This article originally appeared on The DIV-Net September 21, 2009.

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 premium to all four valuations above. Since RPM's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 76.9% premium to its calculated fair value of $10.31. 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. RPM earned a Star as a result of its most recent Debt to Total Capital being less than 45%, and 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 36 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
   

The NPV MMA Diff. of the $302 is below the $500 target I look for in a stock that has increased dividends as long as RPM has. The stock's current yield of 4.44% exceeds the 3.9% estimated 20-year average MMA rate.

Other: RPM is a member of the Broad Dividend Achievers™ Index. Historically, RPM has been able to generate steady operating earnings and free cash flow growth with its diverse product offerings and varied end-markets. The company has maintained its competitive advantages via strong brand identity, high entry barriers, patents, and a good reputation. Risks include outstanding asbestos-related lawsuits, weaker consumer spending and industrial demand and higher raw material costs.

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

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $16.26 before RPM's NPV MMA Differential rose to the $500 that I like to see for a stock with 36 years of consecutive dividend increases. At that price the stock would yield 4.98%.

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 2.5%. This dividend growth rate is higher than the the 1.3% used in this analysis, thus providing no margin of safety. RPM has a risk rating of 2.25 which classifies it as a medium risk stock.

RPM has a good Free Cash Flow Payout at 49%, and an acceptable Debt To Total Capital at 45% and a good dividend yield of 4.44%. However, with a buy price of $10.31 and a NPV MMA Diff. below my target, I will waitfor a more opportune time to initiate a position. 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 (0.0% of my Income Portfolio).

What are your thoughts on RPM?

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For your 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 High Yield, High Risk Dividend Stocks
• The Dividend Guy presented Dividend Safety and Warnings
  
• Dividend Growth Investor presented Dividends Stocks versus Fixed Income
  
• Barel Karsan presented Price To Cash Flow: A Useful Metric
  
• Dividend Tree presented Three Companies with Sustainable Dividends
  
• Buy Value presented The Significance of Fundamental Analysis
  
• moneygardener presented are you overweight real estate?
  
• Disciplined Approach to Investing presented Changing Investor And Potentially Strong Recovery
  
• Living Off Dividends & Passive Income presented The Sun Sets On Dollar Supremacy
  
• Old School Value presented Earnings Power Value EPV Valuation Microsoft
  
• Everyday Finance presented How to Achieve Incredible Results on the Backs of Others - for a Fraction of the Cost
  
• Dividend Basket presented Annaly Capital Management, Inc. Announces 3rd Quarter Dividend of $0.69 Per Share
  
• BuyLikeBuffett.com presented What the Rich Are Doing With Their Money
  
• 40percent 20years presented Weekly Tips #8
  
• Value Investing Pro presented Quick Security Analysis With The Magic Formula
  
• EPIC INVESTOR presented Recency Bias and One-Time Gains

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

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

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It is not unusual after I publish a list of stocks to get a comment or two asking why those stocks and not these stocks. Often the real thrust of the question is why buy those low yield stocks when you can buy these high yield stocks. The answer involves risk and its management.

When I started investing in dividend stocks for income, I did as most new income investors - I chased yield. To make things worse, I had success early on. At one time I had a portfolio consisting of Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs) and high yield, high risk stocks. The portfolio’s yield was consistently in the low to mid-teens. I remember once being disappointed in buying a stock that only yielded 8%.

As I continued to read and learn about investing in dividend stocks, it became apparent that I was doing it the wrong way. I started to unwind my high-yield strategy and move into more traditional dividend stocks. However, the high-yield strategy was still experiencing some success so I did not move as fast as I should and ultimately suffered some unnecessary losses.

My portfolio still carries some remnants of my high yield investing days with stocks such as:

• Integrys Energy Group Inc. (TEG) - Yield: 7.62% - Div. Growth: 1.5%
  
• National Retail Properties (NNN) - Yield: 6.75% - Div. Growth: 1.4%
  
• Realty Income Corp. (O) - Yield: 6.33% - Div. Growth: 2.1%
  
• Health Care Property Investors, Inc. (HCP) - Yield: 6.12% - Div. Growth: 1.1%
  

None of the above stocks are currently on my buy list, mainly due to their underlying fundamentals. I suspect over time they will work their way out of my portfolio.

