Linked here is a PDF copy of my analysis of The Home Depot, Inc. (HD) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: The Home Depot, Inc. operates as a home improvement retailer primarily in the United States, Canada, and Mexico.

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 and 4.) Graham Number. HD is trading at a discount in 3 of the 4 valuations listed above - 1.) Avg. High Yield Price, 2.) 20-Year DCF Price and 3.) Avg. P/E Price. If I exclude the high and low valuation, and average the remaining two valuations, HD is trading at a jaw-dropping 43.3% discount. HD gets a Star for being fairly valued.

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 and 5.) Payout 15% of avg. HD earned 3 of the 4 available Stars in this section - 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate and 3.) Years of Div. Growth. Dividends will double every 5 years if they grow by 15%. A Star was earned for 1.) above since dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1998-2001, 1999-2002, 2000-2003, etc.)

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. and 2.) Years to >MMA. HD earned 1 Star in this section for 1.) NPV MMA Diff. HD's NPV MMA Diff. was an impressive $81,874. That means if the historical dividend growth rate were to continue into the future, the NPV of HD's dividend income in excess of what could be earned on a 4.6% MMA over 20 years would be $81,874 per $1,000 invested.

Other: HD is the reigning champion of the home improvement super stores. However, it has recently taken some body blows from the economic downturn in housing and from its leading competitor, Lowe's. Many analysts are projecting 2008 to be a difficult year in this sector. A recurring criticism on HD has been poor customer service compared to its rival Lowe's. The company has taken steps to improve its customer service. Though I am a shareholder of HD, I am a customer of LOW - I continue to drive by a HD to shop at LOW.

Conclusion: HD earned one Star in the Fair Value section, three Stars in the Dividend Analytical Data section, and one Star in the Dividend Income vs. MMA section for a total of Five Stars, which rates it as a 5 Star-Strong Buy.

HD is expected to increase its dividend in an announcement later this month. I am currently treating HD as a "hold" pending its dividend announcement.

Disclaimer: As always this is only my opinion and you should not rely on it. 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 own shares of HD.

What are your thoughts on HD?

Coming up tomorrow in round 2, the contender: LOW-Lowe's Companies, Inc.


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Summary only...

I hate to sell a stock. When I buy a stock, my intention is to hold it forever and enjoy its ever-growing dividend income. Unfortunately, it doesn't always work that way. Sometimes a stock changes and no longer fits in my income portfolio. It could be a company that cuts its dividend or in some cases freezes its dividend. Let's take a look at a two-step process designed to help us determine if we should sell a stock after a dividend freeze.

I. Does The Stock Still Meet Our Investment Criteria?

Dividend investing is about about building a reliable income stream that increases each year. When an investment stops raising its dividend it is no longer providing the future income growth required by my dividend portfolio. The stock may still be a good value, but my dividend portfolio’s primary objective is ever-increasing dividend income, not capital gains.

Obviously, the company's future prospects would play into a decision to keep or sell. Can the company raise its dividend, albeit late, and still preserve a year-over-year increase? Will the future earnings provide sufficient free cash flow to pay a dividend? What other obligations, such as debt, might absorb future cash flows? Is management committed to the dividend? Would you buy this stock today as an income investment? This step determines if the stock is a candidate for a sale.

II. Are There Better Alternatives Available?

Once the stock has been identified as a candidate for a sale, the question then becomes is there something out there that is better? Don't forget in determining the market value of a stock, the market considers any known "bad news" about about a company. So after the bad news is out and the company freezes the dividend, the price may drop and increase the effective yield on the stock. Yield on cost is not relevant when considering a sale.

The current price and current yield are what you will receive and give up when selling a stock. With the cash received is there another stock that would be an "upgrade" from the one you are selling? What does its future prospects look like? Will the new stock replace the dividend income lost from the one sold? What does its debt and cash flow look like? Will it continue to grow its dividend in the future? Is it a more riskier stock?

If in answering these questions you determine the stock should be sold, then you pass step two. At this point, you should sell the stock that froze its dividend and purchase the one you identified in step two.

A Real-World Example

I am holding three stocks with frozen dividends. Last week I spent some time analyzing one of them - Home Depot (HD). Its quarterly dividend has been frozen at $0.225/share since November 2006. Let's run it through the two-step process and see what happens.

I. Does The Stock Still Meet Our Investment Criteria? - Home Depot (HD)

• Can the company raise its dividend, albeit late, and still preserve a year-over-year increase? No, the annual dividend was $0.90/share in 2007 and 2008.


• Will the future earnings provide sufficient free cash flow to pay a dividend? Not easily. HD's 2008 free cash flow was $2.2 billion while it dividend was $1.7 billion.


• What other obligations, such as debt, might absorb future cash flows? HD has been increasing its debt over the last several years. In 2006, HD's total debt was $4.1 billion. At the end of 2008, HD's debt has nearly tripled to $11.4 billon.


• Is management committed to the dividend? This is subjective, but given the above it will be hard to increase the dividend in the near-term.


• Would you buy this stock today as an income investment? Definitely not!
  

Based on Step I, HD is a candidate for a sale. Let's take it through step 2.

