In this low-interest-rate environment, investors have turned
to high-yielding blue chips for retirement income. This is the
final part of a five-part series outlining what I believe are the
top fivedividend aristocrat stocks, the ones most suitable for a
You may wonder what unites stocks as diverse as
paper products giant
Emerson Electric (NYSE:
outsourcing payroll firm
Automatic Data Processing (Nasdaq:
and agricultural processor
Archer Daniels Midland (NYSE:
. After all, they're certainly not linked by the businesses they're
in. They are, however, all members of the S&P 500Dividend
Dividend aristocrats are, in many ways, the
creme de la creme
of the stock universe. Members must have raised dividends
consistently each and every year for at least the past 25 years.
They must have done so in good economic times and in bad.
Dividend aristocrats often have rising revenue andearnings
streams -- they need to if they are to keep hiking their dividends.
They often provide greater total returns than the S&P 500. And,
the aristocrats frequently provide a good place for retirees to
invest their capital, rewarding investors with a rising dividend
income stream and share-priceappreciation .
The final dividend aristocrat stock in this five-part series is
a company whosebusiness model is dramatically different from the
previous four: Discount retailer
Family Dollar Stores (NYSE:
From Sept. 1, 2006, through August 2011 -- Family Dollar'sfiscal
year ends on Aug. 30 -- Family Dollar has provided 220% total
returns with reinvested dividends (dividends that are invested into
buying moreshares of the stock). Compare that to the 129% return
for the S&P 500 and you've got an outperformance of 71%. The
company has also increased its dividend substantially during this
Family Dollar opened its first store in Charlotte, N.C., in
1959. Since then, it has opened more than 7,200 stores in 45 states
-- with the greatest concentration located in the Deep South. There
are 917 in Texas, 487 in Florida and 347 in Georgia.
The company targets consumers who are young to middle-aged,
middle income, blue-collar and have a high school education or
less. Frequently, the target household is headed by a female, and
the household income is less than $40,000 per year.
Roughly 63% of stores are in strip malls and 35% in
free-standing buildings. The stores are small -- they average only
7,500 square feet to 9,500 square feet, compared with the
108,000-square-foot size of the average Wal-Mart.
The majority of customers live less than 5 miles away. These
customers are drawn by value and convenience: The average
transaction is only $10.
In 2011, 66.5% of the store sales were so-called "consumables"
-- items such as food, paper products, and health and beauty aids.
Another 13.4% of revenue came from household products such as
Men's, women's and children's apparel, as well as seasonal items
and electronics -- school supplies and prepaid cell phones -- each
constituted about 11% of sales.
The company's target marketing and merchandising strategy has been
extremely successful. Over time, Family Dollar has been able to
consistently grow revenue, earnings and dividends.
Solid technical outlook
Here's a three-year chart that begins in June 2009.
The first thing to note is the stock broke out of a multimonth
"base" formation in early 2010, near the $30 level. Since that
time, shares have been in amajor uptrend that intersects the chart
at about $53. The 40-weekmoving average that defines the long-term
trend is just more than $60 and parallels the "accelerated" uptrend
line, which has been in force since August 2011.
While the stock reached $74.73 in March of this year, it has
since fallen along with the overallmarket . The first level of
important support is near $65. Even more major support is at $60,
where the stock found resistance -- the price above which it is
unlikely to climb -- from October 2011 to March 2012. This level
coincides with the 40-week moving average, which has provided
support during the entire uptrend since 2010. Unless there happens
to be a very strongbear market , it is difficult to imagine the
stock dropping below this level. The downtrend line drawn from the
$74.73 currently intersects at about $69.75 a share.
Strong fundamental outlook
Fundamentally, Family Dollar has demonstrated very strong growth in
revenue, earnings per share and dividend distribution during the
past several years.
In 2009, revenue was $7.4 billion. They expanded by 6.8% to $7.9
billion in 2010 and then they grew another 8.8% to $8.6 billion in
2011.Earnings have more than kept pace. They were $2.64 per share
in 2009, jumped 16.2% to $3.15 in 2010 and then went up another
9.8% to $3.36 per share in fiscal year 2011.
The company has increased earnings per share by expanding its
store numbers, squeezing more sales out of each location and
shrinking its number ofshares outstanding . Number of shares
outstanding dropped from 137 million in 2009 to 119 million in
During this time, Family Dollar has increased its yearly
dividend payout substantially: In 2009, it was $0.54 per share,
went up nearly 15% to $0.62 in 2010 and jumped another 16% in 2011
to $0.72 per share. In the first quarter of 2012, the payout was
raised to $0.21 a quarter or $0.84 per share a year. That amount
provides a forwardyield of 1.25% a year. The 25 analysts that
follow the stock this year project the company is likely to earn
$3.65 in 2012. This would give it a projecteddividend payout ratio
of only 23% ($0.84/$3.65) leaving the door open for dividend hikes
well into the future.
Despite this strong growth, the stock is still reasonably
valued. Its trailing price-to-earnings (P/E ) ratio is 19, compared
to 15.8 for the S&P 500. On a price-to-sales basis, the stock
is cheap at 0.87, compared to 1.27 for the S&P 500.
Action to Take-->
There are two strategies that could be used in purchasing Family
Dollar. The first would be to buy the stock around support in the
low $60s. The stock might pull back to those levels if there is
market weakness this summer or fall. But if Family Dollar broke its
downtrend line by exceeding $70, then it would indicate the decline
from the $74.73 March peak was over. In that case, investors may
wish to purchases shares immediately to take advantage of
potentially strong growth and rising dividends for some time to
-- Dr. Melvin Pasternak
Melvin Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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