Passive Family Income » Dividends

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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Use the Price to Earnings Ratio to Select Dividend Stocks

John S. — Fri, 22 Oct 2010 11:14:50 +0000

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The price to earnings ratio (P/E ratio) is one of the most widely used calculations that is preformed on stocks. Using this ratio has its advantages and disadvantages. It can help an investor determine if a stock is over or undervalued compared to its peers. On the other hand, the calculation can be very misleading at times because of how a company’s financial information is reported.

Used with other criteria and fundamentals, a price to earnings ratio can help dividend investors analyze income stocks. Let’s take a closer look at what a P/E ratio is and how we can use it.

P/E Ratio Definition

Investopedia defines the price to earnings ratio as “A valuation ratio of a company’s current share price compared to its per-share earnings.”

When a company has a high price to earnings ratio, then investors usually expect lots of growth compared to companies with a lower P/E. On the other hand, companies that no longer grow as fast will tend to have a lower P/E as investors don’t expect huge earnings increases.

Calculating a P/E Ratio

Finding a company’s P/E ratio is actually very simple. Go to Yahoo! Finance or any other financial website and look at the details of any stock. This calculation should be readily available anywhere that reports stock information. You could also check with your stock broker to find this ratio.

Since I like to see the actual numbers of what makes up a calculation, I prefer to look at the equation. By running calculations on my own, I can better understand what a ratio represents and the numbers behind it. For those wanting to know how to calculate a company’s P/E on their own, here is the very simple equation that can be used -

P/E Ratio = Share Price / Earnings Per Share

If a company was trading at $40 per share and reported earnings over the past 12 months of $2.00, the calculation would look like this -

P/E Ratio = $40 / $2.00

The results would show a price to earnings ratio equal to 20. Using the trailing earnings per share is the most common method of representing this calculation. It is commonly referred to as the trailing P/E.

Another version of this ratio is to use estimates of future earnings over the next four quarters. The equation remains the same but the value used for the earnings per share becomes the future estimates. When future numbers are used, the calculation is called the forward P/E.

Using P/E to Select Dividend Stocks

As a dividend growth investor, I am no longer interested in buying shares of growth companies. Traditionally, growth companies don’t make very good investment choices for those looking to build an income stream. While they may be quality companies, they just don’t fit into my dividend investment strategy.

Therefore, I will only be searching for companies with a low P/E ratio compared to its peers. A general rule of thumb used by investors is to look for companies with a P/E ratio <= 20. Note that this number is only a benchmark and can be flawed if it is the only criteria you are using.

For the time being, I will narrow down my search for the best dividend paying stocks to only look for those with a P/E ratio of 20 or less. This is not to say that I won’t alter this selection criterion in the future. As I am working to build a solid foundation of income stocks, I am only willing to invest in the best.

Final Thoughts

Selecting the best dividend stocks is crucial for building a solid foundation for income investors. I have learned the hard way that chasing the highest yielding stocks can be a risky move. Using the P/E ratio to select low risk dividend stocks is just one part of finding quality investment options. Adding in other criteria like the current yield, payout ratio, and dividend history can help to narrow down the top dividend stocks even further.

Do you use the P/E ratio as part of your dividend investment strategy?

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2010 S&P 500® Dividend Aristocrats Index

John S. — Tue, 05 Oct 2010 11:22:01 +0000

Investing in dividend paying stocks is one of the top ways to earn passive income. Using a list of dividend stocks can be a good place to find possible investment ideas and start earning that extra income. One of the more recognized and respected lists is the S&P 500® Dividend Aristocrats.

From 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.

Here is a list of the individual stocks that make up this index.

2010 S&P 500® Dividend Aristocrats Index

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)
Integrys Energy Group Inc – (TEG)
Johnson & Johnson – (JNJ)
Kimberly-Clark – (KMB)
Leggett & Platt – (LEG)
Lilly, Eli & Co – (LLY)
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)
Supervalu Inc – (SVU)
Target Corp – (TGT)
VF Corp – (VFC)
Wal-Mart Stores – (WMT)
Walgreen Co – (WAG)

For more details, check out the 2010 List of Dividend Aristocrats.

If you are considering investing in high yielding stocks, the list of dividend aristocrats is a decent place to start. While this index is by no means a list of stocks you should run out and start buying, it contains companies with a strong history of increasing their dividends. A company that has a good track record of increasing their dividends is a clear sign of how well they are run.

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

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Adding Bank of Amercia (BAC) to the portfolio

John S. — Wed, 29 Sep 2010 11:09:39 +0000

Last week I posted that I purchased 100 shares of GE (General Electric) as part of my strategy for creating new income streams. To learn more about this strategy, please review my post – Combining high dividend yields with covered call options. Today, I would like to alert my readers that I have added 100 shares of BAC (Bank of America) to my portfolio using the same strategy. While I understand there is a current market downturn in the financial sector, I feel that this is an opportunity to invest in a stock that I have wanted to own for some time. I also understand that the future looks very bleak for this sector and there will probably be more downward pressure on the stock in the near term. However, I believe that selling Covered Calls to hedge against this purchase will help to reduce this downward pressure on the stock.

Details of the Trade
The follow list details the trading activity -

Purchased 100 shares of BAC for an average share price of $25.35 (commission included).
Sold 1 July 27.50 Covered Call contract for net proceeds of $54.99

I continued to follow my strategy for combining high yielding stocks with covered call options and met the following criteria that I have been using -

The stock purchased must be one that I don’t mind owning over the long term. As I stated earlier, I have wanted to own BAC for some time. I think that long term, BAC will be fine and I will look back at this purchase with a smile on my face.
The stock needs to pay a steady dividend. At the time of the purchase, BAC was yielding around 10%. I also completely understand that there is a chance that the dividend could be cut – although management has said otherwise.
The Options activity on the stock needs to be attractive.
I must have enough resources to purchase a minimum of 100 shares required to sell 1 Covered Call Options contract.

Risks
As always, there is risk involved in trading stocks and options. I have identified the following 2 potential risks in making this transaction.

Stock Jumps – One possible risk is losing out on the stock. In the event that BAC jumps past $27.50 per share before the 3rd Friday in July, I would probably lose out on the stock. Let’s face it – this is not going to happen in the next 2+ weeks. If it did, I would return over 10% on my transactions in less than 1 month.
Stock Drops – The other scenario and risk is if the stock has a major drop along with the rest of the market. This is a concern given the current market, but I believe that selling Covered Call options on a monthly basis will hedge against this trend.

Opportunities
I believe that this transaction provides an excellent opportunity to generate monthly cash flow which can be reinvested into purchasing more and more assets. This fits with my long term strategy of becoming financially independent. I will continue to sell Covered Call option contracts against my position when appropriate to generate this additional income.

What do you think about the trade? Do you think this is a good way to generate monthly cash flow?

Disclaimer - I am not recommending the purchase of Bank of America stock in regards to this post. Instead, I am detailing my strategy for generating monthly income by using this stock as a catalyst. Please do your own Due Diligence before making any purchases. Thanks!

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