates as a diversified technology company worldwide. It operates in six segments: Industrial and Transportation; Health Care; Safety, Security and Protection Services; Consumer and Office; Display and Graphics; and Electro and Communications.

3M Company is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 51 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 7.30% to its shareholders.

At the same time company has managed to deliver an impressive 9.40% average annual increase in its EPS since 1999. In 2008 the EPS fell by 12%. The expectations for 2009 are for another drop in EPS to almost $4/share and an increase in 2010. Over the long run however, earnings for this conglomerate are relatively diversified which is a decent buffer during recessions.

The ROE has remained largely between 29% and 38% with the exception of a temporary dip in 2001 to 23%.

Annual dividends have increased by an average of 6.70% annually since 1999, which is lower than the growth in EPS. Most recently the company increased its dividends by 2% to $0.51/quarter. MMM typically enjoys a slow dividend growth during tough economic conditions, while compensating with stronger dividend growth during boom times. 3M’s dividend is safe, given the strong cashflows that the company generates from its diversified businesses.

A 7 % growth in dividends translates into the dividend payment doubling almost every ten years. Since 1973 3M has actually managed to double its dividend payment on average almost every nine years.

The dividend payout has steadily decreased over the past decade; due to the fact the dividend growth was much slower than earnings growth. Currently the payout is a little over 50%, which good. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

3M is currently attractively valued. The stock trades at a P/E of 10.5, yields 4.20% and has an adequately covered dividend payment. I would be a buyer of 3M at current prices, as long as it does not increase above $68.

Full Disclosure: Long MMM

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Outstanding Investor Digest

There is a relatively unknown publication in the investing world called the Outstanding Investor Digest. If you haven't ever seen it, this is not surprising as it is only published intermittently.

Every issue, the editors publish interviews with selected value managers, or excerpts from their shareholder letters, where they share thoughts on the markets or individual stocks. It's a great read to calm an investors nerves and keep them on track to avoid emotional moves during market routs. The web site is here at:

Outstanding Investor Digest

The cost is only $295 a year , and it is money well spent.

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Opportunities for Technology Dividends

Standard and Poor's "S&P North American Technology Sector Index" (henceforth referred as Tech index) is widely used to benchmark the technology sector in North America. As of February 2008 the Tech index had a weightage of approximately 20% to 23% in overall S&P500 index.

The Tech index represents different sub sectors that include hardware (20 companies), internet (21 companies), multimedia networking (27 companies), semiconductors (43 companies), services (31 companies), and software (40 companies). This is a total to 182 companies in the Tech index. However, similar to any market capitalization based index, Tech index is also top heavy. The cumulative weightage for top 10 companies is approximately 64%, for top 20 companies it is approximately 79%, while top 30 companies it is approximately 86%. The table below shows top 30 companies including the annual per share dividends. There are 17 companies out of top 30 companies that pay quarterly dividends.

(click to enlarge)

In general, the notable positive characteristics of tech titans are free cash flow, low level of debt (zero in many cases), higher gross margins, and cash on balance sheet. In this first group, the prominent one are that have paid consistent dividends. These include AT&T (T), International Business Machines (IBM), Verizon (VZ), Automatic Data Processing (ADP), and Paychex (PAYX). These companies have demonstrated sustainability of dividends and growth of dividends over a period of time. Keen observer will note that these companies are from services sector. All type of dividend investors know these companies very well.

In addition, the second group consists of notable tech titans that have paid or started paying small amount of dividends in last few years. These are Qualcomm (QCOM), Intel (INTC), Microsoft (MSFT), Hewlett and Packard (HPQ), Texas Instruments (TI), and Master Card (MA).

Contrarily, there are few other companies that have not had any favorable dividend policy. The argument for no dividends has been that they need cash for continued innovation and growth. In this third group, the prominent ones that have not paid dividends are Cisco (CSCO), Apple (AAPL), Google (GOOG), Oracle (ORCL), EMC Corp (EMC), eBay (EBAY), and Dell (DELL). Keen observer will note that majority are these companies are from hardware sector.