The focus of my income portfolio is now on blue chip dividend stocks with a long record of growing their dividends. Examples of companies I now follow include:

• Johnson & Johnson (JNJ) - Yield: 3.18% - Div. Growth: 7.5% - Analysis
  
• The Coca-Cola Company (KO) - Yield: 3.05% - Div. Growth: 7.9% - Analysis
  
• Abbott Laboratories (ABT) - Yield: 3.48% - Div. Growth: 8.4% - Analysis
  
• Emerson Electric Co. (EMR) - Yield: 3.21% - Div. Growth: 6.4% - Analysis
  

You will notice the yields on each of these stocks are much lower than those in the first group, but they provide a much stronger dividend growth rate. Over time their yield on cost will grow much faster than the first group, thus have a good chance of producing more income.

That is not to say I have completely walked away from high yield investments. Like salt and pepper, I use them to add a little flavor to my income portfolio, but in limited and controlled portions. Here are some high yield securities that I hold that have performed well for me:

• Alpine Total Dynamic Dividend Fund (AOD) - Yield: 15.74%
  
• Eaton Vance Tax Advantaged Global Dividend Fund (ETO) - Yield: 7.33%
  
• CenturyLink Inc. (CTL) - Yield: 8.86%
  

AOD and ETO are ETF's that pay a steady monthly dividend, but each has cut the dividend over the last 12 months. CTL's dividend has been flat at $0.70/share for 5 straight quarters. If you invest in such securities, you should understand the inherent risk and limit your exposure. I likely will always have a place in my income portfolio for riskier securities, but as I grow older the place will grow smaller.

Full Disclosure: Long ABT, AOD, CTL, EMR, ETO, HCP, JNJ, KO, NNN, O, TEG. See a list of all my income holdings here.

(Photo: Gravity X9)


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What makes investing in dividend stocks so intriguing is the power of compound dividends. We all know that compound interest is what occurs when interest previously earned is added to the principle and is considered when calculating future interest – i.e. earning interest on interest. Compound dividends are like compound interest, but much better.

Like compound interest, reinvested dividends will earn "dividends on dividends", but it doesn't stop there. In addition, great income stocks grow their dividends each and every year, so that means your dividends are growing even if they were not reinvested.

As our detractors like to point out, there is a dark cloud that hangs over dividend stocks in the form of income taxes. Each year the government has their hand out wanting their cut of our dividend income. For most investors in the U.S. investing in stocks with qualified dividends the tax is limited to 15%. But still that is 15% that can't be reinvested.

One way to minimize the negative effect of taxes is with the use of tax advantaged accounts, such as a Roth IRA, to house a portion of your income portfolio. The beauty of using your Roth IRA as a income investment account it that you will never have to pay taxes on the dividends earned. Avoiding the taxes will have a significant affect on your account balance over time.

Consider a hypothetical case where $3,000 is used top purchase three stocks each year for 10 years in a Roth IRA and a taxable account. The accounts are opened on the last trading day of 2008 and dividends and the the year's contribution are reinvested on the last day of the year. I selected three dividend companies, Chevron Corp. (CVX) - Analysis, Consolidated Edison Inc. (ED) and Genuine Parts Co. (GPC) - Analysis, that grew dividends over the last 10 years. Here are the results of the analysis:

The use of of a tax advantaged IRA saved this hypothetical portfolio $1,169.46 or 3.02%. Over time this difference would continue to grow, and would be quite substantial for a person that opened a Roth IRA in their 20's and held it 40+ years into their 60's at retirement.

Click here to see the spreadsheet used to generate the above results.

Full Disclosure: Long CVX, ED, GPC. See a list of all my income holdings here.

(Photo: Photo Credit)


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This article originally appeared on The DIV-Net September 14, 2009.

Linked here is a detailed quantitative analysis of Leggett & Platt Inc. (LEG). Below are some highlights from the above linked analysis:

Company Description: Leggett & Platt Inc. makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets.

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
   

LEG is trading at a discount to only 1.) above. The stock is trading at a 146.2% premium to its calculated fair value of $7.57. LEG 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%
   

LEG 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 years with 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% and 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 1939 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
   

LEG earned a Star in this section for its NPV MMA Diff. of the $867. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LEG has. The stock's current yield of 5.47% exceeds the 3.9% estimated 20-year average MMA rate.

Other:LEG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. In spite of operating in a cyclical industry, LEG has a long history of profitability and strong free cash flows. LEG's markets have mostly stabilized, but demand will likely be slow until the economy recovers in 2010. The company expects to generate more than $400 million in operating cash in 2009. Risks include poor market conditions and increases in raw materials costs.

