Dividends4Life: State of the Dividend Address

State of the Dividend Address

Posted by D4L | Thursday, March 13, 2008 | | 2 comments »

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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  1. Anonymous // March 14, 2008 at 6:12 AM

    Hey 4Life,

    What's the Yield on Walmart? I have to say that if I was US investor I'd be tempted to buy into that company. (In fact, perhaps I should buy in now while the $ is low and get more bang for my buck!)

    An 8% rise is huge in my book for a behemoth like Walmart, and I love how the chart has gone nowhere for a few years. In big dividend payers that's a chance to get on the train before it leaves town again... afterwards you look at the now-low yield you never even realised it was a decent dividend payer.

    Of course, a company too big and old and bloated isn't a good thing, but is Walmart really in that position yet?

    Anyway, just my two cents, everyone has different views of course! :)

    Good luck.

  2. Anonymous // March 14, 2008 at 12:12 PM

    The Investor: An 8% could be good if the companies yield is higher than WalMart's 1.9%. At that yield and growth rate it would under-perform a MMA by about $2500 per thousand invested (assuming the MMA is earning earning a 20-year average of 4.61%).

    For WalMart I see one of two things happening:

    1. The 8% is a one-year anomaly. This happened in 2002 when its dividend increased only 7.1%. It then resumed its double-digit run in 2003, averaging 25% increases through 2007.

    2. The 8% becomes close to the norm. In this case I see a significant decrease in share price to adjust for the lower cash flow. WMT would be a hard-sell as a capital appreciation/growth company.

    Best Wishes,

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