II. Are There Better Alternatives Available? - Home Depot (HD)

On the day I was evaluating HD, its current yield was 3.52%. Good, but not great when compared to companies with a similar yield and growing their dividends. So the question is, "If I sold HD, is there another stock that would be an upgrade?" Over the last several weeks I have looked at three companies the piqued my interest. Let's compare them to HD:

1. Genuine Parts Co. (GPC) - [Recent Analysis]

• What does its future prospects look like? The economic downturn has left GPC struggling in some areas, but its management has done an excellent job managing the company for cash.


• Will the new stock replace the dividend income lost from the one sold? With a current yield in excess of 4.5%, GPC could more than replace HD's lost income.


• What does its debt and cash flow look like? GPC ended 2008 with a low debt to capital of 17.7%. Its 2008 free cash flow of $425 million was down from the 2007 record level of $526 million, but with little debt, the $425 is more than adequate to cover the annual $252 million dividend.


• Is it a more riskier stock? With its strong balance sheet and cash flows, GPC is less risky.


• Will it continue to grow its dividend in the future? For the 53rd consecutive year, GPC raised its dividend in March 2009. It appears to have the financial ability to sustain increases going forward.
  

2. General Dynamics Corp. (GD) - [Recent Analysis]

• What does its future prospects look like? Much of GD's work is tied to long-term defense contracts. Its business jet segment has suffered some.


• Will the new stock replace the dividend income lost from the one sold? With a current yield of 3.27%, GD's income will be slightly less than HD's, but with a dividend growth rate of 11% it could surpass HD in one year.


• What does its debt and cash flow look like? GD ended 2008 with $3.1 billion in debt, up from the $2.8 billion in 2007. Its 2008 free cash flow of $2.6 billion was at a record level and is more than adequate to cover the annual $533 million dividend.


• Is it a more riskier stock? No, with its strong cash flows and debt to capital of 24%, GD is better positioned than HD to weather the downturn.


• Will it continue to grow its dividend in the future? No reason to believe it won't.
  

3. Abbott Laboratories (ABT) - [Recent Analysis]

• What does its future prospects look like? Like all pharmaceutical companies, ABT is facing challenges to their branded patents, drug development and regulatory issues. However, they have a good pipeline and have diversified their business, thus they appear to be in a better position than most of their peers. Near-term, the economic downturn should affect them less than HD.


• Will the new stock replace the dividend income lost from the one sold? With a current yield in excess of 3.6%, ABT will replace HD'd lost income.


• What does its debt and cash flow look like? At 40% ABT's debt to total capital is a little higher than the 35% I like to see. However, it is moving in the right direction. ABT ended 2008 with $11.4 billion in debt, down from the $12.2 billion in 2007. Its record 2008 free cash flow of $6.1 billion was up $2.5 billion from 2007, and is more than adequate to cover the annual $2.2 million dividend.


• Is it a more riskier stock? No. ABT with its strong cash flows should be able to pay its dividend and pay down debt with the cash left over. I consider ABT's near-term prospects better than HD's.


• Will it continue to grow its dividend in the future? No reason to believe it won't.
  

In answering the above questions, I was confident that either GD or ABT would be an excellent replacement for HD. Going into April, GPC was my favorite, but it was disqualified based on its valuation.

I had pegged GPC as a stock to purchase in April. I opted to defer a month and wait until their earnings release on April 16th. Last week GPC reported 11% lower sales and 28% lower income. So why did their stock jump nearly 10% that day? First, they beat analysts prediction by $0.07/share. Secondly, and more importantly to me, they increased free cash flow by $10.6 million, or 8.6%. Management judiciously managed working capital and watched capital spending - signs of good management. Unfortunately, after its run-up, GPC's stock price was was trading well in excess of my buy price of $31.06. For now, I will leave GPC on my watch list.

Taking into account all the above, I sold HD and purchased ABT.

Full Disclosure: Long ABT


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Summary only...

After the market closed on May 22, 2008 Home Depot (HD) announced that its board of directors declared a first quarter cash dividend of 22.5 cents per share. The dividend is payable on June 19 to shareholders of record on the close of business on June 5.

This extends the string of flat dividends to seven dating back to the November 2006 dividend. Since 2004, HD has raised its dividend in the month of November (except November 2007). The flat dividend this quarter did not surprise me. I also expect the August 2008 dividend to remain flat at 22.5 cents. This is where it get interesting.

The way HD has timed their dividend increases, they showed a year-over-year (YOY) increase for calendar year 2007. Even after eight flat dividends, HD can still end up with a YOY increase from 2007 to 2008 with an increase in November 2008. Management knows this.

Though not as bad as a dividend cut, a flat dividend is a close second. From a perception standpoint, a YOY flat dividend will not bode well with the dividend investing contingent of HD's shareholders. HD's 3.34% yield is good, but not good enough for most dividend investors to swallow a flat YOY dividend. The 3.34% yield is misleading since a large portion of it came through HD's share price decline. For example, my yield-on-cost (annual dividend $/cost basis) is 2.49%, significantly lower than the current yield.

Beyond the broader problem of declining residential construction, HD continues to battle with customer service issues. Home Depot Chief Executive Frank Blake was grilled by several shareholders at the company's annual meeting about substandard customer service experiences in HD stores.

As noted in my "State of the Dividend Address", I currently have HD "On The Shelf". This means I am taking a wait and see approach and not adding to my position. If HD does not increase its dividend over the next two quarters, I will reevaluate to determine if it belongs in my dividend income portfolio.

