Company Overview

McDonald’s Corporation franchises and operates McDonald’s restaurants in the food service industry. These restaurants serve a varied, yet limited, value-priced menu in more than 100 countries worldwide. All restaurants are operated either by the Company or by franchisees.

Income Statement and Cash Flow

McDonald’s business model is rather simple. The company has two sources of revenue: 1) Sales from company operated McDonald’s restaurants, and 2) Rent and royalty payments from franchised stores. Sales from the company’s 6,399 operated stores account for 67% of revenue, with franchise fees for the remainder.

What makes this such a great business for investors is the low cost, predictable cash flow of the franchise model. Though McDonald’s usually owns the land and building, the locally-owned restaurant is responsible for operating costs and day to day management. Most franchise arrangements have 20 year minimums, so once a restaurant opens, MCD can rely on 20 years of low maintenance, reliable income.

The past 10 years have had an annual revenue increase of 5.44%, and last year, 2010, saw a revenue increase of 5.86%. Part of this increase is from the 541 new restaurants opened in 2010, and the rest is from the strong comparable sales growth MCD has had. 5% global comparable sales growth in 2010 marks the 8th straight year of such increases.

EPS and FCF per share have also shown strong growth, averaging 15.4% and 22.9% over the last decade. 2010 saw an EPS increase of 11.4%, from $4.11 to $4.58. Analysts expect MCD to earn $5.05 in FY 2011 and $5.51 in FY 2012. This would be an increase of 10.3% and 9.1%, respectively. Analysts predict a 5 year growth rate of 9.4%.

Earnings growth comes from a combination of increased sales and margins, plus the effects of strong stock buybacks. MCD has averaged to take 4.7% of it’s stock off the market every year for the past decade. In 2009 the board approved 10 billion dollars in share repurchases, and to date, they have roughly 6.9 billion dollars left to use, with no expiration on the cash.

Cash flow has grown from 2.7 billion in 2001 to 6.3 billion in 2010. Combined with the share buybacks and slowly increasing capital expenditures, FCF per share has grown faster than EPS. The $3.86 of free cash flow in 2010 was more than enough to cover the $2.26 in dividends.

Margins have been trending upwards, a great sign for the business. I was having trouble finding a reliable gross margin number, but online research pegs it somewhere in the high 30′s – low 40′s, percentage wise. As with all food companies, rising commodity prices may affect MCD in the future, but if any company could deal with increasing raw material costs, it’s McDonald’s.

For one, they are one of the largest food buyers in the world, which gives them incredible leverage. Second, 75% of their grocery bill is comprised of only 10 different commodities. Their streamlined operation allow them offer a full menu with only a few ingredients, thereby reducing costs and simplifying purchasing. Third, they have pricing power. You can buy a hamburger anywhere, but you can only get a Big Mac at McDonald’s. This allows them the freedom to raise prices in order to offset higher food costs.

Dividends

MCD is a dividend powerhouse. They have increased their dividend every year since paying their first one in 1976, and I believe this will continue into the future. The current quarterly rate of $0.61 a share equals an annual dividend of $2.44, and the stock currently yields 3.3%.

Based on dividend history, we can expect an increase in the fourth quarter of 2011, so the yield is probably a bit higher. If we estimate a dividend increase of roughly 10% (similar to 2010 increase), that would mean an annual payment of $2.49, and a yield of 3.4%

10 year average annual growth rate is 28.58%, almost double the EPS growth rate. This was achievable with a mix of strong earnings growth and an increased payout ratio. Since 2001, the payout ratio has increased from 18% to 49%. I expect dividend growth to slow in the coming years, as the increases of the past decade are unsustainable, and the 5 year rolling dividend growth rate is trending down. A 10% growth rate going forward is reasonable. Any higher, and the payout ratios may head into dangerous territory.

Balance Sheet

McDonald’s has a healthy balance sheet.

The current ratio is 1.49, and debt is 44% of capital employed. This is a bit higher than I usually like to see, but interest coverage is a healthy 16.6, and they have over 2 billion in cash. They should have no problems servicing their debt.

Return on Equity has been trending upwards, and is rather high, at 34.5%. Some of this is attributable to the leverage of the company, but most of it is just great management. The past 3 years have kept ROE into the low 30′s, but for most of the 2000′s it was in the mid teens to low 20′s. The 10 year average is 21.2%, a very respectable number.

Stock Price Valuations

current price - 73.38
5 year low p/e - 14.1
p/e (ttm) - 16
p/e (forward) - 14.5
peg - 1.7
5 year high dividend yield - 3.6%
dividend yield - 3.3%

Conclusion

There is a lot to love about McDonald’s. 32,737 restaurants. World-wide brand appeal. A proven business model. Great management. A commitment to shareholder returns. Consistently strong growth. Quality assurance labs around the world to make sure every product is up to standards. And unbelievable brand loyalty. I know, because I am incredibly brand loyal. None of my road trips are complete without a sausage egg mcmuffin.

The future also looks bright for the Golden Arches. They have shown the ability to expand into new markets, while also adding value to their existing stores. There are 1,100 new store openings planned for 2011, and they should all add nicely to the bottom line.

Based on the average of the 5 year high yield, 5 year low p/e, and a discounted cash flow analysis (9% EPS growth, 10% return, over 10 years), McDonald’s is still an attractive buy in the low 70′s. I will add my position when, and if, funds are available and my allocation is balanced.

To get all my updates, please subscribe to my rss feed

Full Disclosure: I am long MCD. My Current Portfolio Holdings can be seen here

For Canadians, November is Financial Literacy Month! That’s right, a whole month dedicated to educating and helping Canadians to become more financially independent, and more aware of their finances.  This national media campaign is spearheaded by Glenn Cooke, of LifeInsuranceCanada.com. The goal for bloggers is to give their best financial tip.

My tip is why you should avoid mutual funds.

Over on the Dividend Ninja, as part of the Financial Literacy Month campaign I wrote about why you should start investing now. My point was to show how easily a nominal $25 per week invested, can grow into a sizeable portfolio of over $17,168 in only ten years. For that figure I assumed a very conservative annual total return of only 5%!

