Archives for May 2011

Weekend Reading 5/29/2011

Dividend Stocks 101: The Essential Guide
If you’re new to the site, check out this key resource.

My articles have been fewer but rather long this month (especially one or two of them), and as a recap, they can be found here:
20 Quick Ways To Check A Company
Novartis Dividend Analysis
Step 5: Research
Step 6: Start Small
6 Significant Yields in the Health Care Industry

In Defense of Dividends
MLPs Faltering
Two solid Morningstar videos.

Dividend Dynamos
Dynamic Dividends provides a list of over 200 companies that have raised dividends for at least 10 years. Furthermore, he breaks it up into five classes of dividend longevity.
For example, here’s the Class A 50+ Year List

Community Trust Bank Analysis
D4L analyzes a smaller bank.

Why Your Financial Resolutions Might Have Failed
My Own Advisor discusses some reasons why financial resolutions don’t always come true.

Unilever Analysis
Defensiven provided an analysis of the discounted consumer giant, and also has an article talking about the realized risks of HCBK.

Single Stock: Reloaded
Andrew Hallam asks, if you had to pick one stock and hold it for 80 years, which would it be?

How To Live Off Dividends In Retirement
Dividend Growth Investor presents this good article to readers.

6 Signs of a Good Dividend Yield Part 1
6 Signs of a Good Dividend Yield Part 2
Sigma Swan puts forth a two part article on dividend yields.

Derek Foster Interview Part1
Derek Foster Interview Part 2
Dividend Ninja begins his interview of a man who retired at age 34 with simple investing and frugality.

Go the LifeCycle or Target Fund Route?
DIY Investor analyzes LifeCycle funds.

Why Do We Think We Are So Good As Investors?
The Dividend Guy asks this always important question about overconfidence.

Why I’m Buying Wal-Mart
Dividend Mantra provides a Wal-Mart analysis.

Investment Advice From an Unusual Source
Dividend Partisan provides four lessons.

Cincinnati Financial Analysis
The Passive Income Earner analyzed CINF.

6 Significant Dividend Yields in the Health Care Industry

The health care industry, with increasing regulation, variably strong and weak pipelines, and substantial risk, can be a potentially lucrative sector. Blue chip health care companies, as a whole, generally lagged the overall market over the last two years.

But prudent investors know that some of the best buys are when the consensus is not cheery, and that diamonds can be found in the rough of most out-of-favor industries. With an aging population in many developed nations, and the universal need of bodily and mental care, health care companies with strong fundamentals, reasonable growth prospects, and shareholder friendly management may be poised to offer significant overall shareholder returns over the long-term, both in the form of passive income and capital appreciation.

Here are six corporations that, among others, may be worth a closer look for both their yield and their value.

Abbot Laboratories (ABT)

Abbott’s pipeline may be nothing to write home about, but with the profitable Humira and other leading pharmaceuticals, along with a successful track record of acquisitions and a large and diverse set of operations, Abbott may offer a significant value. The dividend aristocrat has a mediocre balance sheet, with a sizable amount of debt and goodwill, but a high interest coverage ratio and diverse free cash flow generating operations.
Full Abbott Analysis

Dividend Yield: 3.60%
Latest Dividend Increase: 9%
LT Debt/Equity: 0.56
Return on Equity (TTM): 20%

Johnson and Johnson (JNJ)

The best returns are often not made when an investor agrees with the rest of the market. Johnson and Johnson largely missed out on this two year rally due to a variety of quality control failures that led to recalls. But the company continues to be incredibly diverse, capable of generating incredible free cash flow, and has an exceptionally strong financial position. A portfolio of consumer health products, including Johnson’s baby care, Neutrogena, Aveeno, Neosporin, Band-Aid, Listerine, and Visine are a set of consumer health products that round out their medical devices and pharameceutical portfolios. In addition, the company recently announced a definitive merger with Synthes, a $21 billion deal to strengthen JNJ’s orthopedic market share and product line. They continue to develop their patent moat, and spend billions on research and development each year. With a substantial dividend yield, combined with decades of dividend growth, the company may provide a solid return over the long term as it increases yield on cost year after year.
Full Johnson and Johnson Analysis

Dividend Yield: 3.45%
Latest Dividend Increase: 6%
LT Debt/Equity: 0.16
Return on Equity (TTM): 21%

Novartis (NVS)

Novartis is arguably one of the strongest contenders on this list. The company produces a diverse list of drugs, as well as over-the-counter consumer health products, and animal health products. Based in Switzerland, the company recently acquired Alcon, a $50 billion eye care company. Novartis has a moderately strong balance sheet, with a fairly low debt/equity ratio, reasonable amounts of goodwill, and a high interest coverage ratio. The pipeline is strong, but with a few major drugs nearing expiration, there is some shorter term risk, but this might be giving patient investors a longer term buying opportunity.
Full Novartis Analysis

Dividend Yield: 3.85%
Latest Dividend Increase: 5% (in home currency)
LT Debt/Equity: 0.22
Return on Equity (TTM): 16%

Bristol -Myers Squibb (BMY)

BMY faces large patent losses in 2011 and onwards, but has a fair amount of cash, a very strong balance sheet, and pipeline potential to potentially offset this. Still, investors should be wary of the upcoming reductions in revenue (notably the loss of the drug Plavix to generics), and take this into account in their valuations. I’d suggest that the current valuation of the stock doesn’t leave much margin of error for impending patent losses. Still, the company is very solid financially, and offers a particularly high current dividend yield.