Conclusion: LEG 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 LEG as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $21.91 before LEG's NPV MMA Differential fell to the $500 that I like to see for a stock with 37 years of consecutive dividend increases. At that price the stock would yield 4.65%.

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 0.2%. This dividend growth rate is lower than the the 2.0% used in this analysis, thus providing a margin of safety. LEG has a risk rating of 2.50 which classifies it as a high risk stock.

LEG has many good attributes working in its favor including: Excellent Free Cash Flow Payout at 34%, and Debt To Total Capital at 32%, a good NPV MMA Diff. and a favorable dividend yield and a long history of dividend increases. However, LEG is trading significantly above its buy price of $7.57. Near-term I will not be a buyer, but this is a stock I will keep a close watch on. 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.

I held no position in LEG (0.0% of my Income Portfolio).

What are your thoughts on LEG?

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For your 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 Dividend Stocks Are My Conviction
  
• The Dividend Guy presented DRIPs Are a Means to An End, Not A Reason to Buy a Stock
  
• Dividend Growth Investor presented Are High Dividend Stocks worth it?
  
• Barel Karsan presented Banks And Value Investing
  
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• Everyday Finance presented Herd of Fleeing Investors Have Now Missed 55% Since March
  
• Value Investing Pro presented Creating A Magic Formula Screen With Google Finance

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

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

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Last week I wrote about how dividend stocks were getting expensive and the number of stocks that my model identified as a buy were diminishing. After another week of the market rallying, the number of stocks identified as a buy fell to 4 stocks from 7. So what do you do if you are over-allocated in the four stocks that are a buy?

If you practice asset allocation and dollar cost averaging, as I do, having cash set aside to purchase stocks with no clear buy from an allocation standpoint certainly presents a quandary. When I am faced with this situation, I evaluate what is most important to me and continue to look for that.

In evaluating a dividend stock there are some items that I will not compromise on, such as:

1. NPV MMA Differential: It must be positive and greater than $500.
2. Free Cash Flow Payout + Debt To Total Capital < 100%: Cash is the life blood of dividend increases. If a company, is paying out most of its cash as dividends and/or is carrying high levels of debt, a dividend cut is very likely.
3. Dividend Yield: Too high or too low of a dividend is risky. Too high and the company has a hard time maintaining it; too low and the company will have a hard time growing it at high enough rate to make the numbers work.

That leaves price available for compromise. As a dividend and value investor I want to have it all, but sometime that is not an option. I take heart that even the best investor in America has been where I am at. Consider his quote:

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. -- Warren Buffett

With that in mind I currently categorize stocks that are potential purchases into two tiers:

Tier I: Four and five Star stocks that are trading below my calculated fair value with a yield above my preset minimum. These are the stocks I categorize as "buy" stocks.

Tier II: Four Star stocks that are trading less than 5% above my calculated fair value with a yield above my preset minimum. These are my "wonderful stocks at a fair price."

Sure I would like to buy them below fair value, but that is not always possible. If your holding period is forever, will an extra 5% make a lot of difference in 20 years? Consider these stocks I currently categorize as Tier II stocks:

Genuine Parts Co. (GPC) - Analysis
Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
- Calculated Fair Value: $34.27
- Recent Price: $35.59

Emerson Electric Co. (EMR) - Analysis
Emerson Electric Co. primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.
- Calculated Fair Value: $38.39
- Recent Price: $39.38

Procter & Gamble Co. (PG) - Analysis
The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
- Calculated Fair Value: $55.27
- Recent Price: $55.64

It is important to remember that just a few short months ago everyone was looking for a bottom. There will be other opportunities to buy great companies at a large discount.

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

(Photo: Steve Woods)

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How much money will you need for retirement? This obviously is very important question, but also a very difficult question to answer. There are many factors and assumptions that go into estimating the income that will be needed in retirement. With so many estimates and assumptions, there is a high probability the estimated number will be incorrect.