I also showed how Canadian investors can take advantage of four TD e-Series Index Funds to build a portfolio for only $100 per month, with a purchase of a fund each week at $25. I also showed readers why the TD e-Series funds are such a great deal! There are no commissions to purchase or sell, and the MER (Management Expense Ratio) is less than 0.33%. Unfortunately, these funds are not well known to Canadians, since they are not heavily marketed – in order to keep the costs low.

It’s a different story for Canadian investors who purchase actively managed mutual funds, and who are paying a premium in fees and being rewarded with underperformance. Although U.S. mutual funds have lower fees, almost half of what Canadians pay, here are the reasons why you should avoid mutual funds.

What the Fund?

Back in July 2011, I chopped through all the complexities of mutual funds, index funds, and ETFs (Exchange Traded Funds) in Would The Real “Fund” Please Stand Up!If you aren’t up on the terminology, nor understand the difference between index funds, ETFs, or mutual funds, then be sure to check out this post. It’s a back to basics post for any investor.

Most people have a basic understanding of what Mutual Funds are, since they have invested in them at some point.  A mutual fund is basically a pool of funds collected from many investors for the purpose of investing in securities such as stocks and bonds. Most mutual funds are actively managed, in other words an investment manager decides on the securities to purchase, and manages the portfolio.

Why You Shouldn’t Buy

Most people start off with mutual funds, because it was what they know best through advertising, or by talking with their bank rep or directly through a mutual fund dealer. Mutual funds have long claimed to provide investors with professional management, above market performance, and a solid long-term investment strategy. Yet actively-managed mutual funds rarely deliver on any of these promises, and cost investors a small fortune in ongoing fees.

The main three reasons are:

• Upfront Fees: Commissions to Buy and Sell
• Hidden Fees: MER including Trailer Fees
• Underperformance

1. Upfront Fees

First, mutual funds are expensive in terms of the fees and commissions they charge upfront. What most people don’t realize is that many financial advisors are not financial planners, and are simply mutual fund dealers. Many mutual fund dealers charge hefty front-end and back-end commissions. These are usually laid out as front-end, back-end, and deferred-sales-charges depending on the length of time the funds are held. Here in Canada, these fees can vary anywhere from 2% to 6% of your capital, and are paid directly to the mutual fund company and dealer. That’s money out of your pocket!

2. Hidden Fees

Second, mutual funds are also expensive with the hidden fees that are not so obvious or readily disclosed to investors. These are primarily the MER (Management Expense Ratio), with the included Trailer Fees. In Canada, these particular mutual fund fees are much higher than they are in the U.S. and Canadian investors are simply getting burned.

The Trailer Fee ( part of the MER) is paid directly to the broker as a kick-back for selling the fund. Additionally trailer fees are also paid as an ongoing benefit to mutual fund dealers, depending on the value of a fund’s holding across the dealer’s client base. These are a small percentage, nonetheless add up over time. Essentially, the longer you hold your mutual fund, the more trailer fees you are paying to your advisor.

The MER, called the Management Expense Ratio. This is an annual and ongoing fee that is charged from the fund’s income and profits, to pay for the fund’s management and administration. That also includes all the costs of marketing and promotion. According to an article in the Globe and Mail back in March 2001 by Rob Carrick, The average Canadian equity mutual fund had a whopping annual MER of 2.43%!

When you combine the MER with the included trailer fee, the average Canadian investor is likely paying around 2.5%+ annual fees to own a mutual fund. These fees are paid on top of any other front-end or back-end commissions. The real irony is that investors pay all these fees, compounding year after year, whether the fund does well or performs poorly.

3. Underperformance

While mutual funds are a win for the companies who manage them and the brokers who sell them, most Canadian investors are paying a premium for underperformance. According to the 2011 ETF Landscape Review, only 15.1% of actively managed mutual funds in the Canadian Equity category were able to outperform the S&P/TSX Composite Index according to S&P.  When you consider the large annual MER fees, trailer fees, front-end or back-end commissions mutual fund companies charge, there is simply no excuse for paying for underperformance.  

One of my favourite bloggers, MoneyCone, recently examined the underperformance issue of U.S. mutual funds in The Fund That Beat The Market 9 Times Since 1999.

Award winning author Andrew Hallam, also covered the pitfalls of the mutual fund industry in depth, in his bestselling book [easyazon-link asin="0470830069"]Millionaire Teacher[/easyazon-link]. According to his research, Canadians are at the last spot at 18 out of 18, paying the highest mutual fund fees in the entire world! (Millionaire Teacher, pg.54). Andrew quotes the fund fees that Canadians are paying at around 3.0%, compared to U.S. mutual fund fees of around 1.5%. I interviewed Andrew back in June 2011, before his book was officially published across North America, in The Millionaire Teacher.  If you are currently investing in mutual funds, and think you are doing fine, then I urge you to get a copy of Andrew’s book – you will be glad you did.

Conclusion

In this day and age of low-cost ETFs (Exchange Traded Funds) and low cost Index Funds, paying a premium for underperformance with actively managed mutual funds just doesn’t make for good returns.  Actively managed mutual funds in Canada not only underperform and under-deliver, they cost a lot too!  Although U.S. investors pay at least half of what Canadians do, actively managed mutual funds still diminish your returns through ongoing fees, commissions, and underperformance. You can do much better with low-cost ETFs and low-cost Index Funds.

Many investors don’t think of mining stocks as dividend growth companies, because of their lower dividend yields. The Canadian mining sector has largely been overlooked by the Canadian dividend investing crowd. Yet these are “dividend growth” companies with strong balance sheets. They have recently raised their dividends, and have more potential for share price increase. Take PotashCorp (POT) as an example, which recently raised its dividend by a whopping 33%. By avoiding the lower-yield mining companies, many investors may be giving up a “golden” opportunity for future growth, when the resource sector rebounds.

The Canadian mining sector also has companies which are trading at their two and three year lows. In a rising market where many stalwart blue-chips are trading at their 52 week highs, there may indeed be opportunity in this beaten up sector. This is a sector that has been on my watch list for a few months, and I am ready to make a move. These aren’t penny-stocks, or junior mining companies, but giant multi-billion dollar companies with global reach. The majority of these Canadian mining companies are also “interlisted” on the NYSE as well as the TSX.