First group: These companies have demonstrated favorable dividend policy. If not all, then for most of the companies, pricing have come down to an attractive level.

Second group: These companies are the ones that have potential to become dividend champions (and may be dividend aristocrats). The most promising ones are Intel (INTC), Qualcomm (QCOM), and Master Card (MA).

• Intel: Its technological-driven market leadership is so high that it just does not have any significant competitor. It still continues its hunger for more product diversification such as netbooks, WIMAX, etc.
• Qualcomm: Its CDMA technology provides a stable royalty based cash flow, its chipset in CDMA and 3G domain is market leaders, attempting to diversify in netbooks with new platforms, and chipset competitors (Freescale, Infineon, TI, et. al.) falling apart. It would be prudent to say QCOM is soon becoming Google of wireless communication.
• Master Card: Its service based business model and world wide reach makes it a potential dividend investments.
• Microsoft: I did not include it because I am wary of its habit of squandering cash in meaningless acquisitions.
  

Third group: At the time of this writing, Oracle declared its first dividend. In addition, one other company to watch out for start of dividends is Cisco. It's chief executive has shown some inclination to start paying dividends. Apple and Google have not shown any inclination to pay dividends. Dividend investors will have to wait and watch until companies in this group have shown some consistency and sustainability.

The first group and second group are where dividend opportunities exist for long term dividend investors.

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My Top 17 Investing Quotes

Many of them may seem cliche, however I often find quotes to be inspiring and reminders of what I should be doing in many aspects of my life. There are many quotes related to investing and over the years I have collected quite a few. There are quotes from Warren Buffet, Peter Lynch, and other investment gurus. There are also quotes for relatively unknown people. My criteria is simple - if it makes me think and reinforces best practices then I like it! Here is a list of my top 10 investment quotes that I have collected over time.

1. I rarely think the market is right. I believe non dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for it. - Mark Cuban
2. Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed. - Benjamin Graham
3. I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up. - Jesse Livermore
4. You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets. - Peter Lynch
5. If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor. - Charlie Munger
6. Stocks are a safe bet, but only if you stay invested long enough to ride out the corrections. - Peter Lynch
7. Markets invariably move to undervalued and overvalued extremes because human nature falls victim to greed and/or fear. - William Gross
8. Manage Your Risk or It Will Manage You! - Harald Anderson
9. Successful investing is anticipating the anticipations of others. - John Maynard Keynes
10. October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February. - Mark Twain
11. The safe way to double your money is to fold it over once and put it in your pocket. - Frank Hubbard
12. Only buy something that you'd be perfectly happy to hold if the market shut down for ten years. - Warren Buffett
13. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. - Jesse Livermore
14. Goodness is the only investment that never fails. - Henry David Thoreau
15. Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway. - Warren Buffet
    
16. You make most of your money in a bear market, you just don’t realize it at the time. - Shelby Davis
17. Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of the ebullience and the depth of despair alike that this too shall pass. - John C. Bogle

I am always on the lookout for more quotes. Use the comments to let us all know your favorite quotes.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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Stock Analysis: General Dynamics Corp. (GD)

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

Company Description: General Dynamics is the world's sixth largest military contractor and also one of the world's biggest manufacturers of business jets.

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
   

GD is trading at a discount to 1.), 2.) and 3.) above. Since GD's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, GD is trading at a 53.0% discount. GD 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.
   

GD earned one Star in this section for 3.) above. GD has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 15 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
   

GD earned both of the available Stars in this section. The NPV MMA Diff. of the $21,585 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as GD has. GD's current yield of 4.02% exceeds the 3.22% estimated 20-year average MMA rate.

Other: GD is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. GD has a long-term record of consistent earnings and dividend growth, which is reflected in its S&P Quality Ranking of A+. At the end of 2008, the company had a strong balance sheet with over $1.6 billion in cash just under $3.8 billion in debt. With a conservative debt to total cap of 27%, GD has the needed headroom to access the debt market for strategic needs. The company's strong free cash flows and a 20% cash payout ratio, should ensure the dividend in the near-term. Risks include cuts in the military budget, failure of the company to execute existing contracts, failure to win new contracts and a further deterioration in its business jet backlog.