At the time of this writing, I owned shares of HD (2.0% of my income portfolio).


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Summary only...

If you really want to know what is important to a person, you don't ask the person. Instead, you watch what they do. This will reveal where their heart truly lies. Attached is a PDF copy of my Excel Dashboard that I use to track stocks. I consider each of the metrics on here important, but which do I consider the most important?

In determining which piece of information I consider most important, the answer lies in my actions. Each time I look at this tab, I automatically sort the stocks by the "NPV MMA Diff." column. Upon reflecting on this, I determined that "NPV MMA Diff." is what I consider to be the most important piece of information.

As a reminder, "NPV MMA Diff." is based on a hypothetical $1,000 investment in a stock and a $1,000 investment in a money market account (MMA) earning a pre-defined rate. The value calculated is the net present value (NPV) of the difference between the dividend earnings of this
investment and the interest income from the MMA over 20 years. Other assumptions include:

1. Dividends grow at the Dividend Growth Rate
2. Dividends are reinvested
3. Share price appreciation is not considered
4. Interest income is reinvested in the MMA

If you are interested in seeing how "NPV MMA Diff." is calculated, I will refer you to my DF4-PreScreen.xls model on the Tools page.

Looking at the PDF, you will see four stocks have "NPV MMA Diff." values in excess of $100,000. This is a "too good to be true" situation where the market has discounted the these stocks for some reason. Here is my speculation looking at them individually:

1. SFI - This is a finance company focused on the commercial real estate industry. With "finance company" and "real estate" in the description, this company has taken a double hit. I suspect the market has priced a significant economic hit and a dividend cut into SFI. With a 19% yield, if the market is wrong someone will make a lot of money. I consider this to be my most risky stock.
2. RY - The market does not believe RY can continue to grow its dividend at a 20+% rate. I agree. Using my DF4-PreScreen.xls to run some scenarios I found that to get the $10,000 "NPV MMA Diff." I like to see, RY will have to grow its dividend at 9.1%. An anemic growth rate of 2.8% will get it to $1,000 of "NPV MMA Diff." I am not overly concerned with RY.
3. ACAS - The market believes that ACAS cannot continue to pay a 12% dividend and grow it at 7+%. Maybe it can't, but for the last 10-years it has proved the market wrong. I characterize ACAS as a risky stock - but I am still buying as my allocations allow.
4. HD - Historically HD has raised it dividend at 20+%. those days are gone. Its dividend has been flat for six straight quarters. Using my DF4-PreScreen.xls to run some scenarios, I found that to get the $10,000 "NPV MMA Diff." I like to see, HD will have to grow its dividend at 12.3%. It will take a 6.6% growth rate to get $1,000 of "NPV MMA Diff." HD is in trouble, that is why I have put it "on the shelf".

Moving to the other end of the list. Here is my speculation on the bottom four:

1. WMT - A recent 8% dividend increase was not enough to keep the "NPV MMA Diff." from going negative. I am hoping WMT will return to its double-digit dividend increase in the future, but until then, it is "on the shelf".
2. HCP - With a $1,692 "NPV MMA Diff." driven by a 4.8% yield and a 1.8% growth rate, this stock is a yawner. It is a steady performer, but its performance doesn't leave much room for error.
3. JNJ - Your classic dividend stock. With a $2,443 "NPV MMA Diff." driven by a 2.5% yield and a 11.0% growth rate, there is not much room for error. But that's ok, JNJ historically hasn't made a lot of errors.
4. ED - Classic utility - good dividend yield of 5.6% with an anemic 0.9% growth rate. I will continue to buy for diversification reasons as my allocation allows.

Ahhh... you got to love that "NPV MMA Diff." metric!

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Summary only...

Linked here is a PDF copy of my analysis of Lowe's Companies, Inc. (LOW) (alt.1, alt.2). 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 and 4.) Graham Number. LOW is trading at a discount in 3 of the 4 valuations listed above - 1.) Avg. High Yield Price, 2.) 20-Year DCF Price and 3.) Avg. P/E Price. If I exclude the high and low valuation, and average the remaining two valuations, LOW is trading at an astounding 55.9% discount. LOW gets a Star for being fairly valued.

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 and 5.) Payout 15% of avg. LOW earned 2 of the 4 available Stars in this section - 2.) Dividend Growth Rate and 4.) 1-Yr. > 5-Yr Growth. However, one Star was deducted since LOW has only grown its dividend for 3 consecutive years, leaving a net of 1 Star in this section.

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. and 2.) Years to >MMA. LOW earned no Stars in this section.

Other: Over the last few years LOW has made significant stides to close the gap with HD. LOW has focused on understanding their customers as noted in this 2004 article "How Lowe's Hammers Home Depot".

Conclusion: LOW earned one Star in the Fair Value section, a net of one Star in the Dividend Analytical Data section, and no Stars in the Dividend Income vs. MMA section for a total of Two Stars, which rates it as a 2 Star-Weak stock.

LOW has got its shots in, scored several knock-downs and stunned the champion; but having flat dividends in 2005, 2003, 2002, 2000 and 1999, LOW just doesn't have the stamina to stand toe-to-toe with HD. In a unanioumous decision, the winner is HD. However, given LOW's performance over the last several years, a rematch is inevitable! Stay tuned...