Three Canadian mining companies are now on my watch list: Goldcorp Inc. (G), Teck Resources (TCK), and Potash Corp. (POT). I’ve also included Barrick Gold (ABX) and Agrium (AGU) for comparative purposes. As discussed in the conclusion, Barrick is now off my watch list. Table-1 below gives the basic fundamentals and dividend info.

GG – Goldcorp Inc.

Goldcorp (GG) is the world’s second largest Gold producer, in terms of market cap, and is worth over 28 billion dollars. In terms of productions tonnes, it is the world’s fourth largest, with an annual output of 71 production tonnes in 2011 (see Wikipedia). Goldcorp has the lowest dividend yield of the five Canadian mining stocks I first perused, with a dividend yield of only 1.78%.

However Goldcorp has a phenomenal balance sheet, with a debt-to-equity ratio of only 3.4%. This is a low debt level for any company, and Goldcorp has continually shown itself to be a well run and managed company. Goldcorp also has a high profit margin at 32.1%, and low dividend payout ratio (DPR) of only 28.8%. This is a great combination. So there is more than enough room to grow the dividend. Goldcorp also has the benefit of being a monthly dividend payer. Goldcorp would have made the top of my list, if it were not for the lower yield. Goldcorp is “interlisted” on both the TSX as G, and the NYSE as GG. The company is also trading near its three year lows.

 POT – Potash Corp.

Potash Corp. of Saskatchewan (POT) is the world’s largest supplier of potash, producing 20% of the world’s supply. It is also the world’s largest fertilizer producer, as well as the world’s third largest phosphate and nitrogen supplier. Potash is an important resource on the global marketplace, as it’s predominately used in agriculture for fertilizer.

In August 2010, PotashCorp became well known after a hostile takeover attempt by Australian mining giant BHP Billiton. On August 19th, 2010, shares of Potash Corp. were trading at $52.35 per share (split adjusted) up over 36% from $38.25 per share only a few days earlier. On November 3rd, 2010, The Government of Canada announced that it was blocking the BHP bid, and BHP withdrew its takeover. A few months following in February 2011, Potash Corp. commenced a 3:1 split. Today, in terms of the split-adjusted price, PotashCorp is trading near its two year lows. PotashCorp also trades on the NYSE as POT.

PotashCorp has an excellent balance sheet and great fundamentals. This is a 34 billion dollar company, with a healthy 2.9% dividend yield. PotashCorp is also a “dividend growth” company, recently raising its dividend by 33%, from 0.21 cents to 0.28 cents per share paid quarterly. PotashCorp has a healthy profit margin of 27.9%, a low dividend payout ratio (DPR) of 42.9%, and a moderate to low debt to equity ratio of 41.1%. PotashCorp has excellent fundamentals, and of the three stocks is at the top of my list (only because the yield is higher than Goldcorp).

TCK – Teck Resources

Teck resources (TCK) is Canada’s largest diversified resources company, with a market cap over 18.4 billion dollars. It is focused on the extraction and refinement of copper, steelmaking coal, and zinc. To a large degree Teck is influenced by China and the global economy, since much of its exports and sales are from steelmaking coal. A slowing demand has resulted in the lower share price for Teck.

Teck has a smaller profit margin than Goldcorp or PotashCorp, at 7.84%. But it has a reasonable debt-to-equity ratio of 40% and a similar dividend payout ratio (DPR) of 40.5%. It has a current dividend yield of 2.86%. Teck is also a “dividend growth” company, and recently raised its dividend by 12.5%.

Back in January 2011, Teck Resources (TCK) was trading over $61 per share. Today Teck trades at $31.41 per share, off nearly 50% from its peak.  Teck Resources is currently trading at its two year lows. It trades on the NYSE as TCK.

 Conclusion

I had originally included Barrick Gold (ABX) in my initial analysis, but quickly removed Barrick with its negative earnings and increasing debt load (Table 1). In a recent Globe and Mail post Has Barrick Bottomed?, Lou Schizas looked at the problems plaguing the company. In 2011 ABX paid $7.3-billion to acquire Equinox Minerals, the results of which caused the company to write down the acquisition. Then CEO Aaron Regent was promptly ousted. Barrick also has the highest debt levels of the five mining companies I initially compared, and is off my watch list until things improve.

Agrium (AGU) is a well run company, and more diversified than Potash Corp. I felt Potash was the better buy with its higher profit margin, higher yield, and lower price point. Agrium has great fundamentals though, even with its lower profit margin, and is worth keeping an eye on for the future.  I’ve settled on PotashCorp (POT) and Goldcorp (G) as the two companies I would like to purchase in the near term.  Teck Resources (TCK) remains on my watch list and may be a purchase later in the year.

Readers what’s your take? Are you interested in Canadian mining stocks?

Disclaimer: I do not currently own any of the companies mentioned. I intend to purchase G, POT, and TCK-B in the future. Please note this article is not intended as a buy recommendation or as professional investment advice. Please do your own research, or consult with your financial advisor, and make sure the companies you purchase suit your investment objectives.  

You can read more articles from the Dividend Ninja at www.dividendninja.com.

Stock share buybacks or share repurchase plans have become all the rage on Wall Street lately with the stock market’s excellent run so far this year. In fact, in the first quarter of 2013, companies in the United States have bought back over $105 billion worth of their stock. This has edged out the payment of dividends which only accounted for a little over $70 billion in January through March of this year.

Recently, Wal-Mart announced that it will repurchase $15 billion of its shares in a repurchasing plan. This was just the latest announcement in a string recently. Others announcing repurchase plans or increasing existing plans have been the likes of Sirius XM, CVS, Monsanto, Priceline, Las Vegas Sands, and many others.

But, are share buybacks a good deal for investors? There are a few benefits of the programs to be sure such as raising the earnings per share by withdrawing outstanding shares from the market and returning earnings to shareholders. But, there are also some underlying principles of the share buybacks program that can leave investors with a bad taste in their mouths if they are not careful.