Conclusion: GD earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks GD as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $56.66 before GD's NPV MMA Differential fell to the $7,500 that I like to see. At that price the stock would yield 2.63%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $7,500 NPV MMA Differential, the calculated rate is 6.1%. This dividend growth rate is well below the 11.2% used in this analysis, thus providing a margin of safety. GD has a risk rating of 1.50 which classifies it as a low risk stock.

With its conservative balance sheet and strong free cash flows, GD is in a good position to weather near-term setbacks. The company is quick to react to the changing environment as demonstrated earlier this year when it reduced its workforce by 1,200 workers as result of the deterioration in its business jet backlog and continued weak demand. GD has earned a spot on my watch list with a buy price of $56.66. Though GD is trading well below my buy price, I plan to watch for additional deterioration in its business, which could lead to a better 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 GD (0.0% of my Income Portfolio).

What are your thoughts on GD?

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Weekend Reading Links - March 22, 2009

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network (DIV-Net) over the past week:

Articles From DIV-Net Members

• Dividends Value presented In Dividend Investing, Cash Is King
  
• The Dividend Guy presented The Tyranny of Investment Fees
• Dividend Growth Investor presented Dividend Aristocrats keep raising their dividends
• Disciplined Approach to Investing presented Better Investing's Most Active
• Living Off Dividends & Passive Income presented The End Of Credit?
• Old School Value presented Quality Systems Inc (QSII) is a Quality Company
• Triaging My Way To Financial Success presented Fixed Income Alternatives
• Dividend Money presented Stock Market Statistics
• Barel Karsan presented Industry Profitability
• Everyday Finance presented AIG "Outrage" - Nauseating, Disingenuous and Offensive
• Contrarian Value Investing presented What This Value Investor Is Doing Now
• Buy Value presented A Better Canadian Stock Screener
• Dividend Tree presented Portfolio Management Process - Goldratt’s Way

There are some really good articles here, please take time and read a few of them.

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Dividend Increases - March 21, 2009

This weeks dividend increases came form some unusual sources - A company issuing its first ever dividend and a company paying a generous special one-time dividend. Both companies had excess cash that they are looking to return to their shareholders.

Oracle (ORCL) on Wednesday it reported third-quarter EPS of $0.35/share, $0.03/share better than the analyst estimate of $0.32/share, and it declared its first ever dividend of $0.05/share. The dividend yield is 1.15%. ORCL is a leading supplier of enterprise database management systems and business applications.

On Tuesday, FortuNet (FNET) announced that shareholders will vote at its 2009 annual meeting on April 17, 2009 on a special $2.50/share cash dividend that was approved by the Board of the Company. FNET is a manufacturer of multi-game and multi-player server-based gaming platforms.

Thursday, Air Products and Chemicals Inc. (APD) announced a 2.2% increase its quarterly dividend to $0.45/share payable on May 11, 2009 to shareholders of record at the close of business on April 1, 2009. The new dividend yield is 3.17%. APD is a major producer of industrial gases and specialty and intermediate chemicals also has interests in environmental and energy-related businesses.

Other than the above, it was a slow week for dividend increases. For more companies around the world with a long string of consecutive dividend increases, see my updated Stock Ideas page. There were a lot of companies crossed off last week.

Full Disclosure: No position in any of the aforementioned securities.

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McDonald's (MCD) Dividend Stock Analysis

McDonald’s Corporation, together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company's share of the US fast food market is several times larger than its closest competitors, Burger King (BKC) and Wendy's (WEN).


McDonald’s is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 32 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 6.70% to its shareholders.

At the same time company has managed to deliver an impressive 11.70% average annual increase in its EPS since 1999. Analysts are expecting MCD to grow EPS to $4.20 by 2010. The economic slowdown is making consumers to trade down and dine out at fast food places like the ones owned by the Golden Arches. Mcdonald’s has been focusing more on expanding the sales of existing restaurants since 2003 versus relying on new stores to be the driver for growth. Same store sales and profits have been driven by product innovation, and comparable-store sales growth, and are part of the company’s recent success. The constant innovations in the menu are indeed fueling strong same store sales volumes.