Disclaimer: As always this is only my opinion and you should not rely on it. 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 do not own shares of LOW.

What are your thoughts on LOW?


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Summary only...

I am reminded of the old story about a farmer that said to his wife, "I told you 'I love you' when we got married and if anything changes, I'll let you know." Most of us require a little more frequent feedback than once-in-a-lifetime. The same is true with my dividend investments.

In the U.S. and Canada, most companies pay dividends quarterly. In other parts of the world, it is not uncommon for companies to pay an annual or a simi-annual dividend. Looking at some ADRs for non-U.S. companies Barclays PLC (BCS), ING Groep NV (ING), Toyota Motor Corp. (TM) all pay semi-annual dividends.

That is not to say that North American companies sometimes choose not to pay quarterly dividends. For many years McDonald's (MCD) paid an annual dividend. Since 2000, Walt Disney Co. (DIS) has paid an annual dividend and Ruby Tuesday, Inc. (RT) has paid a semi-annual dividend. Going in the other direction, there are some companies and ETFs that pay monthly dividends. These include Realty Income Corp (O) and Alpine Total Dynamic Dividend Fund (AOD).

Ironically, in a June 19, 2000 BusinessWeek article, Harry M.J. Kraemer Jr., chairman and chief executive of Baxter International Inc (BAX) stated he would be very surprised if a "majority of companies did not move to an annual dividend within four or five years". There has not been much movement in that direction. To the contrary, MCD has moved back to paying quarterly dividends. Around the year 2000, several other companies such as AT&T (T), Wal-Mart Stores Inc. (WMT), Coca Cola Co. (KO), 3M (MMM) and Home Depot (HD) considered moving to annual dividends, but ultimately rejected the change. So why would a company risk annoying its shareholders' and moving to an annual dividend?

Reasons For an Annual Dividend

1. Save on Administrative Costs: Many companies popular with kids such as McDonald's and Disney, have a large number of shareholders that hold a small number of shares. It cost 4 times as much to mail four $0.50 dividend checks instead of one $2.00 check.


2. Generate Additional Income: In March of 2008, MCD paid $426.4 million in dividends. If that was not paid in March, but paid in December the company would have earned around $10 million in interest on the money (assuming a 3% rate).

Reasons Against an Annual Dividend

1. Shareholders Have Come to Expect Quarterly Dividends: Some shareholders of dividend companies use the dividends to pay living expenses. Receiving a single annual distribution and allocating it over the upcoming year would be difficult for some. In addition, the transition would prove financially problematic for those with insufficient resources.


2. Dividends Provide Frequent Assurances of the Company's Health: In November 2007 when HD held their dividend flat it was an indication to the market the extent to which the company was struggling. Since you can't fake cash, dividends are a strong scorecard in judging the company's financial health. If you had a treatable disease would you rather know in 3 months or 12 months?

For me, quarterly dividends provide a perfect balance between to much administrative work (for me and the company) associated with monthly dividends and too little financial feedback from the company associated with annual dividends. How do you feel about annual dividends?

At the time of this writing, I owned shares of AOD, HD, MCD, O and WMT.


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Summary only...

Markets this year have been highly volatile and directionally down. This is depressing for short-term investors, but for us dividend investors it is an exciting buying opportunity! I have been able to increase my position in GE and initiate a position in JNJ. I have been able to increase positions in high yield securities like ACAS, AOD and several banks.

Now a declining market is only good if the companies continue to perform and raise their dividend as expected. Sometimes, for various reasons, that doesn't happen. In yesterday's article "On The Shelf", I described a new concept that I have adopted. In short, if a security is not performing at the desired level for additional purchases, but also is not performing badly enough to warrant a sale, then I will put it "on the shelf". By that I mean it will be set aside within my income portfolio with no additional purchases made until its outlook improves or deteriorates to the point it should be sold.

Let's take a look at several securities that are candidates for the shelf:

Home Depot (HD)
The decline in residential construction has hit HD hard. It has struggled as of late and this has been reflected in its dividend. HD has held its dividend constant at $0.225/share for the last six quarters. Its dividend yield of 3.6% does not allow me to look the other way. Assuming it increases its dividend within a year, the stock could be salvaged, depending on the magnitude of the increase.
Verdict: On The Shelf


Walmart (WMT)
WMT this week raised their quarterly dividend from $0.22/share to $0.2375/share. The market rejoiced and ran WMT's price up. It was one of my few black stocks on that red day, but I was not happy! This was only an 8.0% increase and when I dropped the new dividend rate into my model the NPV MMA Diff. went negative (-2,444). Under the current circumstances WMT was no longer a buy.
Verdict: On The Shelf


SunTrust Bank (STI)
As discussed in my article "Time is My Friend", STI recently raised its quarterly dividend from $0.73/share to $0.77/share. This lowered its growth rate to 5.5% from 10%. Its NPV MMA Dif. is still positive at $9,447. I suspect most of the other banks will significantly lower their growth rate so, as noted in the article, I am taking a wait and see approach to the banks I hold.
Verdict: On The Shelf


M&T Bank Corporation (MTB)

When I started writing "Time is My Friend" I expected the outcome to be a sell for MTB. On a return basis it has been the poorest performer of the banks that I hold. My gut tells me it still may be the first to go once all the dividend increase data is in. As such, I do not think it is appropriate to purchase additional shares at this time.
Verdict: On The Shelf

It is important to continue evaluate your holdings to determine if they merit a buy, hold or sell. I plan to add another section in my holdings for "On the Shelf" securities. These four will be the first to move in. I have an ETF that is eying the neighborhood as well, so stay tuned...