Here are a few things to consider about share buybacks…

Lack Of Ideas For The Money

One of the biggest drawbacks of a share repurchase plan or stock share buybacks is that the company does not have an idea to put their money to good use. Share buybacks are the easy option for the company when they cannot find another creative idea to put the cash to work. Why not spend that money expanding their business? Why not make an acquisition or open new stores? Why not use that money to grow through research and development? Why not use this capital to replace aging property, plant, and equipment? These are what shareholders should be screaming for the companies they own to be doing with excess cash on the balance sheet.

Companies Do Not Have To Honor Share Buybacks

Companies can announce share buybacks all they want. Like the saying goes, it’s the action that truly matters. And, far too many companies announce a large share buyback program only to not finish it. There is nothing binding to a company after they announce a share repurchase plan. It is all voluntary. Sometimes companies wise up and realize that their share buybacks are not in the best interest of shareholders. Other times they run into financial difficulties and decide not to go through with the repurchase plan. Either way it is not set in stone. The announcement of a repurchase plan should not be the driving force for investors to purchase shares in a company. At least with a failed share buyback plan the company can sneak off in the middle of the night and just not finish the repurchasing. Typically there isn’t much fanfare or gnashing of teeth when that occurs. But, that would not be the case if the money was used for a dividend instead and ultimately had to be curtailed.

Companies Who Buyback Shares Tend To Underperform

Studies from “Institutional Investor” and others have recently shown that many companies who repurchase their shares in large share buybacks tend to underperform the market and their competitors. This can possibly be linked the their lack of reinvesting in the business, instead choosing to repurchase shares of their stock for only superficial gains to the share price. Companies that reinvested a higher percentage of their cash provide substantially higher returns to their shareholders than companies that bought back shares and reinvested less money back into their businesses. Studies have shown that it is more profitable ultimately for companies to invest in capital expenditures, new research and development, acquisitions, and increase their working capital instead of buying back shares.

Companies Often Have Bad Timing With Share Repurchases

While we all know that the old adage of “buy low, sell high” has never been more important, companies who repurchase the shares on the open market often do the exact opposite. This of course can be a direct result of companies being flush with cash while the stock market is trending higher like it currently is. So, the stock market is riding high, companies have a lot of money on their balance sheets, and they decide to repurchase their company’s stock. This can be quite costly for the company, and the shareholders are the ones who ultimately pay for poor timing by companies. It would be better for companies to repurchase their shares during a recession or bear market in order to get more bang for their buck. Of course this is a lot easier said than done.

There are a few reports that say recent share value increase can be 20% attributed directly to share repurchase plans and removing common shares from those outstanding in the market. While this looks like a good deal initially, it is an artificial rise in the company’s earnings per share and not directly correlated with outstanding fiscal performance with an increase in earnings or revenue.

Here is a list of the ten best dividend investing books that should be on your nightstand. These are some great dividend investing books that are worth reading. Did I miss any? Which ones are your favorite dividend investing books? Did I miss the mark? Are some of these duds? I’d love to hear what you think.

Top Ten Best Dividend Investing Books

1. The Single Best Investment: Creating Wealth with Dividend Growth by Lowell Miller - This witty guide advises readers to stop playing the stock market or listening to television gurus and instead put their money into dividend-paying, moderate-growth companies that offer consistent returns and minimum risk. Citing statistics that show companies initiating and raising dividends at the fastest rate in 30 years, this analysis declares once-stodgy dividends to be “the next new thing” and provides simple rules for choosing the best stocks, using traditional evaluation tools, reinvesting dividends, comparing stocks and bonds, and building a portfolio. Technical aspects of the stock market are explained in the final pages that include two new chapters and revised statistics as well as academic studies, historic back-tests, examples of real-time performance, and a list of resources for further research.

2. Dividend Stocks For Dummies by Lawrence Carrel – Dividend Stocks For Dummies gives you the expert information and advice you need to successfully add dividends to your investment portfolio, revealing how to make the most out of dividend stock investing-no matter the type of market. The book explains the nuts and bolts of dividends, values, and returns. It shows you how to effectively research companies, gauge growth and return, and the best way to manage a dividend portfolio. And, Dividend Stocks For Dummies provides strategies for increasing dividend investments.

3. The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns by Charles B. Carlson – In The Little Book of Big Dividends, dividend stock expert Chuck Carlson presents an action plan for dividend-hungry investors. You’ll learn about the pitfalls, how to find the opportunities, and will learn how to construct a portfolio that generates big, safe dividends easily through the BSD (Big, Safe Dividends) formula. If you’re a bit adventurous, Carlson has you covered, and will teach you how to find big, safe dividends in foreign stocks, preferred stocks, ETFs, real estate investment trusts, and more.

4. The Ultimate Dividend Playbook: Income, Insight and Independence for Today’s Investor by Josh Peters – Many people believe that the key to success in the stock market is buying low and selling high. But how many investors have the time, talent, and luck to earn consistent returns this way? In The Ultimate Dividend Playbook: Income, Insight, and Independence for Today’s Investor, Josh Peters, editor of the monthly Morningstar DividendInvestor newsletter, shows you why you don’t have to try to beat the market and how you can use dividends to capture the income and growth you seek.

5. Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market by Kelley Wright – A timely follow-up to the bestselling classic Dividends Don’t Lie. In 1988 Geraldine Weiss wrote the classic, “Dividends Don’t Lie“, which focused on the Dividend-Yield Theory as a method of producing consistent gains in the stock market. Today, the approach of using the dividend yield to identify values in blue chip stocks still outperforms most investment methods on a risk-adjusted basis. Written by Kelley Wright, Managing Editor of Investment Quality Trends, with a new Foreword by Geraldine Weiss, “Dividends Still Don’t Lie” teaches a value-based strategy to investing, one that uses a stock’s dividend yield as the primary measure of value. Rather than emphasize the price cycles of a stock, the company’s products, market strategy or other factors, this guide stresses dividend-yield patterns.

6. Get Rich with Dividends: A Proven System for Earning Double-Digit Returns by Marc Lichtenfeld - A comprehensive guide to dividend investing that shows how to obtain double-digit returns with ease. Dividends are responsible for 44% of the S&P 500′s returns over the last 80 years. Today they present an excellent opportunity, especially with investors who have been burned in the dot com and housing meltdowns, desperate for sensible and less risky ways to make their money grow. Designed to show investors how they can achieve double-digit average annualized returns over the long-term, Get Rich with Dividends: A Proven System for Earning Double-Digit Returns is the book you’ll need to get started making money in any market.