International operations, which accounted for almost half of operating profits in 2008, have been a major growth factor over the past two decades. This however exposes the company to fluctuations in exchange rates, which could add or detract from EPS performance.

The ROE has remained largely between 14% and 21% with the exception of lows in 2002 and recent highs for this indicator in 2008.

Annual dividends have increased by an average of 29.20% annually since 1999, which is almost three times higher than the growth in EPS.

A 29 % growth in dividends translates into the dividend payment doubling almost every two and a half years. Since 1978 McDonald’s has actually managed to double its dividend payment on average almost every four years.


The dividend payout has steadily increased over the past decade, due to the fact the dividend growth was much faster than earnings growth. Currently the payout is a little over 50%, which good. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The slow growth in earnings could put future dividend increases at risk.

McDonald’s is currently attractively valued. The stock trades at a P/E of 15, yields 3.70% and has an adequately covered dividend payment. The company has proven to be somewhat recession resistant. I would be a buyer of MCD at current prices, as long as it does not increase above $66.

Full Disclosure: Long MCD

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- Best CD Rates

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Bottom Fishing In Alternative Energy

Is Valero Energy (VLO) the ultimate value investor? I read an interesting story today about Valero purchasing seven Ethanol plants from Verasun, which is in bankruptcy.

Valero paid only $477 million for the assets, which according to the article was a "fraction" of what they cost to build. Valero could have rushed in at the peak of the Ethanol bubble, and spent billions, but either through sheer brilliance or blind luck, they have acquired the infrastructure at only 30% of the replacement cost. The plants have annual production capacity of 780 million gallons.

Investors should remember there are some great companies trading at only 30% of what they sold for a year ago, and they are publicly traded, so stop being afraid and do your research carefully and make your picks.
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Target Date Retirement Funds

My company pension fund has the option of investing in something called a Target Date Retirement Funds. Here is how investopedia defines these types of funds:

A mutual fund in the hybrid category that automatically resets the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement.

These funds are obviously catering to the "one size fits all" crowd - that group of investors who want as little as possible to do with their investment planning and will leave those decisions to their pension company. In my particular, the target-date funds I have access to have taken the target-date concept one step further and provided a guarantee on the value of the fund. Here is how it is described in the fund documentation:

The potential for capital appreciation is combined with protection from downside market risk through a guaranteed value at maturity. If held to maturity, the investor will receive the highest month-end unit value achieved over the life of the fund, as guaranteed by ABN AMRO Bank N.V.

So, I pick the fund with the date closest to my expected retirement date, and I will be guaranteed the highest month-end unit value. So, if the highest month-end value of that fund hits $15 in January 2025 but when I retire the fund has dropped to $10, then I am guaranteed to receive the $15. Sounds like not a bad deal.

What is the catch? Typically, the fees on these types of accounts kill any benefit the guarantee provides. You forgo future returns of the stock market by paying out a high percentage of your portfolio in fees. However, in my pension plan these fees are not too bad but are still substantially more than than some other choices. For example, the U.S. Index Fund option has a MER of 0.06 (which is super low). The 2035 target-date fund has an MER or 0.14%. Again, not much but the difference between 0.06 and 0.14 is actually huge. I did a quick calculation over at SmartMoney on the different on a $10,000 investment and the difference is $586. That does not sound like much but on a portfolio of $500,000 that equates to fees of just under $30,000. That is a substantial amount of money, especially when you factor in inflation.

I am an active passive investor in my personal portfolio, so there is certainly some draw to using a fund such as this in my pension. I consider this money to make up a big portion of my future retirement funds and want to ensure I maximize the risk / return balance. In markets like this it makes sense (the current funds are under the guaranteed value) but how would it work in an up market? That is something I will need to further investigate. As such, I am going to continue researching these funds However, I would love to hear what others think about these funds. Use the comments and let me know!

