Passive Family Income » dividend paying stocks

Five Places to Put Your Money So It Makes You More Money

Julie Mayfield (Staff Writer) — Mon, 06 Jun 2011 10:58:37 +0000

It takes money to make money. While there are exceptions, this old adage is generally true. So where should you put the money you have coming in so that it makes you more money? Here are five ideas.

Start a Small Business

Starting a small business can be an effective way to start a new stream of income. Many small business ideas can be done on a part-time basis and the capital investment can be small. Here’s a list to start you brainstorming. Consider which of the following might be a good match for your interests and abilities:

Childcare
Lawncare
Bookkeeping
Blogging or online content creation
Network marketing or party plan sales
Selling on eBay
Painting contractor
Cleaning service – residential or commercial

Invest for Dividends

Most people consider the payoff from investing in stocks to be an increase in the share price of the stock. Those are gains that are only realized when you sell the stock. But investing in dividend paying stocks will give you a stream of income in addition to any gains from increases in the stock’s value.

You can invest for dividends by buying stocks directly, or by investing in any number of mutual funds designed for that purpose.

And don’t be seduced by the biggest dividend payouts out there. L ook instead for stocks that have a long track record of increasing the dividends they pay each year, even if the initial dividend payout is lower.

Build a CD Ladder

Interest rates are at historical lows. And while that’s good for borrowers of money, it’s detrimental for those looking to earn interest on their deposits with investments like certificates of deposit (CDs).

One way to get the most out of your CDs is to create a CD ladder, which involves dividing the amount of money you have to invest among CDs with different lengths of time until maturity. (For example: one, two, three, four, and five-year CDs.) As each CD matures, you reinvest that amount in a CD with the longest maturity period.

CD ladders lock in higher interest rates for some of your money (the longer term CDs) and yet keep some of your money in shorter term CDs so you can take advantage of higher rates if they happen. And with interest rates so low, the only way for them to go is up.

Invest in Real Estate

Real estate investing is appealing to many and – for the right kind of investor – it can be a great way to make money from your money. Two common ways of generating cash flow from real estate are flipping houses and becoming a landlord.

Flipping a house involves buying it at a good price and then improving the property, holding it until it appreciates in value, or both. Flipping was an easier path to profits several years ago, when property prices were increasing year after year – or even month after month in some locations. That is no longer the case. But if you have a solid understanding of the real estate market in your area and some rehabbing skills, there are still deals to be made.

Another way of generating cash flow from real estate is to become a landlord. That involves buying property and leasing it out to others. Again, you will need to have a solid understanding of the real estate and rental markets in your area, as well as enough cash to purchase the property and a way to handle property management. If all those things are in place and the property cash flows (meaning rental income exceeds the costs of owning and maintaining the property) you could be sitting on an appreciating asset that also provides income.

Pay off Debt

Paying off debt may seem like an odd suggestion as a way to make money. But paying down debt can create an income of sorts with the principal and interest payments it frees up.

In fact, before investing in a small business, real estate, dividends, or even CDs, it makes sense to direct some of your current income toward getting rid of debt – especially high interest consumer debt like credit card balances. Once that is done, you can redirect your new found cash flow toward building income producing assets like the others mentioned in this post.

Where are you putting your money in order to make more money?

This post was written by staff writer Julie Mayfield.

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Reviewing the New Dividend Aristocrats for 2011

John S. — Tue, 21 Dec 2010 11:14:45 +0000

The 2011 S&P 500® Dividend Aristocrats index has gone through its annual update and re-balancing. As of December 17th, 2010 there were 3 stocks dropped from the index for failing to increase their dividends over the past 12 months. At the same time, 3 new companies were added to this prestigious list of dividend paying stocks.

As I am working to build a solid passive income stream of income stocks, I am using the list of dividend aristocrats as a tool to help select my investments. This list is one of 5 different criteria I am currently using to narrow down my investment options. My goal is to build a portfolio of about 8 to 10 dividend stocks using the following criteria, which will be the foundation of this income stream.