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Summary only...

Looking back to the beginning of the current recession, there were two things that initially put the brakes on the economy: 1.) the sub-prime melt-down and 2.) virtual halt of residential construction. They go hand-in-hand. As new homes are constructed, many were being bought by those wanting to upgrade. In turn they had to sell their house. Eventually, as new home construction expanded while the buying population shrank, the only way to feed the beast was to expand the sub-prime market. Like most houses of cards, ultimately it failed. Has housing finally hit bottom?

I am not ready to call a bottom, but recently there has been some encouraging news. First, the Commerce Department reported housing starts jumped 22% in February to a seasonally adjusted annual rate of 583,000 from a revised 477,000 in January. This was the biggest percentage gain in 19 years. Single-family home construction increased 1.1% last month, and new construction of multi-unit buildings surged 80%. Building permits rose 3% in February, according to the Commerce Department report, to an annual rate of 547,000. Building permits are considered a reliable indicator of future activity in construction. This should be good news for homebuilders such as DR Horton Inc. (DHI), Toll Brothers, Inc. (TOL) and Pulte Homes, Inc. (PHM) who have seen their share prices collapse over the last 18 months.

Though some economists are inclined to write this off as a weather-related fluke, one homebuilder is saying that conditions are improving slightly in the industry. "Traffic is definitely up, and the number of contracts for houses has doubled on a per-month basis since October," said Ara Hovnanian, CEO of the homebuilding company Hovnanian (HOV).

Another sign of the thaw came March 17th when an analyst upgraded home improvement retailers Home Depot Inc. (HD) and Lowe's Cos. ( LOW) citing the HD's cost-control efforts and the LOW's potential for expansion as reasons. Home Depot's cost control efforts, fewer store openings and strong free cash flow helped the company deal with the troubled housing market. "Home Depot is demonstrating strong capital discipline. The company is spending cash wisely and only opening 12 new stores this year," Binder wrote in a note to clients.

In another note, Binder said Lowe's may be able to gain ground when people start looking forward to new store openings again. "While it doesn't feel like we need any more home improvement stores, Lowe's has half the number of stores Home Depot has in many major markets and convenience matters in this business. In other words, the company could get credit again at some point for having more unit growth opportunities relative to Home Depot. While spring selling will give us a better feel for inventory levels during prime selling season, we are encouraged by greater affordability and possible improvement in banks willingness to lend as bank balance sheets see some repair."

We must continue to cautiously manage our portfolios in this downturn, while keeping a watchful eye on our surroundings. Signs of new life make it easier for long-term investors to stand firm in their convictions.

Full Disclosure: Long HD

(Photo Credit)


References:
- Is a housing bottom in sight?
- Ahead of Bell: Lowe's, Home Depot upgraded


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Summary only...

Earlier in the month we looked at reasons why to sell a dividend stock when it cuts its dividend. But what should you do if a company opts to just leave its dividend flat? This is happening more and more with the recent economic downturn.

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

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

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

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

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

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

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

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

Disclosure: Long in HD, GE and RY.


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Linked here is a PDF copy of my analysis of Lowe's Companies, Inc. (LOW) (alt.1, alt.2). 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 all four of the metrics above. If I exclude the high and low valuation, and average the remaining two valuations, LOW is trading at an astounding 41.4% discount. A Star is added since LOW 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.

LOW earned three Stars in this section for 1.), 2.) and 3.) above. LOW has paid a cash dividend to shareholders every year since 1961 and has increased its quarterly cash dividend payments for 25 consecutive years (calendar). The Rolling 4-yr Div. > 15% means that LOW has grown its dividend in excess of 15% in every consecutive 4 year period during the last 10 years. This metric identifies a company that has historically grown its dividend on a high and consistent basis.

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 one Star in this section for 1.) above. I like to see a NPV MMA Diff. of $3,000 for a company that is both an Achiever and an Aristocrat; and $10,000 for a company that is neither. At $13,836, LOW's NPV MMA Diff. is quite strong.

Other: LOW is a member of the S&P 500, is an Achiever and an Aristocrat. The home improvement retail industry is cyclical in nature and is strongly reliant on economic growth. Home ownership rates are near historical highs and the homes are aging. That coupled with an increased net worth of baby boomers make for a powerful long-term driver for LOW's growth. In addition, LOW has favorable growth opportunities in for international expansion in both Canada and Mexico.

Conclusion: LOW earned a Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and one Stars in the Dividend Income vs. MMA section for a net total of 5 Stars. This quantitatively rates LOW as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could go up to $29 before LOW dropped to the $3,000 NPV MMA Diff. I like to see; or its long-term dividend growth could drop to 15.9% and LOW would still be a buy. As a long-time Home Depot (HD) shareholder, I have not been pleased with HD as a retail operation. I would drive past HD to shop at LOW. This has created a desire in me to own LOW, but the numbers never would work - until now. Barring a significant change in LOW's fundamentals or valuation, I will likely initiate a position in LOW during the month of August.