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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Stock Analysis: Genuine Parts Co. (GPC)

Linked here is a detailed quantitative analysis of Genuine Parts Co. (GPC). Below are some highlights from the above linked analysis:

Company Description: Genuine Parts Co. is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.

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

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

GPC is trading at a discount to 1.) and 3.) above. Since GPC's tangible book value is not available, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, GPC is trading at a 11.1% discount. GPC 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.
   

GPC earned one Star in this section for 3.) above. GPC has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 53 consecutive years, most recently in January 2009.

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
   

GPC earned both of the available Stars in this section. The NPV MMA Diff. of the $9,292 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as GPC has. GPC's current yield of 5.79% exceeds the 3.3% estimated 20-year average MMA rate.

Other: GPC is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. GPC's long-term record of rising sales, earnings and dividends is driven by its strong leadership and firmly supported by a healthy balance sheet. Its debt to total capital of 18% is well below the 35% target I prefer. The company's return on capital employed has been in the mid-to-high teens for the last four years. With little debt and free cash flow more than 1.5 times the dividend, GPC is in a good position to weather the current economic crisis and continue to grow its dividend. An above-average dividend yield, in excess of 5%, adds to GPC's total return potential. Risks include include weaker-than-expected product demand and a slow improvement in operating margins.

Conclusion: GPC earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks GPC as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could decrease to $40.83 before GPC's NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 3.92%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is -3.5%. This dividend growth rate is negative and well below the 2.6% used in this analysis, thus providing a margin of safety. GPC has a risk rating of 1.75 which classifies it as a medium risk stock.

I must admit to being pleasantly surprised by GPC. I have driven by their NAPA Auto Parts stores my entire life and would have never guessed it was such a well run business. GPC has earned a spot on my watch list with a buy price of $31.06. 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 GPC (0.0% of my Income Portfolio).

Tracking the Dow Jones Industrial Average can be done conveniently and cost-effectively by purchasing the Dow Diamonds (DIA). It can be bought and sold like regular common stock, has a very low (0.18%) expense ratio, and effectively tracks the performance of the DJIA.

What are your thoughts on GPC?


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Weekend Reading Links - March 15, 2009

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network (DIV-Net) over the past week:

Articles From DIV-Net Members

• Dividends Value presented Warren Buffett Quotes
  
• The Dividend Guy presented My Portfolio and Asset Allocation
• Dividend Growth Investor presented Merck/Schering-Plough Merger Arbitrage Opportunity
• the moneygardener presented net worth update, march 2009
• Disciplined Approach to Investing presented Not Convinced This Is "THE" Bottom-Yet
• Living Off Dividends & Passive Income presented Jim Rogers: How To Get Out of This Mess
• Old School Value presented K-Tron: Record Earnings Amid Deep Recession
• Triaging My Way To Financial Success presented Taking Stock in Pfizer (PFE)
• Barel Karsan presented Can't Forget Corporate Governance
• Everyday Finance presented Is This the Rebound? A Financials Volatility Play
• Contrarian Value Investing presented How I’m Ahead of Bernanke/Geitner and What’s Going On Now…
• Buy Value presented Everything is amazing, nobody is happy

There are some really good articles here, please take time and read a few of them.

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This Week's Dividend Increases - March 14, 2009

You expect your employer to give you a raise periodically. Why wouldn’t you expect the same from your investments? We all know about the power of compound interest (earning interest on interest) on growing wealth. Compound dividends are much more powerful - they are like compound interest on steroids. Not only are dividends being reinvested, but great dividend companies raise their dividends each year.

Here are a couple companies rewarding their shareholders with increased dividends:

• Piedmont Natural Gas (PNY) Increases Dividend by 3.8% - yield 4.85%
• Warwick Valley Telephone (WWVY) Raises Dividend by 10% - yield 9.78%

Lest we forget the diligent companies the follow through and pay their regular dividends at the appointed time. During the past week several big name companies declared dividends, including:

• Safeway (SWY) $0.0828/share - yield 1.87%
• General Mills (GIS) $0.43/share - yield 3.46%
• Microsoft (MSFT) $0.13/share - yield 3.43% - (Analysis)
  
• Heinz (HNZ) $0.415/share - yield 5.40%
  
• Target (TGT) $0.16/share - yield 2.35% - (Analysis)
• Kraft (KFT) $0.29/share - yield 5.25% - (Analysis)
  

For more companies around the world with a long string of consecutive dividend increases, see Dividends Value's Stock Ideas page.