This past summer BusinessWeek week ran an article in which Brett Hammond, TIAA-CREF's chief investment strategist, shared an easy way for people to check on their retirement readiness. Here are some of the major points from the article:

• Hammond's calculations start with one of the basic tenets of retirement planning—that people need at least 70% of their pre-retirement income during post-working years.
• If you're 35 and plan to retire at 65, you need 2.1 times your salary to be on track.
• By 45, you had better have 3.6 times.
• At 55, the multiple rises to 5.4 times.
• And by the time you retire, you'll want it to be 7.7 times.
• He assumes a 10% contribution rate, 4% salary growth, a bit ahead of inflation; a 6% return on investments; and a 25-year retirement period to finance.

If your investments are growing at 6% every year and you are withdrawing 4% each year, then you will not run out of money, even with 2% inflation. The problem that I have with such estimates is that market does not move in a straight line. What happens when the market tanks?

Consider 2008 when the S&P 500 lost a third of its value. A retiree will still have bills and thus need to withdraw a certain amount of dollars. This dollar amount is likely fixed, which means it will be more than the 4% estimated. For example, if your living expenses are $40,000/year, you would need a one million dollar portfolio to support it if you limited your withdrawals to 4%. Assuming your portfolio lost 33% in 2008, that would leave you with $667,000 dollars. Taking a flat $40,000 from it would result in a 6% spend rate, more than the 4% maximum many experts cite. Another alternative would be to limit yourself to 4% which would be only $26,680, well below the $40,000 needed.

Once you get behind it is hard to catch up. Let's say you spend the full $40,000 needed to meet your expenses, this leaves you with $627,000. To get back to the one million needed to generate the needed income of $40,000 at 6%, your portfolio would have to grow by 59% in 2009.

To mitigate the risk associated with relying solely on capital appreciation, consider introducing an income component to the equation. In addition to bonds, some high-quality lower risk dividend stocks could help provide a steady income allowing you to rely less on selling securities to harvest their capital gains. Of the 107 dividend stocks that I currently only 5 carry the lowest risk rating of 1.00. They are:

Sysco Corp. (SYY) - Yield: 3.70% - Analysis
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.

Johnson & Johnson (JNJ) - Yield: 3.20% - Analysis
Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.

Procter & Gamble Co. (PG) - Yield: 3.20% - Analysis
The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.

PepsiCo, Inc. (PEP) - Yield: 3.10% - Analysis
PepsiCo, Inc. (PepsiCo) is a global snack and beverage company. The Company manufactures, markets and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.

Wal-Mart Stores, Inc. (WMT) - Yield: 2.20% - Analysis
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.

Astute entrepreneurs will tell you it is good to diversify your income streams to minimize the risk of one or more of them drying up. The same is true in retirement planning. We shouldn't rely on any single income stream (social security, pension, 401(k), etc.), but instead look to diversify our income streams. Quality low-risk dividend stocks make an excellent addition to our retirement portfolio, and the good new is, you don't have to wait until you retire to figure out what income it will generate.

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

(Photo Credit)


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This article originally appeared on The DIV-Net September 7, 2009.


Linked here is a detailed quantitative analysis of Lowe's Companies, Inc. (LOW). Below are some highlights from the above linked analysis:

Company Description: Lowe's Companies, Inc. and its subsidiaries operate as a home improvement retailer in the United States and Canada. The company offers a range of products and services for home decoration, maintenance, repair, remodeling, and property maintenance.

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
   

LOW is trading at a discount to only 1.) above. The stock is trading at a 8.4% premium to its calculated fair value of $19.95. LOW 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%
   

LOW earned two Stars in this section for 2.) and 3.) above. LOW earned a Star as a result of its most recent Debt to Total Capital being less than 45%. LOW earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1961 and has increased its dividend payments for 47 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
   

LOW earned a Star in this section for its NPV MMA Diff. of the $1,285. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LOW has. If LOW grows its dividend at 15.0% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Other:LOW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The the home improvement retail industry tends to be very cyclical and relies on economic growth. However, LOW is a strong player with opportunities for growth both domestically and abroad. Aging homes and relatively high home ownership rates are powerful long-term demographic drivers that should help mitigate the continued weakness in residential construction. Consumers viewing their homes as investments will continue to spend money on home improvement projects. Risks include a sharp slowdown in the economy, a large rise in long term interest rates and the inability of LOW to execute its expansion strategy.

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

Using my D4L-PreScreen.xls model, I determined the share price could increase to $28.86 before LOW's NPV MMA Differential fell to the $500 that I like to see for a stock with 47 years of consecutive dividend increases. At that price the stock would yield 1.21%.