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 do not own shares of LOW (0.0% of my Income Portfolio).

What are your thoughts on LOW?


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Last week I listed the stocks in my portfolio that I considered to be "My Favorite 5 Stocks for Today". I thought it would be interesting to followup with the stocks that I am holding that are on the other end of the spectrum. It is important to note these picks will change over time (maybe even by the time the market opens on Monday). Below are the 5 stocks in my portfolio that I am the least happy with:

1. HD - HD has held its dividend constant at $0.225/share for the last six quarters, and I suspect it will continue for at least one more quarter. That's ok if you have a double-digit yield, but at 3+% I expect more. This stock is currently "On The Shelf".


2. WMT - Unlike HD, WMT raised its dividend at the appointed time, but at 8.0% it wasn't enough to keep my model smiling. At the current yield and a lower growth rate the NPV MMA Diff. is now negative. WMT is no longer a buy but is also "On The Shelf".


3. STI - As noted in an earlier post, I am holding too many different bank stock (6) and I am looking to sell 2-3 of them. From a total return standpoint STI is my worst performer of all income stocks that I hold, which has put it "On The Shelf".


4. MTB - Ditto STI above. From a total return standpoint, MTB is my second-worst performer of all income stocks that I hold, which too has put it "On The Shelf".


5. SFI - Within my income investments, SFI is by far my most risky investment. This is reflected in its ~20% yield. SFI is normally above-average when it comes to volatility, but recently, its volatility has been especially high. SFI is currently not "On The Shelf", but I am watching it closely.

Disclaimer: Material presented here is for informational purposes only and is based solely on my opinion. 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 own shares of all the above-mentioned stocks.

What are your 5 least-favorite stocks in your portfolio?


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If it’s uncomfortable on Capitol Hill, it’s at least doubly so on Wall Street. Again, this is the reason why I’m bullish on dividend stocks to buy. If things go well, you have the potential for capital returns and passive income. If the markets take an unexpectedly negative turn, dividend-paying companies tend to ride out bearish cycles better than less-generous organizations. With this in mind, here are my ideas for dividend stocks to buy, ranging from safer options to speculative bets...

At only a 1.55% dividend yield, Microsoft (NASDAQ:MSFT) doesn’t strike most people as a true passive-income opportunity. I’ll easily concede that Home Depot (NYSE:HD) is not an exciting name. As a ubiquitous consumer-staple name, HD often comes up as a defensive strategy. Take Kimberly Clark (NYSE:KMB) as an example. Among dividend stocks, AMC (NASDAQ:AMC) is a tough one to classify. As boring as it is, International Business Machines (NYSE:IBM) paradoxically arouses controversy among investment-analysis circles. Consider National CineMedia (NASDAQ:NCMI) and its 8% dividend yield. I’ll end my list of dividend stocks to buy with my craziest idea: General Electric (NYSE:GE).

Source: Yahoo Finance

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Dividend growth stocks have obvious appeal. After all, dividend investing is based on buying and holding a stock for the payouts. So if a company can consistently increase its distributions to investors over time, all the better. Unlike traditional growth investing, where you depend on a stock increasing in value based on profits or sales trends, dividend growth investing focuses on the payouts above all else. The best dividend stocks to buy offer regular deposits into your bank account, but the best dividend growth stocks are committed to making those paychecks larger every year. So what are some of the most impressive dividend growth plays on Wall Street as we enter 2018? Here are 10 to consider...

If you think CVS Health Corp (NYSE:CVS) is just a drug store filling prescriptions and selling candy bars, you don’t understand the business fully. In truth, Cisco Systems, Inc. (NASDAQ:CSCO) actually has 10-year dividend growth that is infinite because it didn’t pay out out a penny in dividends before 2011. Home Depot Inc (NYSE:HD) may not have a particularly noteworthy yield at present, with its payouts just short of that found via 10-year Treasury bonds. Texas Instruments Incorporated (NASDAQ:TXN) is a global semiconductor company that develops analog integrated circuits and embedded processors. In truth, Starbucks Corporation (NASDAQ:SBUX) didn’t offer regular distributions before 2010. No dividend list would be complete without consumer products king Procter & Gamble Co (NYSE:PG). And just like HD stock, Lowe’s Companies, Inc. (NYSE:LOW) is committed to sharing its success with stock holders via bigger dividends over time. Meats mega brand Hormel Foods Corp (NYSE:HRL) is as stable a stock as they come. It’s easy to overlook the strength of a company like American States Water Co (NYSE:AWR) that deals in water and sewer infrastructure.Visa Inc (NYSE:V) is a global payments technology company providing electronic payment services.

Source: InvestorPlace

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With all the talk about the financial crisis, market melt-downs, Dow/S&P crashing, et. al., the one metric that really matters to each of us individually is the performance of our personal portfolio. So, how is your portfolio doing this year? Mine has performed above expectations.


Investing Goals
Year to date through October, I am up 67%, with no single negative month so far in 2008. I am at 137% of my 2008 goal and expect to go higher. Before you brand me a liar, heretic or worse, let me explain. The above statements are relative to the goals I set for my portfolio, which is not total shareholder return or a specific portfolio size. My goals were defined in this December 1, 2007 Investing Goals post.

