By Chloe Lutts
---
A few months ago, we surveyed you, our Investment of the Week
readers, and asked what types of investments you wanted to read
about. Small company stocks, technology stocks and oil and gas
stocks were all popular choices. However, the investment class
with the most votes by far, with 69% of readers expressing
interest in it, was dividend-paying stocks.
The subscribers to my Dick Davis Dividend Digest were among those
surveyed, and they're obviously interested in income-generating
investments. However, they represented far less than 69% of the
sample, leading me to conclude this is a topic of broad interest
among you.
One of the likely reasons for high interest in dividend payers is
the increasing number of Americans-and my readers-approaching or
at retirement age. Owning dividend-paying stocks is a great way
to keep receiving regular income after you retire. Consequently,
I suspect that these investments will only increase in popularity
as the baby boomer generation retires. Those of you already
invested in dividend payers will benefit as their increasing
popularity drives up prices. And investors looking to add an
income component to their portfolios will probably see even more
options in coming years, as demand drives younger blue chip-type
stocks like
Cisco (
CSCO
)
to introduce dividends for the first time. I also expect some
companies that currently pay only small dividends to increase
their payouts to attract more retiree investors.
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Of course, there are already plenty of great dividend payers out
there. The most reliable are the S&P 500 Dividend
Aristocrats: Companies that have increased their dividends for at
least 25 consecutive years. Typically, a so-called Dividend
Aristocrat is, by its very nature, a large and relatively stable
blue-chip company with a healthy balance sheet. A Dividend
Aristocrat is considered the "gold standard" for
dividend-generating stocks and, as such, income investors seek
them out. A lot of companies, particularly financials, fell off
this hallowed list in 2008 and 2009, so the ones left are truly
the crème de la crème of dividend payers. Many of them are
featured in the Dividend Digest regularly.
Today, I'd like to share a few of the most recent recommendations
from the list. They're all great options for investors looking to
create or add to an income-generating portfolio:
Insurer and Dividend Aristocrat
The Chubb Corporation (
CB
)
was originally recommended in the Dividend Digest over a year
ago, on February 10, 2010, at 48.40 by John Eade of the Argus
Weekly Staff Report. At that time, he wrote: "We expect a
well-managed combined loss and expense ratio and an aggressive
stock buyback program to drive results, as the top line takes a
couple more quarters to revive. The company's balance sheet is in
solid shape, with industry-low debt levels. CB shares are now
trading at near parity to book value, which is historically an
attractive valuation."
In a follow-up published in the Dividend Digest almost exactly a
year later, on February 9, 2011, Eade wrote: "We are maintaining
our BUY rating and $65 target price on Focus List selection The
Chubb Corp. Chubb is doing a good job managing what it can
control-the noncatastrophe combined loss and expense ratio- and
its aggressive stock buyback program is also driving results."
In February 2011, CB was trading around 59. It has since crept up
a bit to 62, and on March 16 it paid a 39-cent dividend, its
highest ever. Think insurance companies are boring? Think again.
Well-managed insurers can be insanely profitable-and they produce
most of their profits by investing customers' premiums
themselves, often in income-generating securities. That's why
owning top-quality insurance stocks like CB is a great way to
generate reliable and growing income.
Exxon Mobil (
XOM
)
is the S&P 500 Dividend Aristocrat Index's seventh-largest
constituent by market cap. XOM's performance has been nothing
less than stellar over the last six months. It was last
recommended in the Dividend Digest on January 12, 2011, when it
was selected as a Top Pick for 2011 by Stephen Todd, Editor of
the Todd Market Forecast. He wrote:
"The stock's current yield is 2.3%, and the appreciation
potential should be excellent. This is because 2011 is likely to
see an economic growth spurt and the Obama Administration seems
anti-oil. This will prevent drilling at a time when demand
increases. The rise in oil prices should be a boon to
ExxonMobil."
Four months later, oil prices have indeed risen, and XOM is 14%
higher, trading around 85. The yield has fallen closer to 2%
thanks to the price increase, but Exxon usually increases its
dividend for the second quarter, which will be paid in May.
Abbott Laboratories (
ABT
)
is definitely an income investor favorite; I see it recommended
by one of our contributors at least once every month. Ingrid
Hendershot, CFA, editor of Hendershot Investments, also chose it
for the January Top Picks issue. She wrote:
"Abbott Laboratories (ABT 47.86 NYSE - yield 3.70%) is a global,
broad-based health care company. Abbott's primary businesses
include pharmaceuticals, with key therapeutic areas including
immunology, cardiology and infectious diseases; nutritional
products for infants, children and adults with special dietary
needs; and medical products, including vascular, laboratory and
molecular diagnostics, vision care and diabetes. The company
markets its products in more than 130 countries. Abbott is
expanding its overseas presence, most recently with the
acquisition of Piramal Healthcare Solutions, one of the biggest
generic pharmaceutical suppliers in India.