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 12.4%. This dividend growth rate is lower than the the 15.0% used in this analysis, thus providing a margin of safety. LOW has a risk rating of 1.50 which classifies it as a low risk stock.

LOW has been a consistent performer and continued to raise its dividend during the economic downturn. It has held up much better than its chief rival Home Depot (HD), which hasn't raised its dividend since November 2006. The stock would have rated a 4-Star Buy except for 3 years of negative cash flow between 2000 and 2002. I have followed LOW for some time, but have been hesitant to initiate a position in a cyclical company with such a low dividend yield. I calculate LOW's buy price at $19.95. 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 LOW (0.0% of my Income Portfolio).

What are your thoughts on LOW?

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For your 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 Seeding A Forest Of Dividend Stocks
  
• The Dividend Guy presented Benjamin Graham’s The Intelligent Investor
  
• Dividend Growth Investor presented Not all dividend stocks are overvalued
  
• Barel Karsan presented Incentives Gone Awry
  
• Dividend Tree presented Start Running Only After Knowing the Finishing Line
  
• Buy Value presented 5 Facts about Benjamin Graham
  
• moneygardener presented lowered my cost of borrowing
  
• Disciplined Approach to Investing presented Dividend Actions In August Not Too Positive
  
• Living Off Dividends & Passive Income presented Investing In Tax Liens
  
• Old School Value presented Special Situation: Going Private Transaction
  
• Dividend Money presented French Investors Turn To Cash Cows…Literally!
  
• Everyday Finance presented Leveraged Funds Switching from Daily to Monthly - Great News!
  
• Dividend Basket presented 5 bank failures bring 2009 tally to 89
  
• 40percent 20years presented My New Entrepreneur Adventure
  
• Value Investing Pro presented Stocks On The Move 9.06.09
  
• EPIC INVESTOR presented Mini-Tender Offers: Awful Deals in Disguise?

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

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

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In the southern U.S. where I live, there has been some controversy over harvesting forests of hardwoods and reseeding them with pines. Valuable hardwood trees such as white and red oaks, cherry, ash, yellow poplar and black walnut require decades to reach financial maturity. The southern pine reaches financial maturity in a fraction of the time, but will not yield the same price as hardwoods. Growing hardwoods is very similar to investing in dividend stocks.

What you plant or invest in today will not yield much for years to come. That is not to say progress is not seen. It is just slow and deliberate. To grow hardwoods it takes great foresight and commitment to the process. The small investments we make in quality dividend stocks each month won't yield large payments in the near-term. It will take time for the payments to grow and compound, but they will.

Consider what these six "hardwood" dividend stocks have done over the last 10 years, assuming a buy at 1999's high:

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

• 1999 Yield on Cost: 0.3%
  
• 2008 Yield on 1999 Cost: 1.40%
  
• Yield on Cost Growth: 4.8 times
  
• Years of Consecutive Dividend Increases: 35
  

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

• 1999 Yield on Cost: 0.5%
  
• 2008 Yield on 1999 Cost: 3.4%
  
• Yield on Cost Growth: 6.6 times
  
• Years of Consecutive Dividend Increases: 27
  

McDonald's Corp. (MCD) - Analysis
McDonald's Corporation is the largest fast-food restaurant company in the world. Its restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world.

• 1999 Yield on Cost: 0.4%
  
• 2008 Yield on 1999 Cost: 3.3%
  
• Yield on Cost Growth: 8.1 times
  
• Years of Consecutive Dividend Increases: 32
  

Nucor Corp. (NUE) - Analysis
Nucor Corporation 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.

• 1999 Yield on Cost: 0.8%
  
• 2008 Yield on 1999 Cost: 8.3%
  
• Yield on Cost Growth: 9.8 times
  
• Years of Consecutive Dividend Increases: 36
  

Lowe's Companies, Inc. (LOW) - Analysis
Lowe's Companies, Inc. and its subsidiaries operate as a home improvement retailer in the United States and Canada. The company offers a range of products and services for home decoration, maintenance, repair, remodeling, and property maintenance.

• 1999 Yield on Cost: 0.2%
  
• 2008 Yield on 1999 Cost: 2.0%
  
• Yield on Cost Growth: 11.0 times
  
• Years of Consecutive Dividend Increases: 47
  

CenturyTel Inc. (CTL)
CenturyTel Inc. provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin.