My investing goals center around dividend income and yield on cost. If the first step in successfully managing something is to set a goal, then the logical second step is to determine how to measure your progress to ensure you are moving toward your goal.


Align Your Goals With The Desired Results
If you are a long-term buy and hold income investor, does the absolute size of your portfolio matter? Put another way, if you need to generate $100,000 of income each year to live on, does it really matter if that income is generated from a $900,000 or $1,100,000 portfolio?

Many people make the mistake of setting the wrong goal, such as 'I want to be a millionaire' or I want a portfolio of certain size. Okay, once you have a million dollars or a large portfolio, what are you going to do with it? Will it be enough for you to live on? How do you plan to make it work for you?


Resiliency In The Face of Adversity
Like most investors, my portfolio's 2008 return is negative. However, it has performed significantly better than the S&P. Relative to its goal of increasing dividend income, my portfolio has faced adversity during the year:

Three stocks cut their dividend, resulting in an immediate sale:

• Bank of America (BAC)
• iStar Financial Inc. (SFI)
• SunTrust Banks, Inc. (STI)

In addition, three stocks have been put "On The Shelf" after not increasing their dividend:

• General Electric Co. (GE)
• The Home Depot, Inc (HD)
• RBC Royal Bank (RY)

There will likely be other problem stocks before the financial crisis is over. However, one of the true advantages of income investing over capital appreciation is it can be successful in any type of market conditions.

Disclosure: Long GE, HD and RY


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Summary only...

Dividend growth stocks have obvious appeal. After all, dividend investing is based on buying and holding a stock for the payouts. So if a company can consistently increase its distributions to investors over time, all the better. So what are some of the most impressive income-growing plays on Wall Street as we enter 2018? Here are 10 to consider...

If you think CVS Health Corp (NYSE:CVS) is just a drug store filling prescriptions and selling candy bars, you don’t understand the business fully. Cisco Systems, Inc. (NASDAQ:CSCO) actually has 10-year dividend growth that is infinite because it didn’t pay out out a penny in dividends before 2011. Home Depot Inc (NYSE:HD) may not have a particularly noteworthy yield at present, with its payouts just short of that found via 10-year Treasury bonds. Texas Instruments Incorporated (NASDAQ:TXN) is a global semiconductor company that develops analog integrated circuits and embedded processors. Starbucks Corporation (NASDAQ:SBUX) didn’t offer regular distributions before 2010. No dividend list would be complete without consumer products king Procter & Gamble Co (NYSE:PG). And just like HD stock, Lowe’s Companies, Inc. (NYSE:LOW) is committed to sharing its success with stock holders via bigger dividends over time. Meats mega brand Hormel Foods Corp (NYSE:HRL) is as stable a stock as they come. American States Water Co (NYSE:AWR) deals in water and sewer infrastructure. Visa Inc (NYSE:V) is a global payments technology company providing electronic payment services.

Source: InvestorPlace

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Like virtually everything else in this world Dividend Stocks can be placed into a few categories based on their historic performance and expectations for the future. Here are three broad categories and some representative selections from each:

The Good

As you might guess, these dividend stocks that are doing exactly what they should do - consistently raising their dividends each year in spite of troubled economic times. Some of these companies are in sectors that are less affected by the economic downturn, but they have one thing in common, they are well-managed by executives that understand the importance of growing the companies dividends. Here are some examples of these companies:

• Johnson & Johnson (JNJ) in May 2008 increased its quarterly dividend 10.8% to $0.46/share
  
• Kimberly-Clark Corporation (KMB) in March 2008 increased its quarterly dividend 9.4% to $0.58/share
  
• McDonald's Corp. (MCD) in November 2008 increased its quarterly dividend 35.1% to $0.50/share
  
• Pepsico, Inc. (PEP) in June 2008 increased its quarterly dividend 13.3% to $0.425/share
  
• Procter & Gamble Co. (PG) in April 2008 increased its quarterly dividend 14.3% to $0.40/share
  
• Wal-Mart Stores Inc. (WMT) in April 2008 increased its quarterly dividend 8.2% to $0.238/share
  

The Bad

Companies that held their dividends flat. Dividend investors are keying on companies that can consistently raise their dividends year after year. Sometimes a company can't do this this. Instead of cutting the dividend, they hold it flat and try to weather the economic storm. This may not always be a bad thing, because it shows that management understands the importance of maintaining its dividend. Many dividend investors, myself include, may overlook a single flat year. Here are several companies that missed their last dividend increase:

• General Electric Co. (GE) last raised its dividend December 2007
  
• The Home Depot, Inc (HD) last raised its dividend November 2006
  
• Pfizer Inc. (PFE) last raised its dividend November 2007
  
• US Bancorp (USB) last raised its dividend December 2007
  

Each of the above stocks has been classified as On The Shelf. That means they will be set aside within my income portfolio with no additional purchases made until its outlook improves or deteriorates to the point it should be sold. As I was writing this article, PFE announced Monday that it was going to slash its second quarter dividend 50%. I immediately sold the stock after its dividend cut.