"Abbott generates strong cash flow from its operations. Free cash
flow has more than doubled from $3 billion in 2004 to over $6
billion in 2009. Free cash flow through the first nine months of
2010 increased 24% to $5.7 billion. The company returned $2.9
billion of the cash to shareholders in the form of $2 billion in
dividends and $866 million in share repurchases. The dividend
currently yields an attractive 3.7%. Abbott has paid a dividend
every year since 1924 and increased the dividend for 38
consecutive years. With market leadership positions across
multiple growth areas, a strong financial position, record cash
flows and highly profitable operations, Abbott is a HI-quality
company. With an expected 13% free cash flow yield, Abbott is
attractively valued and well-positioned to continue to increase
its dividend thanks to its bountiful cash flows. Long-term
investors should consider injecting Abbott into their portfolio
for healthy long-term total returns."
Abbot just increased its dividend, to be paid May 16, to 48
cents, giving it a yield of 3.80% at today's price of 50. As Top
Picks, the Abbott and Exxon recommendations will both be updated
in this summer's special issue of Dividend Digest Top Picks
Update.
Johnson & Johnson (
JNJ
)
is another popular recommendation among Dividend Digest
contributors. Mark Deschaine, editor of Deschaine & Company's
Viewpoint, was the last expert to recommend it in the Digest on
October 10, 2010. He wrote:
"Johnson & Johnson may seem out of fashion in today's
frivolous, hyperactive, and alpha-starved investment environment;
but this $170 billion dollar health care and personal product
empire has been a wealth creating, income producing, compounding
machine for well over a century. … Johnson & Johnson makes
and markets thousands of diverse health care and personal care
products, including such household medicine cabinet staples as
Tylenol and Listerine, as well as some of the world's most
sophisticated medical devices and diagnostic equipment. JNJ has
been paying a dividend since 1944 and has increased it annually
for over 47 years. … For every share you might have bought in
1979 at $0.85, you would now be receiving $2.16 in annual
dividends, or more than 2.5 times your initial investment-each
and every year- and growing to boot! Going forward, you can be
sure we do not anticipate this kind of supercharged income
growth. However, our analysis indicates that Johnson &
Johnson should be able to continue to generate positive cash flow
from its stable of products and continue to pay and increase its
dividends for years to come. As long as that's the case, and the
price of the stock remains reasonable by our valuation measures;
we'll continue utilizing the dividend and dividend growth
attributes of JNJ to provide growing income to our clients."
At today's price near 59, JNJ is currently yielding 3.63%.
Most recently, Patrick McKeough, editor of the Wall Street Stock
Forecaster, recommended Dividend Aristocrat
The McGraw-Hill Companies (MHP)
in the March 9, 2011, Dividend Digest. He wrote:
"McGraw-Hill gets 70% of its earnings and 45% of its revenue from
its Standard & Poor's division, which provides financial
information, including credit ratings on bonds. The company also
publishes textbooks and magazines, and owns nine television
stations. In 2010, McGraw-Hill's revenue rose 3.6%, to $6.2
billion from $6.0 billion. Revenue from Standard & Poor's
rose 8.3%, as businesses took advantage of low interest rates to
issue more bonds. The textbook division's revenue rose 1.9%,
thanks to higher college enrollment and rising demand for
electronic versions of its books. That offset slower demand for
new elementary and high school textbooks. Revenue at
McGraw-Hill's media operations fell 4.9%, mainly because the
company sold BusinessWeek magazine in 2009. Without this sale,
this division's revenue would have risen 6.2%.
"Earnings rose 13.2% in 2010, to $840.0 million, or $2.69 a
share. The company earned $742.2 million, or $2.37 a share, in
2009. These figures exclude gains on the sale of BusinessWeek and
other assets, as well costs to restructure the textbook and media
businesses. McGraw-Hill continues to buy related companies. It
recently paid roughly $300 million for TheMarkets.com, a
privately held firm that sells investment research and data to
hedge funds and other institutional investors. The company can
easily afford to keep making purchases like this. Its long-term
debt of $1.2 billion is just 10% of its market cap, and it holds
cash of $1.5 billion, or $4.97 a share. Continued falling demand
for elementary and high school textbooks could hold back
McGraw-Hill's earnings growth in 2011. Still, the stock trades at
a reasonable 13.3 times the company's likely 2011 earnings of
$2.85 a share. McGraw-Hill also raised its quarterly dividend for
the 38th consecutive year, to $0.25 a share, up 6.4% from $0.235.
The new annual rate of $1.00 yields 2.6%. McGraw-Hill is a buy."
To learn more about Dividend Aristocrats like CB, XOM, ABT, JNJ
and MHP, check out Dick Davis Dividend Digest, where top
income-generating stocks are recommended each and every month.
Learn more here.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week