Dividends are Sweet...Sweeter Than Interest
At the end of each month I enjoy looking at the interest I have earned from my Fidelity Government Reserves Money Market Fund, currently with a yield of around 5%. Automatically reinvested back into more shares of the fund, the interest compounds and grows so satisfactorily. Then my bubble is slightly burst when I realize that I will be paying ordinary income taxes on this monthly payout. Depending upon your tax bracket and annual income that means we will be paying between 20 and 35% federal income taxes and in most states between 5 and 10% in income taxes. Thus the yield is now reduced by a sickening average of around 30%. This means that 5% yield now drops down to an after-tax rate of only 3.5%. The same reality hits our CDs, our bank accounts and even our bonds and our bond funds. Darn, it just isn’t fair, especially when there are no chances for capital gains and the buying power of the dollar is dropping each year!
But instead of moaning and groaning about all this, I will be moving more and more of our personal monies to dividend paying stocks that we believe are fairly priced. Most common stocks in the U.S. will pay what the tax code calls “qualified dividends” and by tax law if you hold the stock long enough you will be taxed a maximum of 15% on your dividends. We should all check with our tax advisors and financial advisors to get the details and make sure that the dividend-paying stocks we might buy qualify to be taxed at this significantly lower rate.
We get excited when we see publicly-traded companies whose stock is under-valued. We get almost deliriously happy when that stock has an S&P Dividend and Earnings Quality rating of A- or better, an outstanding record of long-term dividend growth, a price-to-earnings ratio of 18 or less and a payout ratio of 50% or less, debt off 50% or less and a dividend yield of 1.5% or more. These criteria will narrow down the candidates from the universe of common stocks.
Right now we are focused on 4 companies who meet these standards. McDonald’s (NYSE:MCD), Eaton Vance (NYSE: EV), Citigroup (NYSE:C) and Home Depot (NYSE:HD). MCD, with a 2.4% dividend yield is an example of a company with rising dividends and little known intrinsic value. Its dividend has been rising at more than a 30% clip per year, almost twice as fast as the stock price. Analysts say that the dividend yield on MCD, which historically has been around 1.5% or lower, is high now because of the negative sentiment that Wall Street has toward this largely undervalued stock.
With an annual dividend of $1 per share, the stock would have to rise above the $65 per share price in order to revert to its historical dividend yield. Currently trading below $43 per share we can see that the dividend alone has the potential to increase the share price. With their real estate holdings (MCD has one of the finest portfolios of commercial property in the world) and their history for raising their dividend payout each year, it is no wonder that some analysts believe that MCD’s price could double in the next 5 years.
Home Depot (NYSE:HD) has many of the same desirable aspects that we see in MCD. After recently raising its dividend by 50% and with a historical yield of around 1%, the current 2.3% yield and P/E ratio of 13 indicates that this stock has a long way to go on the upside in the years ahead. Many analysts feel that Home Depot fits the profile of a rock-solid investment that every educated investor would want to have in their portfolio. If you are computer-savvy we would encourage you to check the web sites for each of these outstanding payers of dividends to see why they are both great companies and great investments.
Although it doesn’t meet all the criteria of the companies mentioned above, we also really like Emerson Electric (NYSE:EMR). With the expectations for around 15% earnings growth and only trading at 15 times next year’s earnings, this enduring company grabs our attention. With its 2.5% dividend yield, I have to take my handkerchief out of my pocket because I begin to drool. With the tax laws truly favoring income from dividends, we would all be wise to consider those stocks and companies who are generous in that department. “How sweet it is,” as Jackie Gleason used to say.
But instead of moaning and groaning about all this, I will be moving more and more of our personal monies to dividend paying stocks that we believe are fairly priced. Most common stocks in the U.S. will pay what the tax code calls “qualified dividends” and by tax law if you hold the stock long enough you will be taxed a maximum of 15% on your dividends. We should all check with our tax advisors and financial advisors to get the details and make sure that the dividend-paying stocks we might buy qualify to be taxed at this significantly lower rate.
We get excited when we see publicly-traded companies whose stock is under-valued. We get almost deliriously happy when that stock has an S&P Dividend and Earnings Quality rating of A- or better, an outstanding record of long-term dividend growth, a price-to-earnings ratio of 18 or less and a payout ratio of 50% or less, debt off 50% or less and a dividend yield of 1.5% or more. These criteria will narrow down the candidates from the universe of common stocks.
Right now we are focused on 4 companies who meet these standards. McDonald’s (NYSE:MCD), Eaton Vance (NYSE: EV), Citigroup (NYSE:C) and Home Depot (NYSE:HD). MCD, with a 2.4% dividend yield is an example of a company with rising dividends and little known intrinsic value. Its dividend has been rising at more than a 30% clip per year, almost twice as fast as the stock price. Analysts say that the dividend yield on MCD, which historically has been around 1.5% or lower, is high now because of the negative sentiment that Wall Street has toward this largely undervalued stock.
With an annual dividend of $1 per share, the stock would have to rise above the $65 per share price in order to revert to its historical dividend yield. Currently trading below $43 per share we can see that the dividend alone has the potential to increase the share price. With their real estate holdings (MCD has one of the finest portfolios of commercial property in the world) and their history for raising their dividend payout each year, it is no wonder that some analysts believe that MCD’s price could double in the next 5 years.
Home Depot (NYSE:HD) has many of the same desirable aspects that we see in MCD. After recently raising its dividend by 50% and with a historical yield of around 1%, the current 2.3% yield and P/E ratio of 13 indicates that this stock has a long way to go on the upside in the years ahead. Many analysts feel that Home Depot fits the profile of a rock-solid investment that every educated investor would want to have in their portfolio. If you are computer-savvy we would encourage you to check the web sites for each of these outstanding payers of dividends to see why they are both great companies and great investments.
Although it doesn’t meet all the criteria of the companies mentioned above, we also really like Emerson Electric (NYSE:EMR). With the expectations for around 15% earnings growth and only trading at 15 times next year’s earnings, this enduring company grabs our attention. With its 2.5% dividend yield, I have to take my handkerchief out of my pocket because I begin to drool. With the tax laws truly favoring income from dividends, we would all be wise to consider those stocks and companies who are generous in that department. “How sweet it is,” as Jackie Gleason used to say.
posted by Marc Mentor at 5:43 PM
1 Comments:
I agree 100%. The vast majority of my portfolio is dividend paying stocks. Over the years I've built up a portfolio that gets over $800 per month in dividends. Each month I reinvest these dividends back into the portfolio (not necessarily the same company).
It's been growing steadily.
Hopefully when I decide to retire, I can live a simple life, paid for with my monthly dividend checks!
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