The Ugly

Companies that cut their dividends. Fourth quarter 2008 was the worst period for dividend cuts since 1956 when Standard & Poor's started keeping records. Unfortunately, the carnage may not be over. UBS Securities strategist Thomas Doerflinger estimates that S&P 500 dividends per share will drop an additional 8% in 2009. That would be the largest decline since the Great Depression and only the eighth time since 1942 that dividends fell in consecutive years. Here are several companies that contributed to the 2008 decline:

• Bank of America Corporation (BAC) first dropped its dividend in December 2008
  
• Fifth Third Bancorp (FITB) first dropped its dividend in June 2008
  
• KeyCorp (KEY) first dropped its dividend in August 2008
  
• Regions Financial Corp. (RF) first dropped its dividend in September 2008
  

Long-term, the best companies to add to our dividend portfolios are those that will continue raising their dividends even during economic downturns. These stocks tend to have conservative payouts less than 50%, which allows them to maintain their dividends during the tough times. They also have growing sales and earnings - you can't continue to pay higher dividends unless you have the earnings to back it up.

Full Disclosure: Long JNJ, KMB, MCD, PEP, PG, WMT, GE, HD, USB


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When I add a stock to my dividend portfolio, it is my intention to hold the stock forever. However, sometimes selling a stock is the right thing to do. In determining when to sell a dividend stock, I have one hard and fast sell rule: When an individual stock held as a dividend investment lowers its dividend, immediately sell it. This rule has served me well. Since I have begun chronicling by investments online, there have been several stocks I sold immediately after a dividend cut. Here is a list of those stocks with my exit price and a recent price:

Symbol	Date Sold	Sell Price	Recent Price	%
Washington Mutual Inc. (WM)	12/11/2007	$18.11	$0.00	100%
Wachovia Corporation (WB)	4/15/2008	$25.89	$5.54	79%
iStar Financial Inc. (SFI)	10/3/2008	$2.32	$1.09	53%
Bank of America Corporation (BAC)	10/7/2008	$28.50	$3.14	89%
SunTrust Banks Inc (STI)	10/28/2008	$36.43	$9.36	74%
First Industrial REIT (FR)	11/4/2008	$10.22	$2.51	75%
American Capital Ltd (ACAS)	11/11/2008	$6.50	$0.59	91%
Pfizer Inc (PFE)	1/27/2009	$15.64	$12.73	19%
General Electric Co (GE)	2/27/2009	$8.59	$7.06	18%
US Bancorp (USB)	3/4/2009	$12.70	$8.82	31%

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

Symbol	Date Froze	Freeze Price	"Sell Price"	%
Bank of America Corporation (BAC)	7/23/2008	$30.64	$28.50	7%
Pfizer Inc (PFE)	12/15/2008	$17.36	$15.64	10%
General Electric Co (GE)	9/25/2008	$25.25	$8.59	66%
US Bancorp (USB)	9/16/2008	$33.34	$12.70	62%
Home Depot Inc (HD)	11/15/2007	$29.07	$18.00	38%
M&T Bank Corp (MTB)	7/23/2008	$68.51	$31.85	54%
Royal Bank of Canada (RY)	8/28/2008	$45.68	$22.99	50%

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

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

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

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

Full Disclosure: Long HD, MTB, RY


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Some investors believe that it is a mistake to own stocks as their retirement draws near. However, the Social Security Administration estimates that today's average 65 year old will live for 20 more years, which is why we Fools think that it is a mistake to forgo the stock market altogether in your golden years. After all, well-chosen stocks can provide investors with both near-term income and long-term growth potential, giving their portfolio a better chance of staying ahead of inflation.

Of course, not every stock is a good choice for investors in their 60s. In general, older investors should favor businesses that are stable and offer a good mix of income, growth potential, and value. Here's a list of three stocks I think fit those criteria perfectly: Pfizer (NYSE: PFE), Medivation (NASDAQ:MDVN) and Home Depot (NYSE: HD).

Source: Motley Fool

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Companies with the safest dividends typically possess reasonable payout ratios, time-tested operations, a proven commitment to paying dividends, great cash flow and strong moats. Our Dividend Safety Scores look at many of these factors to help investors locate the safest blue-chip dividends on Wall Street and avoid dividend cuts. You can learn more about how our Dividend Safety Scores work and view their real-time track record here. We used our Dividend Safety Scores to identify 10 of the safest dividend payments in the market. Let’s take a closer look at these blue-chip stocks.

Johnson & Johnson (NYSE:JNJ) is a global healthcare company engaged in the manufacture and development of a wide range of healthcare products. TJX Companies Inc (NYSE:TJX) is a leading off-price retailer of apparel and home fashions goods in the U.S. and internationally. Home Depot Inc (NYSE:HD) is a leading home improvement retailer in the U.S. The Walt Disney Co (NYSE:DIS) is a global entertainment company. 3M Co (NYSE:MMM) as it is popularly called, is a large, diversified technology conglomerate with operations in over 70 countries. United Technologies Corporation (NYSE:UTX) is a provider of high-technology systems and services. Union Pacific Corporation (NYSE:UNP) is the operator of North America’s premier railroad franchise. Lockheed Martin Corporation (NYSE:LMT) is one of the biggest defense and aerospace companies in the world. Texas Instruments Incorporated (NASDAQ:TXN) is a global semiconductor company that develops analog integrated circuits and embedded processors. General Dynamics Corporation (NYSE:GD) is a global aerospace and defense company.

Source: InvestorPlace

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