Dividend Yield: 4.65%
Latest Dividend Increase: 3%
LT Debt/Equity: 0.33
Return on Equity (TTM): 21%

GlaxoSmithKline (GSK)

This London-based company, which traces its roots back over 100 years, has a strong late-stage pipeline but significant 2012 patent expirations, and £3.6 billion worth of pharmaceutical sales exposure to emerging markets. The dividend yield is quite high, but the balance sheet isn’t as strong as some of the others in terms of debt/equity and interest coverage ratio. The company’s vaccine business is particularly impressive, accounting for nearly a billion and a half vaccine doses in 2010.

Dividend Yield: 4.90%
Latest Dividend Increase: 6% (in home currency)
LT Debt/Equity: 1.63
Return on Equity (TTM): 19%

Pfizer (PFE)

Pfizer produces numerous drugs such as Lipitor and Viagra, along with consumer health products such as Advil for pain relief, and Centrum multivitamins. The company is rather well-known to many dividend investors for cutting its dividend in 2009 in order to acquire Wyeth. Another major issue is that Lipitor, the company’s blockbuster drug, is going to have generic competition this year. Earlier in 2011, the CEO announced a slash in the research and development budget, in addition to a reduction in the job force, to streamline the enormous corporation and return more value to shareholders to the tune of a multi-billion dollar share buyback program. The company has a moderately strong balance sheet, with a fairly low debt/equity ratio, a healthy interest coverage ratio, but substantial goodwill.

Dividend Yield: 3.85%
Latest Dividend Increase: 11%
LT Debt/Equity: 0.40
Return on Equity (TTM): 10%

Full Disclosure: As of this writing, I am long ABT and JNJ, and none of the other companies mentioned.
You can see my list of individual stock holdings here.

Step 6: Start Small

This is the sixth in a series of articles elaborating on the 9 Steps To Build and Manage a Dividend Portfolio.

Initiate new positions with a smaller investment

Once an investment has been thoroughly researched and decided upon, it may seem like initiating the investment is trivial. Knowing how much to invest, however, is another significant decision.

This article isn’t about what percentages you should have for individual stocks in your portfolio, or a discussion on what the optimal number of positions is. Rather, this discussion begins after you’ve decided the approximate position size you want in an investment (based on your confidence in the company, the target diversification, and number of positions in your portfolio). Once you know what position size you want, the next question is how to get there.

The “clumsy” way to do it is to take a lot of your available investment capital and immediately enter your full position. Now, this may be appropriate if your positions are small and therefore due to trading costs it makes sense to enter it in one trade. But if you have a larger portfolio, it typically makes sense to build positions over time. The reasons to start small with stock positions are many:

Stock Movements
Large stock swings could give you better opportunities later. Even blue chip companies can have fairly dramatic stock valuation changes over the course of several months, and smallcaps are even more volatile. A long-term dividend investor typically cares little for stock price- save for always being on the lookout for better and better buying opportunities. Entering a position all at once is like putting all of your eggs in one basket; you’re declaring that this is a great value and disclaiming the option to continue to look for better values. In reality, the market is kind enough to give patient investors opportunities to add wisely to their positions.

You may have misjudged your decision, and taking more time to familiarize yourself with the company can help you find faults with your investment analysis, realize things you missed, or perhaps boost your confidence in your initial estimations. Every investor, no matter how experienced and patient, is going to make an investment mistake from time to time. Minimizing the scale of mistakes by starting small and entering positions over time can keep your losses minimal. There’s an element of risk with any investment, and it’s better for a mistake to occur with a small position than with a large position.

It’s always a good idea to have sufficient capital available. You never know when you might come across a great investment at a great time. Similarly, you never know when the whole market might retract and give you plenty of attractive buying opportunities across the board.

Breaking an investment up into smaller chunks might sound like it adds a lot of work, but it doesn’t have to be. Once you have a fairly substantial and diversified portfolio, adding to existing positions is a lot easier than initiating new stock positions, as long as you consistently record your investment thesis for each investment. When you’re familiar with a company, and you know the reasons you invested, it only takes a fraction of that information to add to the position. There’s usually no need to start from scratch and analyze the investment all over again (although doing this occasionally isn’t a bad idea either). Instead, you need only take into account any significant changes that occurred since your last investment, including price changes, major business changes, revised outlook, and updated dividend and financial information.


In summary, there are plenty of reasons to build your positions over time. How much you should invest in any one trade depends to a certain extent on your portfolio value, your invest-able income, and your trading costs. It’s best, when possible, to avoid going too far into an investment on a single day, assuming one has a very long-term view of the holding and isn’t looking to cash in on quick stock moves.