• 1999 Yield on Cost: 0.4%
  
• 2008 Yield on 1999 Cost: 4.4%
  
• Yield on Cost Growth: 12.1 times
  
• Years of Consecutive Dividend Increases: 36
  

When the time comes to enjoy the fruits of your labor, the steady stream of dividend income will delight the investor. When money is not an issue, few people would say, "That's a nice cherry bedroom suite. Do you have anything in pine?"

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

(Photo Credit)


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For many investors, there is no clear conviction as to how they should invest. Today's investments are guided by what was read yesterday, and the popular media is constantly churning out new and different ideas. Granted it makes for some "interesting" reads, but it certainty is no way to run a portfolio.

Recently, I read a Wall Street Journal article on "Rethinking Stocks' Starring Role" in our portfolio. It presented the same set of facts we have seen in numerous other articles on how bonds have recently out-performed stocks. That is not what caught my attention, but instead it was the numerous directions the article took the reader. In the end, virtually anything you were doing, except practicing fundamental asset allocation, you could find support for in this article. Here are a few excerpts:

• "Asset allocation should be 'more dynamic'. There are a lot of opportunities on the other side of the balance sheet." Andrew Silverberg, co-manager of Alger Balanced Fund referring to corporate bonds
• "There's no single answer to the question of how a typical investor should allocate assets. But he adds that most investors should put at least 20% into alternatives. " Rob Arnott, chairman of money manager Research Affiliates in Newport Beach, Calif.
• For investors with a heavy stock exposure, "this is the perfect time to move elsewhere," including alternative assets such as commodities, Mr. Arnott says.
• "Any kind of strict percentage allocation doesn't make sense," says Steven Romick, manager of FPA Crescent Fund. "It's just ridiculous." FPA Crescent has a go-anywhere mandate.
• "A lot of people who said they wanted to be aggressive [in investment approach] realized last year that they weren't comfortable with that," he says, adding that he increased some investors' stock allocations in the first half of August.

And finally, to keep from totally alienating the stock investors:

• Still, many financial pros continue to believe that stocks should be the biggest element of a long-term portfolio. Ned Notzon, chairman of the asset-allocation committee at T. Rowe Price Group Inc., believes stocks will generally beat bonds over long time periods. And he says it's hazardous to try to sidestep periods of weak stock performance and then heavily invest in shares in the good times.

If you invest without conviction, it is a recipe for disaster. Time has shown that emotion is an investors worse enemy. To paraphrase Warren Buffett, emotion will make you greedy when you should be fearful and fearful when you should be greedy. So how do you overcome this?

An asset allocation model was designed to help investors overcome their natural instinct of doing the wrong thing. The basic formula for success in the market is buy low and sell high. An asset allocation model helps you achieve this goal. When a segment declines, you have two choices to get your allocation back in line, buy more of what declined (buy low) or sell what didn't (sell high). But to do this, and go against your emotions, requires a belief in your asset allocation and your investing process.

Herein lies the problem. Many investors don't have a process, an allocation and thus, have no conviction. They read something that has been very successful then follow it until it loses money, at which point they sell and start the process again. This continues until they become frustrated and pull out of the market. They will later reenter the market when it appears that 'everyone is making money.'

My conviction is dividend stocks. I have researched it and found that it has been successful over long periods and in many types of markets. Also, dividend stocks provide you positive feedback each time one pays or raises its dividend. Below are several bellwether dividend stocks for your consideration:

Johnson & Johnson (JNJ) - Analysis
Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. The company has raised its dividend for 47 consecutive years. With a 7.5% dividend growth rate, JNJ will double its dividend every 9.6 years. The stock is currently yielding 3.20%.

The Procter & Gamble Company (PG) - Analysis
The Procter & Gamble Company is focused on providing branded consumer packaged goods. PG has raised its dividend for 53 consecutive years. With a 7.3% dividend growth rate, the company will double its dividend every 9.8 years. The stock is currently yielding 3.33%.

Abbott Laboratories (ABT) - Analysis
Abbott Laboratories is engaged in the discovery, development, manufacture, and sale of a range of health care products. The company has raised its dividend for 37 consecutive years. With a 8.4% dividend growth rate the stock will double its dividend every 8.6 years. ABT is currently yielding 3.51%.

The Coca-Cola Company (KO) - Analysis
The Coca-Cola Company is a manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups in the world. The company has raised its dividend for 47 consecutive years. With a 7.9% dividend growth rate, KO will double its dividend every 9.1 years. The stock is currently yielding 3.28%.