Full Disclosure: No position in any of the aforementioned securities.

This article was written by Dividends4Life. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

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AT&T (T) Stock Analysis

AT&T Inc. provides telecommunications services to consumers and businesses in the United States and internationally.
AT&T Inc. is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend achiever. AT&T Inc. has been consistently increasing its dividends for 25 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 2.40% to its shareholders.


At the same time company has managed to deliver a very modest 1.40% average annual increase in its EPS since 1999. Analysts are expecting T to earn $2/share in 2009 and $2.26 in 2010.
AT&T also provides adjusted EPS from continuing operations, which exclude certain non-cash merger related costs of $0.49/share in 2008 (versus $0.73/share in 2007), Workforce reduction of $0.11/share and Merger Related trust investment losses of $0.05/share. If we sum all that up, AT&T’s EPS rises to $2.81. For the purposes of my analysis however, I used EPS from continuing operations.

The company has recently announced plans to eliminate 9000 job positions. It announced a 12000 cut in payrolls in December and create 3000 new jobs in March. Furthermore it expects to spend couple billions dollars less on capital spending in 2009.

The ROE has fallen from a high of over 27% in 1999 to 12.20% in 2008.

Annual dividend payments have increased by an average of 5.70% annually since 1999, which is much higher than the growth in EPS. Given the slow growth in earnings per share and a slowdown of share buybacks I doubt that future dividend increases could be sustained at that level.
The dividend costed AT&T $9.5 billion in 2008, which took over 70% of the company’s free cash flow of $13.3 billion for the year. There have been several bullish articles on the stock, which portray AT&T as a safe vessel to ride out the economic storm. As a contrarian I view these as a sell signal or hold at best.

Nevertheless a 6 % growth in dividends translates into the dividend payment doubling almost every twelve years. Since 1984 AT&T Inc. has indeed managed to double its dividend payment almost every twelve years on average.

The dividend payout has ranged between 43% and 91% over the past decade. Currently the payout ratio is at 74%, which is very high. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The slow growth in earnings could put future dividend increases at risk.

AT&T is well positioned in the wireless segment, as it always tends to unveil new and appealing phones to its subscriber base. The company is working its way in cutting costs through job reductions and realizing synergies from its mergers with the old AT&T and BellSouth. Furthermore the company is expecting to spend 18 billion on capex in 2009 versus 20 billion in 2008. Most recently the company announced after its earnings that it had no plans for significant buybacks in 2009.

The company has the cash to pay the dividend at the moment. Since telecoms in general need a lot of cash to sustain their networks, the credit crunch could affect the payment down the road.

AT&T Inc. is currently attractively valued. The stock trades at a price/earnings multiple of 10.70 and an above average dividend yield of 7.10%. The high dividend payout worries me at the moment and indicates a danger to its sustainability in the current environment or a further slowdown in dividend growth at best. Despite the fact that AT&T has the cash flows to sustain its current dividend, the above average dividend yield indicates that investors have concerns over the sustainability of the current dividend payment.
Thus I believe AT&T is a hold at current prices.

Full Disclosure: None

Relevant Articles:

- Why do I like Dividend Achievers
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- AT&T (T) Dividend Analysis
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Is It Time To Look At Retailers?

A value investor must look at out of favor sectors in order to find value, and there are few sectors more unloved right now than retail. The American consumer is dead say the pundits, and we must prepare for life without these out of control spenders.

However, the Commerce department reported today that retail trade sales were down 0.1% in February, and January sales were revised to a stronger increase of 1.8%. Is it time to hunt for bargains in this sector? I found a list of cash rich companies and noticed three retailers on it –

Foot Locker - $2.78 cash per share.
Sears Holding - $6.12 cash per share.
Abercrombie & Fitch - - $6.75 cash per share.