7. Dividends Don’t Lie: Finding Value in Blue-Chip Stocks by Geraldine Weiss – Investment-newsletter publisher Weiss and business journalist Lowe suggest that wealth is an all-but-sure result of investing according to recurring stock market cycles. In their technically detailed, conservative analysis, the authors recommend careful study of high grade issues with steady dividend-increase records. Investors should buy shares when the stock is undervalued in relation to dividend yield, then sell (reinvesting elsewhere) when a bullish trend drives the share price up to an overvalue level.

8. The Strategic Dividend Investor by Daniel Peris – The Strategic Dividend Investor shows you why, over the long run, investing in companies with high and rising distributions is far superior to “playing the market.” Responsible for $4.5 billion in dividend-anchored portfolios, Daniel Peris demonstrates that, for most investors, buying a stock in the hope of making a quick buck by selling it in a few weeks or months is far from the best way to create wealth. Instead, you should use the stock market as a means of receiving a share of excess profits—dividends—from corporations in which you own stock. Over time, those payments—and the growth of those payments—represent the vast majority of stock market returns.

9. The Dividend Growth Investment Strategy: How to Keep Your Retirement Income Doubling Every Five Years by Klugman Roxann – Over half of all Americans have money in the stock market, most of it in mutual funds. But most mutual funds underperform the stock market, and they are taxed. The taxes and fees destroy compounding of investments and diminish the retirement nest egg. Anne Scheiber’s method, the Dividend Growth Investment Strategy (DGIS), beats the mutual fund in returns fivefold after thirty years, though both approaches achieve 14 percent annual growth. The Dividend Growth Investment Strategy examines and compares the various investment strategies of stocks, bonds, and mutual funds and shows in hard figures why DGIS is the better investment strategy. The DGIS maximizes growth of the nest egg while producing income that doubles every five years. It also minimizes anxiety over market downturns and inflation because investors can ride the market “roller coaster” by keeping their capital growing, while riding the stock market “escalator” through dividend growth returns, all the while avoiding taxes on their dividends.

10. Income Investing Secrets: How to Receive Ever-Growing Dividend and Interest Checks, Safeguard Your Portfolio and Retire Wealthy by Richard Stooker – Learn how to make money whether the stock market goes up, down or sideways. Discover how to avoid the financial pitfalls and emotional stress of depending upon the stock market to deliver market price appreciation to you — capital gains. They come — sometimes, but they also disappear. The Dow Jones Industrial Average is now about at the high it first broke ten years ago. The buy and hold strategy requires a lot of patience these days. Income Investing Secrets advocates rewarding yourself right away with regular income from stock dividends and bond interest. It shows you the best, most dependable types of income-producing investments — and how to minimize risk.

Is there an honorable mention that should be added? What did I miss? Let me know in the comment section below!

I have been an investor in Dr. Pepper Snapple Group (NYSE: DPS) ever since it spun off from its former parent company Cadbury Schweppes in 2008. It is an excellent company with a good dividend that, not only continues to increase its dividend, but is poised to see a run in its share price as well. It is a good dividend stock that should be added to your watch list.

Here are a few reasons why I like Dr. Pepper Snapple Group shares.

Dr. Pepper Offers A Good Dividend Yield

With returns on Treasuries, money markets, and certificates of deposit still at some of the lowest levels seen in a generation, investors continue to be on the hunt for yield. At current share price levels, Dr. Pepper Snapple Group’s current annual dividend of $1.52 per share provides a dividend yield of 3.33%. Stocks like Dr. Pepper that offer over a 3% annual dividend yield provide investors with a high yield that dividend investors are looking for.

Dr. Pepper Continues To Increase Its Dividend

Dr. Pepper Snapple Group spun off and became a publically traded company in 2008. In 2009, the company started issuing a dividend, and that dividend has increased every year since 2009. The dividend has more than doubling in 4 years, which equates to over an 18% increase to the dividend annually.

Potential Reasons For Dr. Pepper’s Share Increasing

DPS Has A Low P/E Ratio

Dr. Pepper Snapple Group has a Price to Earnings (P/E) Ratio of just 15.2 with its current share price of $45.64. This P/E Ratio is well below its industry rivals Coca-Cola (NYSE: KO) and Pepsi Co. (NYSE: PEP). Currently, both Coke and Pepsi enjoy a P/E Ratio of 21.

If Dr. Pepper had Coke’s P/E Ratio of 21, its shares would be valued at $63 per share. That is over 34% that the share price could rise based on its current valuations.

Dr. Pepper Should Go International

Currently, Dr. Pepper has next to no international exposure. While this can be a blessing because it has missed the European and emerging market struggles as of late, it is also a missed opportunity. Increasing their international offerings would help the brand grow revenue to match their dividend growth.

Dr. Pepper Has A Stable Of Brands

Dr. Pepper reminds me a Billy Joel. When I was a kid, I’d hear all these great songs that sounded like completely different categories: blues, rock, ballads. I thought that there was no way that these great songs could be sung by the same man. You forget how many different songs are in Billy Joel’s enormous catalog. Dr. Pepper is the same way.

You forget how many great brands Dr. Pepper Snapple Group owns. They are the parent company behind some of the biggest beverage names that we have grown up with and love. DPS owns such iconic brands like Mott’s apple juice, A&W Root Beer, Country Time, Crush, Clamato, RC Cola, Hawaiian Punch, and the list goes on and on.

There is more to just dividend yield and dividend growth with this great company. Dr. Pepper Snapple Group continue to be poised for growth in shareholder value.

What do you think about Dr. Pepper Snapple Group’s long-term potential for dividend and share price increases? Is P/E Ratio a good metric to use? I’d love to hear your thoughts in the comment section below.

Note: I am currently a shareholder of DPS, and I plan to continue buying more shares every month through dollar cost averaging.

A recent reader questioned the validity of a dividend aristocrat as a growth stock. His argument was whether or not you could find a growth stock among those dividend aristocrats. He asked, why invest in a dividend aristocrat because after 25 years of consistently rising dividends, how much growth could there be left in the shares?