Here is the criteria I am using to pick the top dividend stocks for my portfolio.

Must be on the S&P 500 Dividend Aristocrats Index
Current Yield >= 3%
Current Yield <= 5%
Dividend Payout Ratio <= 60%
P/E Ratio <= 20

When I last used the criteria above to look for investment options, I found 8 stocks that made the cut. This list included the following stocks -

Abbott Laboratories (ABT)
Automatic Data Processing (ADP)
Clorox Co (CLX)
Johnson & Johnson (JNJ)
Kimberly-Clark (KMB)
McDonald’s Corp (MCD)
Procter & Gamble (PG)
Questar Corp (STR)

At the time of this writing, I own positions in 4 out of the 8 stocks listed above. In the future, I will probably alter my selection process to include stocks that fall just outside of this criteria as I have only come up with a small list. Many of these investment options are from similar business sectors, so I want to make sure that I am not overloaded in just one area of the market.

3 Stocks Dropped from the 2010 Index

There were 3 stocks dropped from the new list of dividend aristocrats, which include the following companies.

Lilly, Eli & Co – (LLY)
Supervalu Inc – (SVU)
Integrys Energy Group Inc – (TEG)

I did not own a position in any of these stocks as each fell below my selection criteria. All 3 companies from the index did not raise their dividend in the past 12 months (which is why they were dropped). Both Eli Lilly and Integrys held their current dividend while Supervalu cut their dividend distribution.

Since I don’t hold any of these stocks currently, I will not consider buying any of them at this time.

3 Stocks Added to the Index for 2011

The rebalanced dividend aristocrats index added 3 new positions for 2011. Since they are new members to the index, I have screened each one to see if they will be added to my buy list

Here are the new stocks that were added for 2011 and how they stack up.

McCormick & Company – (MKC)

Current Yield = 2.4%
Dividend Payout Ratio = 39%
P/E Ratio = 17.99

Hormel Foods Corporation – (HRL)

Current Yield = 2.0%
Dividend Payout Ratio = 29%
P/E Ratio = 17.70

Ecolab Inc. – (ECL)

Current Yield = 1.40%
Dividend Payout Ratio = 29%
P/E Ratio = 23.33

As you can tell from the numbers above, none of the new stocks added to the list for the upcoming year passed all of my selection criteria to be added to my buy list. Based on it’s low payout ratio and price to earnings, I would consider adding McCormick & Company (MKC) to my watch list. With a current yield of 2.4%, I will probably not be adding any positions soon, but will keep it on my radar.

Final Thoughts

It is important to point out that not every stock on the list of dividend aristocrats should be considered a good investment. This is why it is important for income investors to realize that the index should be used only as a tool, not as the only criterion for stock selection. I have been using the index for the past year to help guide my decision making, but not dictate it.

Will you be buying any of the new stocks added to the index for 2011? Are you planning to sell any of the stocks that have been dropped from the list?

Full Disclosure – As of this writing, I own shares of ABT, ED, JNJ, MCD, and PG.

Reviewing the New Dividend Aristocrats for 2011

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2011 S&P 500® Dividend Aristocrats Index

John S. — Thu, 16 Dec 2010 11:23:50 +0000

Standard & Poor’s recently announced their annual changes that will be made to the S&P 500® Dividend Aristocrats list, effective December 17, 2010. These changes will reflect the list of dividend stocks that are tracked by the index. Investing in dividend paying stocks is an excellent way to generate passive income, and the aristocrat list is a perfect place to find investment ideas.

This index includes some of the most well known and stable companies around, making it a great tool for income investors. According to the Standard & Poor’s website – The S&P 500® Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.

Each year in December, the index is reviewed and stocks that have not increased their dividend in the past year are dropped. At the same time, new stocks are added that match the 25 consecutive year dividend increase requirement.