I haven’t independently verified these numbers, but certainly pessimism is too great in this sector and investors should start looking for the companies that will emerge from the recession.

This article was written by Stock Market Prognosticator. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

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Has Fear Blinded Investors to Value

Simoleon Sense brought to attention an article on the Wall Street Journal that I found interesting.

Should shares in Kraft Foods really be so low they have a dividend yield of about 5 ½%? What about A T & T (7%)? Or DuPont (9 ½%), Altria (8%), American Electric Power (6%), British Petroleum (9 ½%), drinks giant Diageo (5%) cellular network giant Vodafone (8.5%), Merck (6 ½%) or a host of many others?

You be the judge. These are not individual stock tips. You need to do your own homework. And of course dividends can be cut. If business keeps getting worse many will be, right across the market.

But these are, on the whole, pretty solid companies. They are not financials. You'd expect their businesses to hold up pretty well in almost any circumstance except the end of the world. Any one or two companies can get into difficulty, of course, but it would remarkable indeed if they all fared badly.

The "efficient market hypothesis" used to claim that, when it came to the stock market, "the price was always right" – in other words if, say, "Jellyfishforpets.com, Inc." was trading at $180 a share, then by golly, that's what it should be trading at, and who could possibly say it was overvalued?

As I read this article, I couldn't help but agree with how efficient market theory is dead. It also led me to wonder how Universities will change their course material. If 2008-2009 doesn't prove that efficient market theory is rubbish, then I don't know what does.

There is a continual fear that the Dow could drop another 50% to the 3000 level, but if you remain in the game, stand your ground and wait it out, then the rewards could be enormous. If the market completely implodes and the US and global economy goes with it, then our money would be worth less (or worthless) anyways.

As I continue to search for the screaming bargains that jump out, it's difficult to ignore where the market is and how bad my portfolio is doing, but then again, anything that is profitable cannot be comfortable.

This article was written by Old School Value. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

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7 Questions to Ask Before You Buy a Stock

If you invest in individual dividend stocks, then I would recommend that you should ensure that you read the books and articles written by Harry Domash. Domash is well respected as an expert in understanding the investment analysis process and has developed many quality techniques and tools for individual stock analysis. In a recent article posted on MSN Money, Domash outlined 7 questions an investor must ask before investing in any company.

Before investing in any stock, regardless of whether you have been analyzing stocks for 50 years or you are brand new, these seven steps can help to formalize your process. The key is to ensure that you examine all parts of the business before making a decision to invest. Without this thorough understanding, investing in individual stocks is just gambling. Here are the seven questions outlined by Domash in the article:

1. What does the company do?
2. How many widgets is it selling?
3. Just how profitable is the company?
4. Is cash flowing in or out?
5. Is the company submerged in debt?
6. Any bad news lately?
7. Which way are forecasts moving?

Of course, within each of these questions are ratios and analysis techniques that will help you answer these questions. Check out the article and his book, Fire Your Stock Broker, for more detail on how to answer each of these questions.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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Stock Analysis: Wal-Mart Stores, Inc. (WMT)

Linked here is a detailed quantitative analysis of Wal-Mart Stores, Inc. (WMT). Below are some highlights from the above linked analysis:

Company Description: Wal-Mart Stores, Inc. is the largest retailer in North America. The company operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International.

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
   

WMT is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, WMT is trading at a 13.0% discount. WMT 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.
   

WMT earned one Star in this section for 3.) above. WMT has paid a cash dividend to shareholders every year since 1973 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
   

WMT earned one Star in this section for 1.) above. The NPV MMA Diff. of the $4,553 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as WMT has. If WMT grows its dividend at 11.3% per year, it will take 7 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.3%.

Other: WMT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. WMT is the dominant retailer in North America with the leading position in most markets. The company is typically the price leader and generates strong cash flows. Given its discount focus, it is well positioned to gain market share in the current adverse economic environment. WMT is growing internationally via acquisitions and joint ventures. Inroads have been made in China, India and Japan. Risks include rising unemployment, lower consumer confidence and unfavorable foreign currency exchange rates.