The question, like most, begs for a little further examination. It made me dig into some questions? When does a growth stock become a value play? Can a dividend aristocrat be a growth stock? Or, is it a value stock by its very nature? And, what role does the dividend payout ratio play in our determinations?

Understanding Growth Stocks vs Value Stocks

Investopedia defines a growth stock as a stock whose share price grows at a faster rate than the overall stock market. Last year, of course, the S&P 500 Index saw a 13% gain, and it is set to make a comparable run here in 20113 as well.

Conversely, a value stock is the ying to growth stocks’ yang. Value stocks are often undervalued when compared to the company’s financial metrics. Investors often find that value stocks have a higher dividend yield, lower price to book ratio, and often a lower price to earnings (PE) ratio than growth stocks traditionally.

Can A Dividend Aristocrat Be A Growth Stock Too?

Yes, a dividend aristocrat can be a growth stock also, but it may be unlikely. They are more likely to be a value stock and a blue chip company. Out of the 59 dividend aristocrats in the S&P 500 index, many have seen year over year share price growth of over 13% in recent years. While we may not consider strong dividend payers as high growth companies, the possibility is still out there for those companies to provide both income and capital appreciation to shareholders.

How The Dividend Payout Ratio Fits In

Just because a company is a value stock does not mean that there isn’t room for its share price to grow. A company’s dividend payout ratio tells the story and of its potential to grow and provide investors with a safe and secure dividend.

The dividend payout ratio is simply the total amount of net income or profits that a company pays out to shareholders in the form of dividends. Simply divide the total amount of dividends (cash and stock) paid out to shareholders by the company’s total profit to get a percentage. You can find these numbers in the company’s Annual Report.

Many dividend investors tend to balk at investing a company that pays out more than 50% to 60% of its profits in dividends. Keep in mind though that this is a rule of thumb. It does not apply to some investments like real estate investment trusts which must by law distribute 90% of their profits to investors.

A company that has a dividend payout ratio of greater than 50% may be an indication that the companies are not plowing back enough profits into the business to invest in research and development, new property, plant, and equipment, and the like. It could be a warning sign. Conversely, a low dividend payout ratio for a stellar company could be an indication that the firm has the ability to increase dividends in the future without too much impact on their business.

Are all dividend aristocrats growth stocks? No, of course they are not. But, that does not mea that dividend aristocrats do not have room to grow their share prices at a decent rate. These tried and true companies may not be the next stock to shoot up 20%, 30%, or more in a year, but they also have the capability thanks to their dividend payout ratios to not only continue raising their dividends year in and year out but also reinvesting their profits for continued growth.

I love dividend paying stocks. They pay you to wait on their share prices to grow with dividends. A company’s dividend growth rate is a good proxy for how much their share price should also grow.

A company’s share price is the present value of all its future cash flows (dividends) according to classic finance theory. So, a simple way to look at it is that a company who is increasing its dividends by 3% to 5% each year should see its share price of its common stock growing at approximately the same rate.

An Example of the Dividend Growth Rate in Action

To give you an example, let’s look at one of my favorite companies, Coca-Cola (Stock Symbol: KO). In 2002, the Coca-Cola company issued a quarterly dividend of 10 cents or 40 cents per year (adjusted for the 2 for 1 stock split that took place in 2012). The share price of Coke at that time was right at about $50 (or $25 factoring the split). Over the past eleven years, Coca-Cola’s dividend has increased to 28 cents per quarter or $1.12 per year. That is a 9.8% annual increase in their dividend.

Currently, Coca-Cola’s stock price has risen to $39.23 this year. That actually equates to only a 4.2% annual rise in the price of their stock (stock split adjusted). Of course, that rise hasn’t been on a straight line but ebbs and flows with the macro economy as well. So, using this dividend growth rate and the share price, it is not out of line to say that Coca-Cola may be undervalued at these levels using this metric alone. Of course, it’s not always wise to put all of your investing eggs into the one basket of a single metric. There’s more to a stock price than that.

What Is Dividend Yield?

Dividend yield is a measure of the amount of cash flow you will receive from your investment. Dividend yield is typically measured as a percentage of your total investment.

To give you an example of how to calculate dividend yield, let’s say that your stock investment pays annual dividends of $1 per share and you bought it for $20 per share. That means that your stock’s dividend yield is 5% ($1 / $20).

One thing to consider though is that the share price of your stock rising will cause your dividend yield to drop. A company’s dividend won’t change as much as its share price might. If the stock price doubles to $40 per share, your dividend yield will drop to 2.5% ($1 / $40). The dividend itself hasn’t changed, but the share price and dividend yield sure have.

Too Much Dividend Yield May Be Bad Too

This very same dividend yield problem can have a similar and negative effect if the share price drops too much. You shouldn’t simply look for a stock with the highest yield of course. If a share price drops like a rock but the company still issues its same dividend, the yield will rise incredibly. This can be a serious red flag to investors.

A share price that dropped to $10 per share but still issues $1 annual dividend will result in a 10% dividend yield. So, a juicy dividend yield doesn’t always indicate a great stock. Be sure to find out why the yield looks so great.

Dividends provide compounding interest if you reinvest your dividends back into new shares of stock. When you get a dividend and immediately have the company or your stock brokerage firm reinvests it for you, you purchase additional shares of the stock. Then, you will receive even more dividends during the next quarter when the next round of dividends is issued. And, like compounding interest on your bank account, your dividends will earn their own dividends compounding year after year.

What about you? What’s your favorite metric to look for when you are searching for a new dividend stock to invest in? Is it dividend growth rate, dividend yield, or something else entirely? I’d love to hear your thoughts in the comment section below.

Disclaimer: I currently own shares of Coca-Cola and continue to purchase new shares every month through the company’s dividend reinvestment plan (DRIP) and dollar cost averaging.

Dividends are like the third rail for public companies. Most board members and executives would much rather do something drastic like borrow money instead of reducing their dividend payments to shareholders. So, there is something to be said for dividend aristocrats who continue to raise their dividends year in and year out improving their shareholder’s personal finances.