Changes to the Index

Overall, there were 3 stocks added to the index and 3 stocks that were dropped for 2011. The stocks that will be removed from the index include -

Lilly, Eli & Co – (LLY)
Supervalu Inc – (SVU)
Integrys Energy Group Inc – (TEG)

The new editions to the index include the following stocks -

McCormick & Company – (MKC)
Hormel Foods Corporation – (HRL)
Ecolab Inc. – (ECL)

2011 S&P 500® Dividend Aristocrats Index

Here is the full list of dividend aristocrats for 2011.

3M Co – (MMM)
AFLAC Inc – (AFL)
Abbott Laboratories – (ABT)
Air Products & Chemicals Inc – (APD)
Archer-Daniels-Midland Co – (ADM)
Automatic Data Processing – (ADP)
Bard, C.R. Inc – (BCR)
Becton, Dickinson & Co – (BDX)
Bemis Co Inc – (BMS)
Brown-Forman Corp B – (BF/B)
CenturyLink Inc – (CTL)
Chubb Corp – (CB)
Cincinnati Financial Corp – (CINF)
Cintas Corp – (CTAS)
Clorox Co – (CLX)
Coca-Cola Co – (KO)
Consolidated Edison Inc – (ED)
Dover Corp – (DOV)
Emerson Electric Co – (EMR)
Exxon Mobil Corp – (XOM)
Family Dollar Stores Inc – (FDO)
Grainger, W.W. Inc – (GWW)
Johnson & Johnson – (JNJ)
Kimberly-Clark – (KMB)
Leggett & Platt – (LEG)
Lowe’s Cos Inc – (LOW)
McDonald’s Corp – (MCD)
McGraw-Hill Cos Inc – (MHP)
PPG Industries Inc – (PPG)
PepsiCo Inc – (PEP)
Pitney Bowes Inc – (PBI)
Procter & Gamble – (PG)
Sherwin-Williams Co – (SHW)
Sigma-Aldrich Corp – (SIAL)
Stanley Black & Decker – (SWK)
Target Corp – (TGT)
VF Corp – (VFC)
Wal-Mart Stores – (WMT)
Walgreen Co – (WAG)

For more details, check out the S&P 500® Dividend Aristocrats.

Final Thoughts

The S&P 500® Dividend Aristocrats Index is a great tool for income investors of all backgrounds to leverage. This list of dividend paying stocks, which is updated annually, contains some of the most stable and well known companies in the world. While it is the responsibility of every investor to do their own due diligence when buying and selling stocks, the aristocrats can help in the decision making process.

I have been using this list for the past year to help guide my investment decisions and recommend it to others just starting out who are building their portfolio.

Full Disclosure – As of this writing, I own shares of ABT, ED, JNJ, MCD, and PG.

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High Yield ETFs – An Alternative to Dividend Paying Stocks?

John S. — Fri, 05 Nov 2010 11:20:03 +0000

There are many financial tools that can be used by the average investor to generate dividend income. From high yield REITs and CanRoys to blue chip companies who are members of the dividend aristocrats, the opportunities seem to be endless. Another option for income investors seeking to quickly build a diversified portfolio are high yield ETFs.

Let’s take a closer look at what an ETF is and some of the advantages and disadvantages of investing in this type of asset.

What is an ETF?

According to Investopedia, an ETF is “A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.”

Investors who buy and sell ETFs (Exchange Trading Funds) enjoy many of the benefits of trading stocks and mutual funds. An ETF trades like a stock but offers the diversification of a mutual fund making them popular investment choices in today’s market.

An investor considering an exchange traded fund should first understand the pros and cons of this type of asset. Several advantages and disadvantages of this type of investment option have been detailed below.

Advantages of ETF Investing

As we learned earlier, exchange traded funds are traded just like a stock but offer several advantages of a mutual fund. Here are a few specific reasons why choosing an ETF can be a wise investment decision.