Conclusion: WMT earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks WMT as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $54.92 before WMT's NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 1.98%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 9.9%. This dividend growth rate is below the 11.3% used in this analysis, thus providing a margin of safety. WMT has a risk rating of 1.25 which classifies it as a low risk stock.

As a result of WMT's low yield (less than 2%) and its lower than normal 2008 dividend increase (8.2%), I had not purchased any shares since December 2007. This all changed after WMT's recent 15% dividend increase. On March 6th, after watching WMT's stock pull back all day, I tripled my position in it to nearly my full allocation. I will additional purchases at prices below $54.92, as my allocation allows. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in WMT (4.8% of my Income Portfolio).

What are your thoughts on WMT?


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Weekend Reading Links - March 8, 2009

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network (DIV-Net) over the past week:

Articles From DIV-Net Members

• Dividends Value presented As Financials Wither, One Titan Stands Strong
  
• The Dividend Guy presented Rounded Out My Portfolio with Some New ETFs
• Dividend Growth Investor presented No Risk Stock Market Investing
• the moneygardener presented added more P&G
• Disciplined Approach to Investing presented Paying Attention To Dividends More Important Than Ever
• Living Off Dividends & Passive Income presented Detroit’s Median Home Price Is $7,500
• Old School Value presented Words of Wisdom
• Triaging My Way To Financial Success presented The Bottom for Canadian Banks?
• Barel Karsan presented Value Investors: Take Heart
• Everyday Finance presented Dow 3700 - $3,500 Gold - $300 Oil...Oh My!
• Contrarian Value Investing presented Notes and Quotes from 2008 Berkshire Hathaway Shareholder Letter

There are some really good articles here, please take time and read a few of them.

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This Week's Dividend Increases - March 7, 2009

You expect your employer to give you a raise periodically. Why wouldn’t you expect the same from your investments? We all know about the power of compound interest (earning interest on interest) on growing wealth. Compound dividends are much more powerful - they are like compound interest on steroids. Not only are dividends being reinvested, but great dividend companies raise their dividends each year.

Here are several companies that are rewarding their shareholders with compound dividends:

• Qualcomm (QCOM) lifts dividend 6% to $0.17/share (yield 1.84%)
• General Dynamics (GD) boosts qtr. dividend 8.6% to $0.38/share (yield 3.48%)
• Wal-Mart (WMT) increases its quarterly dividend 15% to $0.2725/share (yield 1.96%)
• WGL Holdings (WGL) raises quarterly dividend 3.5% to $0.3675/share (yield 4.68%)

For more companies around the world with a long string of consecutive dividend increases, see Dividends Value's Stock Ideas page.

Full Disclosure: Long WMT

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PepsiCo (PEP) Dividend Stock Analysis

PepsiCo, Inc. manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide.

PepsiCo is a major component of the S&P 500, Dow Industrials and the Dividend Aristocrats Indexes. PepsiCo has been consistently increasing its dividends for 36 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered a 4.70% annual average total return to its shareholders.

At the same time company has managed to deliver a 9.90% average annual increase in its EPS since 1999.

The ROE has remained largely between 31% and 38%, with the exception of 2004, when it fell to as low as 22%.

Annual dividend payments have increased by an average of 13.50% annually since 1999, which is much higher than the growth in EPS. Analysts are expecting slight increase in EPS for 2009 compared to 2008, given the sluggish state of North American economies. The strong US dollar could potentially hurt sales, as over 44% of PepsiCo’s revenues are derived internationally.
A 13.50 % growth in dividends translates into the dividend payment doubling almost every five years. Since 1978 PepsiCo has actually managed to double its dividend payment every six years on average.

The dividend payout has remained in a range between 31% and 42%. In 2008 the dividend payout ratio has surged to 51%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The slow growth in earnings could put future dividend increases at risk.

PepsiCo is currently attractively valued. The stock trades at a price/earnings multiple of 15, has an adequately covered dividend payout and the current dividend yield at 3.50%, which is above the minimum threshold that I have set.

Full Disclosure: Long PEP

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