What Are Dividend Aristocrats?

A dividend aristocrat is a company that has consecutively raised its dividend every year for at least 25 years. The 25 year mark is of increasing dividends every year at least once if not more times within a year is hard to do. Twenty-five years shows consistent growth through all types of bull and bear markets, dips, downturns, and even recessions. Dividend aristocrats have shown investors that they are consistent and growing winners in the stock market that can be trusted.

Dividend aristocrats are often blue chip stocks. These stocks have paid a consistent dividend with solid returns for many years. Many of these stocks have increased their dividends substantially over time, and some of them have even increased their dividends quarterly.

Dividend aristocrats not only pay their dividend, but these are also high growth stocks that have consistently put up good numbers. Imagine realizing a consistent return from growth, even a split, and then turning around to receive a dividend as well.

Dividend Aristocrats Do Well In A Market Down Turn

Dividend aristocrats are stellar companies generally even during an economic recession, bear market, or downturn. Many people are always looking for investments that do well in an economic downturn as well as in boom times. Dividend aristocrats are investments that do well during an economic upturn and downturn. Dividend aristocrats have a track record of paying out a dividend every quarter no matter what is going on.

Some of these companies have been in the group of dividend aristocrats for more than the required 25 years. 3M (NYSE: MMM) has been increasing its dividend since 1959, and Johnson and Johnson (NYSE: JNJ) has been increasing its dividend every year since 1963. And, these are just two of several examples. In a world that is constantly moving towards instant gratification and speculative stocks, a secure dividend that has been increasing every year for several decades can be very appealing.

Dividend Aristocrats In The Dow Jones Industrial Average

Currently, there are nine members of the Dow Jones Industrial Average that are dividend aristocrats. The dividend aristocrats of the Dow Jones Industrial Average are Wal-Mart, Coca-Cola, Johnson & Johnson, Proctor and Gamble, McDonald’s, ExxonMobil, AT&T, Chevron, and 3M. As you can see, these names are a wide selection of American companies from consumer stables, industrials, etc. 3M and Procter & Gamble have been increasing their dividend payouts to investors since the 1950s. Chevron just barely made the list having started to increase its dividends in 1988. The current dividend yield for these companies range from 2.3% to 5.1%.

Dividend Aristocrats In The S&P 500 Index

There are currently 59 companies who are dividend aristocrats in the S&P 500 Index according to Standard and Poor’s. The companies run the gamut of industries and sectors in the index. You will find healthcare companies like Abbott Laboratories, consumer discretionary like the Family Dollar Stores, material and industrial companies, and many more. It really does cover the wide spectrum of the economy.

Dividend aristocrats set themselves up beautifully for a buy and hold investment strategy. Of course, I’m not recommending buy and hold forever, never selling. But, dividend stocks that increase their dividend payouts for decades can help you to feel comfortable buying and holding stocks for the long term.

It does not take but one time for these companies to not increase their dividends for them to be removed from the list of dividend aristocrats. And, then it is another 25 year wait for those companies who cut their dividends to be added back to the list of dividend aristocrats. You can understand why executives and boards take dividends and increasing them so very serious.

When you are investing in dividend aristocrats, not all of them are created equal of course. Each company is still a unique entity that has definitive investment characteristics that you must be concerned about when you invest. You must still do your research and pick the ones that will best work out for you and your investment objectives in the end.

What do you think? Are dividend aristocrats attractive? Do you have them in your portfolio? Do you seek them out specifically? I’d love to hear your thoughts in the comment section below.

For Canadians, November is Financial Literacy Month! That’s right, a whole month dedicated to educating and helping Canadians to become more financially independent, and more aware of their finances.  This national media campaign is spearheaded by Glenn Cooke, of LifeInsuranceCanada.com. The goal for bloggers is to give their best financial tip.

My tip is why you should avoid mutual funds.

Over on the Dividend Ninja, as part of the Financial Literacy Month campaign I wrote about why you should start investing now. My point was to show how easily a nominal $25 per week invested, can grow into a sizeable portfolio of over $17,168 in only ten years. For that figure I assumed a very conservative annual total return of only 5%!

I also showed how Canadian investors can take advantage of four TD e-Series Index Funds to build a portfolio for only $100 per month, with a purchase of a fund each week at $25. I also showed readers why the TD e-Series funds are such a great deal! There are no commissions to purchase or sell, and the MER (Management Expense Ratio) is less than 0.33%. Unfortunately, these funds are not well known to Canadians, since they are not heavily marketed – in order to keep the costs low.

It’s a different story for Canadian investors who purchase actively managed mutual funds, and who are paying a premium in fees and being rewarded with underperformance. Although U.S. mutual funds have lower fees, almost half of what Canadians pay, here are the reasons why you should avoid mutual funds.

What the Fund?

Back in July 2011, I chopped through all the complexities of mutual funds, index funds, and ETFs (Exchange Traded Funds) in Would The Real “Fund” Please Stand Up!If you aren’t up on the terminology, nor understand the difference between index funds, ETFs, or mutual funds, then be sure to check out this post. It’s a back to basics post for any investor.

Most people have a basic understanding of what Mutual Funds are, since they have invested in them at some point.  A mutual fund is basically a pool of funds collected from many investors for the purpose of investing in securities such as stocks and bonds. Most mutual funds are actively managed, in other words an investment manager decides on the securities to purchase, and manages the portfolio.

Why You Shouldn’t Buy

Most people start off with mutual funds, because it was what they know best through advertising, or by talking with their bank rep or directly through a mutual fund dealer. Mutual funds have long claimed to provide investors with professional management, above market performance, and a solid long-term investment strategy. Yet actively-managed mutual funds rarely deliver on any of these promises, and cost investors a small fortune in ongoing fees.

The main three reasons are:

• Upfront Fees: Commissions to Buy and Sell
• Hidden Fees: MER including Trailer Fees
• Underperformance

1. Upfront Fees

First, mutual funds are expensive in terms of the fees and commissions they charge upfront. What most people don’t realize is that many financial advisors are not financial planners, and are simply mutual fund dealers. Many mutual fund dealers charge hefty front-end and back-end commissions. These are usually laid out as front-end, back-end, and deferred-sales-charges depending on the length of time the funds are held. Here in Canada, these fees can vary anywhere from 2% to 6% of your capital, and are paid directly to the mutual fund company and dealer. That’s money out of your pocket!