Very Flexible – ETFs can be bought and sold during the entire trading day, not just once like a mutual fund. This allows an investor more flexibility in purchasing and selling the funds at targeted amounts. These types of assets can also be bought on margin and sometimes offer derivative opportunities to hedge against current positions.
Diversification – Exchange traded funds offer built in diversification which is great for investors who want to take a passive investment approach.
Sector Specific Funds – Not only do ETFs offer built in diversification, there are also those funds that target specific sectors. This can be an ideal opportunity for an income investor to target an underrepresented sector in their portfolio.
Less Taxes – Mutual funds usually pay capital gains at the end of the year which exposes the investors to extra taxes. Exchange traded funds are structured differently to minimize any taxes that are paid.
No Minimum Investment – Since an ETF trades like a stock, there are no minimum investment requirements that are found with mutual funds. The investor purchases actual shares of the asset instead of investing a lump sum amount.
Low Maintenance Fees – Exchange traded funds traditionally have lower maintenance fees compared to mutual funds.

Disadvantages of ETF Investing

Investing in ETFs has several disadvantages as well, especially for dividend growth investors. Here are a few reasons why you may not want to choose a high yield ETF over a dividend paying stock.

Inconsistent Dividends – One of the knocks on high yield ETFs is that they tend to have inconsistent dividend distributions. This is often very frustrating for the income investor, making an ETF not as attractive as a traditional stock.
Limited Dividend History – Many exchange traded funds are relatively new, which means there is not a lot of historical data. In comparison, the list of dividend aristocrats is made up of companies that have consistently raised their distributions for at least the past 25 years. There is just more historical data to use on stocks than ETFs.
Tracks an Index – ETFs are designed to track a specific index or sector. As a result, the fund is built to follow an index not beat it. This can be both a good and bad thing, but investors looking to beat an index may want to build and manage their own portfolio of stocks.
Maintenance Fees – While an ETF will probably have a lower maintenance fee charged compared to a mutual fund, it is an extra cost. Investors who purchase individual stocks don’t have to pay this fee, unlike an ETF investor.

High Yield ETFs

Investors looking to start a diversified income portfolio may be able to do so through high yield ETFs. There are plenty of respected ETFs that payout modest dividends compared to traditional blue chip stocks. Since these assets trade like a diversified stock, they can offer an excellent starting point for the income investor with little funds to initially invest.

Even experienced investors who have built up a solid dividend paying portfolio can leverage the power of exchange traded funds. Sector specific funds that have modest yields can be a great way to target holes in a stock portfolio. For example, if an income investor is light on dividend paying stocks from the energy sector, they could target energy ETFs to quickly gain exposure to this industry.

Final Thoughts

Investing in ETFs may not be for everyone, but can offer the flexibility of trading stocks with the diversification of a mutual fund. That being said, I don’t plan to target any high yield ETFs to build my portfolio at this time. The inconsistent dividend payouts and lack of historical data are enough reason to continue to focus only on the top dividend stocks at this time. This does not mean that I won’t consider these investment options in the future.

Do you invest in high yield ETFs as part of your dividend portfolio?

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How to Find the Top Dividend Stocks

John S. — Fri, 29 Oct 2010 11:37:50 +0000

Selecting the top dividend stocks is not as simple as looking for companies with the highest yield. A stock that has a current yield of 10% today may seem like a wonderful investment. There is probably a good chance that the dividend is not a real representation of the financial standing of the company.

Long term dividend investing is much more than high yields. It is more about finding low risk investment options made up of strong blue chip stocks that have a solid history of dividend growth. While not the most glamorous of investment strategies, investing in the top dividend stocks is a proven way to build solid recurring income streams.

How to Find the Top Dividend Stocks

Building a strong income portfolio of top dividend stocks takes careful planning and patience. Here are some important criteria that can be used to narrow down your search for the top dividend stocks.