Wal-Mart Stores, Inc. (WMT) - Analysis
Wal-Mart Stores, Inc. serves customers and club members more than 200 million times per week at more than 8,000 retail units under 53 different banners in 15 countries. WMT has raised its dividend for 35 consecutive years. With a 11.3% dividend growth rate, the company will double its dividend every 6.5 years. The stock is currently yielding 2.11%.

McDonald's Corporation (MCD) - Analysis
McDonald's Corporation franchises and operates McDonald's restaurants that serve a varied, limited, value-priced menu in more than 100 countries globally. The company has raised its dividend for 32 consecutive years. With a 15.5% dividend growth rate the stock will double its dividend every 4.8 years. MCD is currently yielding 3.56%.

I am so confident in my process that I gleefully welcome downturns as buying opportunities. Let the others flee to whatever the pundits are recommending this week, a scared market provides cheaper stocks. To be a long-term bear in U.S. equities, one must believe the underlying companies are flawed. And if that is the case, which I do not believe, then the U.S. and the world economies have bigger problems than the equities markets.

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

(Photo Credit)


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This article originally appeared on The DIV-Net August 31, 2009.

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

Company Description: Grainger (W W) Inc. is the largest global distributor of industrial and commercial supplies, such as hand tools, electric motors, light bulbs, and janitorial items.

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
   

GWW is trading at a discount to 1.) and 2.) above. The stock is trading at a slight discount to its calculated fair value of $88.65. GWW earned a Star in this section since it is trading at a fair value.

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%
   

GWW earned one Star in this section for 2.) above. GWW earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1965 and has increased its dividend payments for 38 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
   

GWW earned a Star in this section for its NPV MMA Diff. of the $678. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as GWW has. If GWW grows its dividend at 11.1% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Other:GWW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. GWW has a excellent record of growing both earnings and dividends. In the near-term GWW will likely face tough markets due to slow economic conditions. Long-term initiatives to enhance their distribution should help the company increase market share. Risks include economic conditions, pricing pressures and an adverse ruling from the Department of Justice related to compliance issues on a U.S. government contract.

Conclusion:GWW 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 total of three Stars. This quantitatively ranks GWW as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $95.89 before GWW's NPV MMA Differential fell to the $500 that I like to see for a stock with 38 years of consecutive dividend increases. At that price the stock would yield 1.86%.

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 10.4%. This dividend growth rate is lower than the the 11.1% used in this analysis, thus providing a margin of safety. GWW has a risk rating of 1.25 which classifies it as a low risk stock.

For GWW, the difference between a 3-Star Hold and a 4-Star buy is negative cash flow in 1999. I could look beyond the negative cash flow 10 years ago if that were the only thing keeping me from buying GWW. Even though GWW is trading slightly below my calculated buy price of $88.65, I will pass for now since the 2% dividend yield is below the 2.75% I am currently looking for. 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 GWW (0.0% of my Income Portfolio).

What are your thoughts on GWW?


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Summary only...

For your 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 Never Fall In Love With A Stock
  
• The Dividend Guy presented Why ETF Marketing is Hurting Investors
  
• Dividend Growth Investor presented Six things I learned from the financial crisis
  
• Barel Karsan presented When Bad Times Are Good
  
• Dividend Tree presented Dividend Stocks for Hedging against Dollar’s Long Term Fluctuations
  
• Buy Value presented Presidents and the Stock Market
  
• Stock Market Prognosticator presented BJ Services Take Under
  
• The Div Guy presented Top 20 Stock Holdings
  
• Disciplined Approach to Investing presented Record Level Of Cash For S&P Industrials
  
• Old School Value presented Portfolio Update August 2009
  
• Triaging My Way To Financial Success presented Where’s the Value?
  
• Dividend Money presented 3 Key Issues That Influence the Stock Market
  
• Everyday Finance presented August in Review - Awesome!
  
• Dividend Basket presented Five North American Natural Gas Buys
  
• 40percent 20years presented New Invesment Clips
  
• EPIC INVESTOR presented Opportunities in Foreign Real Estate Market -- Part I

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

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

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Over time we tend grow fond of people we have a relationship with. Sometimes we grow to love them like a brother or sister; sometimes even more. In much the same way we can easily grow to love certain stocks, but this is not necessarily a good thing.