Dividend Aristocrats – A stock must be a member of the S&P 500 Dividend Aristocrats that is published annually. This list of publicly traded companies contains some of the best dividend stocks in the world. Each company must have raised their dividends annually for at least the past 25 years. Based on this criterion alone, we are narrowing down our search to only the top dividend stocks.
Current Yield >= 3% – In order to maximize a return on investment, the minimum current yield threshold will be set at 3%. Any yield less than this amount will make other investments like a certificate of deposit more attractive.
Current Yield <= 5% – To avoid chasing the highest yielding stocks, the maximum dividend yield threshold will be capped at 5%. This will help to filter out stocks that could have an unsustainable yield in the near future.
Dividend Payout Ratio <= 60% – The dividend payout ratio represents how much of a company’s earnings are being paid out in the form of dividends. Ideally, a company should use a good portion of their earnings to grow the organization, regardless if they are considered a growth company. Since the focus is to select only the top dividend stocks, the dividend payout ratio criterion will be set no higher than 60%.
P/E Ratio <= 20 – No dividend paying stocks will be selected that have a price to earnings ratio greater than 20. Since the value of a stock is important, the P/E ratio can help filter out companies that are currently overvalued in the market.

I had planned to set the screen to pick up on companies with a dividend payout yield less than 50%. As I found out, there are very few stocks that meet those criteria. I decided to open up the filter to look for companies with a payout less than or equal to 60% instead which is still a legitimate percentage.

Stocks that Make the Cut

After running the criteria listed above through a filter, I found 8 top dividend stocks. These companies have several things in common including a modest current yield between 3% and 5%. In addition, they all have a decent payout ratio (below 60%), which tells us that not all of the earnings are going to pay the dividend. All of the stocks listed below also have a P/E ratio under 20 which means they are probably not overpriced. Finally (and most importantly), the companies below all have a strong dividend history.

Here are a few details from our top dividend stocks.

Abbott Laboratories (ABT)

Current Yield – 3.41%
Payout Ratio (TTM) – 55.45%
P/E Ratio (trailing) – 17.45

Automatic Data Processing (ADP)

Current Yield – 3.04%
Payout Ratio (TTM) – 55.97%
P/E Ratio (trailing) – 18.69

Clorox Co (CLX)

Current Yield – 3.32%
Payout Ratio (TTM) – 46.73%
P/E Ratio (trailing) – 15.65

Johnson & Johnson (JNJ)

Current Yield – 3.40%
Payout Ratio (TTM) – 42.21%
P/E Ratio (trailing) – 13.05

Kimberly-Clark (KMB)

Current Yield – 4.23%
Payout Ratio (TTM) – 58.37%
P/E Ratio (trailing) – 14.07

McDonald’s Corp (MCD)

Current Yield – 3.15%
Payout Ratio (TTM) – 48.35%
P/E Ratio (trailing) – 17.10

Procter & Gamble (PG)

Current Yield – 3.06%
Payout Ratio (TTM) – 36.31%
P/E Ratio (trailing) – 17.67

Questar Corp (STR)

Current Yield – 3.35%
Payout Ratio (TTM) – 33.33%
P/E Ratio (trailing) – 10.66

The stocks identified here are by no means a recommendation to buy. The listed stocks are simply those that meet a certain criteria that could be used to identify top dividend stocks.

Final Thoughts

Are there more than 8 top dividend paying stocks that currently trade in the market today? I bet there is. Are the stocks listed above absolute locks as a dividend investment? Probably not 100% guaranteed, but I believe about as close as an income investor can hope for.

I have experienced the downfalls of chasing high yield CanRoys and other high flying names only to take huge losses in the end. I can understand the investor who fantasizes about 15% yields. I have been there before and learnt my lesson. The days of chasing double digit yields are over for me as an income investor.

The selection criteria I have put together above are what I plan to use to start building my foundation of income stocks. As I grow my portfolio, I will probably tweak my selection criteria to open up the potential to add new positions to my portfolio. In the meantime, I will focus on the securities listed above to establish a solid passive income stream that will continue to pay me for many years.

What criteria do you use to select top dividend stocks?

Full Disclosure – At the time of this writing, I owned shares of ABT, JNJ, MCD, and PG.

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