It is easy to be captivated with a top performer. Everyone loves a winner. During the 80's and 90's when Jack Welch ran General Electric (GE) the company was a well-oiled machine that routinely beat the streets expectation and the ever-increasing stock price reflected its performance. I once said that if I could only buy one stock for the rest of my life, it would be GE.

Then there's the first-love dart - that first stock that you bought. For some reason there is often an emotional attachment for the first of anything. Some business owners frame the first dollar they earn, while some investors have a hard time letting go of the first stock they purchased, especially if the stock performed well for an extended period of time. For me it wasn't the first stock I purchased (I can't even remember what it was), but instead it was the first stock I purchased for its dividend that held a special place. That stock was a REIT, First Industrial Realty Trust Inc. (FR).

So what happened? Both stocks cut their dividends and I immediately sold them. To achieve our long-term investing goals we must remove emotion from the equation. It is a recipe for disaster when we make investing decisions based on a past relationship with a stock that is contrary to the current fact pattern.

That is not to say I am not fond of certain stocks. For example, I currently like or admire these dividend stocks:

Johnson & Johnson (JNJ) - Yield: 3.30% - Analysis
Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.

Nucor Corp. (NUE) - Yield: 3.10% - Analysis
Nucor Corporation 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.

United Technologies Corp. (UTX) - Yield: 2.60% - Analysis
United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.

McDonald's Corp. (MCD) - Yield: 3.60% - Analysis
McDonald's Corporation is the largest fast-food restaurant company in the world. Its restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world.

3M Co. (MMM) - Yield: 2.80% - Analysis
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.

Not all of the above stocks are on my current buy list, but they are some of the ones that I keep a close eye on for good opportunities to add to my position.

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


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Over the last several weeks, the number of dividend stocks my model identified as a buy has greatly declined. On July 3rd it flagged 14 stocks as potential buys verses only 7 stocks on August 29th. The August 29th list had the advantage of using a quarter point lower minimum dividend. Needless to say the recent market rally has made many dividend stocks expensive.

Several market observers believe the market has moved too high too fast. In a recent Wall Street Journal article Jason Zweig expressed his concern. Here are some points he made:

• The Dow Jones Industrial Average is up 46% since March 9
• In March, stocks traded as low as 11.7 times their average earnings over the previous 10 years
• Today stocks are selling at 18.4 times which is above the long-term average of 16.3 times earnings
• In March, investors feared getting crushed in a further decline
• Now all they seem afraid of is missing an even greater rally
• In August, corporate insiders sold nearly 31 times as much stock as they bought
• Investors chase past performance, buying whatever has just made the most money for other people and themselves
• 401(k) participants tend to add significantly to whichever funds they already own that have gone up the most
• Benjamin Graham in his classic book "The Intelligent Investor," wrote "the investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances."
• If you can't exercise that kind of emotional control, then by Graham's definition you aren't an investor at all

I have long believed that most people will lose money in the stock market over their lifetime. The above provides indirect evidence of my hypothesis. Emotion is a powerful thing the fear of losing it all or missing out when everyone else is making money drives some people to make bad decisions. To be a successful investor, you need a winning process and a firm conviction to stand by it during the good and bad times. Otherwise, you would be better off not investing in stocks.

Here are five dividend stocks that are trading below their calculated fair value:

Automatic Data Processing Inc (ADP) - Analysis
Automatic Data Processing Inc. is one of the world's largest independent computing services companies, provides a broad range of data processing services.

• Fair Value: $43.57
• Recent Price: $37.50
• Yield: 3.4%

Cardinal Health Inc (CAH) - Analysis
Cardinal Health Inc. is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.

• Fair Value: $46.16
• Recent Price: $25.00
• Yield: 2.0%

Dover Corp. (DOV) - Analysis
Dover Corp. manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.

• Fair Value: $35.65
• Recent Price: $33.50
• Yield: 3.0%

Emerson Electric Co. (EMR) - Analysis
Emerson Electric Co. primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.

• Fair Value: $38.39
• Recent Price: $35.75
• Yield: 3.6%

Sysco Corp. (SYY) - Analysis
SYSCO Corporation, through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily for food service industry in the United States and Canada.

• Fair Value: $27.36
• Recent Price: $25.00
• Yield: 3.8%

My investing process involves selecting stocks from quality companies that have a history of consistently increasing their dividends. I believe in this methodology enough to stick with it through the good and bad times.


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