2. Hidden Fees

Second, mutual funds are also expensive with the hidden fees that are not so obvious or readily disclosed to investors. These are primarily the MER (Management Expense Ratio), with the included Trailer Fees. In Canada, these particular mutual fund fees are much higher than they are in the U.S. and Canadian investors are simply getting burned.

The Trailer Fee ( part of the MER) is paid directly to the broker as a kick-back for selling the fund. Additionally trailer fees are also paid as an ongoing benefit to mutual fund dealers, depending on the value of a fund’s holding across the dealer’s client base. These are a small percentage, nonetheless add up over time. Essentially, the longer you hold your mutual fund, the more trailer fees you are paying to your advisor.

The MER, called the Management Expense Ratio. This is an annual and ongoing fee that is charged from the fund’s income and profits, to pay for the fund’s management and administration. That also includes all the costs of marketing and promotion. According to an article in the Globe and Mail back in March 2001 by Rob Carrick, The average Canadian equity mutual fund had a whopping annual MER of 2.43%!

When you combine the MER with the included trailer fee, the average Canadian investor is likely paying around 2.5%+ annual fees to own a mutual fund. These fees are paid on top of any other front-end or back-end commissions. The real irony is that investors pay all these fees, compounding year after year, whether the fund does well or performs poorly.

3. Underperformance

While mutual funds are a win for the companies who manage them and the brokers who sell them, most Canadian investors are paying a premium for underperformance. According to the 2011 ETF Landscape Review, only 15.1% of actively managed mutual funds in the Canadian Equity category were able to outperform the S&P/TSX Composite Index according to S&P.  When you consider the large annual MER fees, trailer fees, front-end or back-end commissions mutual fund companies charge, there is simply no excuse for paying for underperformance.  

One of my favourite bloggers, MoneyCone, recently examined the underperformance issue of U.S. mutual funds in The Fund That Beat The Market 9 Times Since 1999.

Award winning author Andrew Hallam, also covered the pitfalls of the mutual fund industry in depth, in his bestselling book [easyazon-link asin=”0470830069″]Millionaire Teacher[/easyazon-link]. According to his research, Canadians are at the last spot at 18 out of 18, paying the highest mutual fund fees in the entire world! (Millionaire Teacher, pg.54). Andrew quotes the fund fees that Canadians are paying at around 3.0%, compared to U.S. mutual fund fees of around 1.5%. I interviewed Andrew back in June 2011, before his book was officially published across North America, in The Millionaire Teacher.  If you are currently investing in mutual funds, and think you are doing fine, then I urge you to get a copy of Andrew’s book – you will be glad you did.

Conclusion

In this day and age of low-cost ETFs (Exchange Traded Funds) and low cost Index Funds, paying a premium for underperformance with actively managed mutual funds just doesn’t make for good returns.  Actively managed mutual funds in Canada not only underperform and under-deliver, they cost a lot too!  Although U.S. investors pay at least half of what Canadians do, actively managed mutual funds still diminish your returns through ongoing fees, commissions, and underperformance. You can do much better with low-cost ETFs and low-cost Index Funds.

After first learning of DGI (Dividend Growth Investing), I immediately realized this strategy was perfect for my investing goals and more importantly, my risk tolerance.

See, I’m a pretty risk averse guy and I DO NOT LIKE losing money!  Downturns in the market makes me sick.  But with with Dividend Growth Investing, your goals change.  It’s no longer about getting lucky and buying a stock right before it doubles to quickly sell.

With Dividend Growth Investing, you aren’t gambling with the hopes that a company stock price goes up. Instead, you’re investing in the company understanding that they are going to reliably pay you every year through dividends.  And, since we focus on Dividend Growth Investing, we look to invest in companies that have long histories of paying their stockholders a dividend raise every year as well.

For example, I had never heard of Nautilus Inc (NLS) before today, but their stock is up over 30% over the last month (the time of writing this).  That would be a stock that I would have been on the lookout to trade before I was introduced to Dividend Growth Investing.  However, instead of finding the Nautilus stocks of the world, I would typically find the Hydrogenics Corp (HYGS) of the market which is down a little over 11% YTD and pays no dividend.

These types of companies no longer interest me.  I’m much more interested in the $26.56 dividend AT&T (T) and $13.30 dividend General Mills (GIS) paid me this week.  My only goal is to find dividend aristocrats with a long history of uninterrupted dividend payments and buying them at fairly valued (or even better, undervalued) prices (relative to their dividend yield range).

Once again, the key is buying these dividend aristocrats at undervalued prices.  Companies have business cycles.  And, like all cycles, there are peaks and troughs. More importantly, they have high/low dividend yields ranges.

The objective is to buy these companies when they are paying a high dividend yield according to their range.  Some recent examples of some companies that are paying close to their undervalued yield range are the big boys in the Oil and Gas industry:

Chevron (CVX) and Exxonmobil (XOM)  are both huge companies with long dividend histories and huge (literally) ocean sized moats.

So why isn’t everybody doing this?  Well, a lot of people are.  At the moment, it’s not an easy task to find high quality companies with prices that are in line with the high end of their yield range (or undervalued).

This is because of the artificially low interest rate environment we’ve been in for the last six years.  The majority of the high quality stocks have been bid up to all time highs because institutional investors, foreigners, and folks like us who have have been throwing money anywhere they can find a decent yield.  But, good values do pop up, and the values will certainly avail themselves once interest rates begin to rise.

I aim to invest in companies who will pay my way through retirement with dividends.  If I’m able to pay all of my expenses with my dividends payments and never have to sell shares to raise capital, then I’m set for life.

But, the real reason of why I’m using dividend investing as the cornerstone of my early retirement plan is to diminish portfolio anxiety.  I’m no longer worried about my portfolio balance.  It’s a treat to look at my portfolio spreadsheet to see what I’m going to make this month in my reliable and predictable dividend holdings.

Are you investing in dividends? What draws you to dividend investing? We’d love to hear from you in the comment section below.

Disclaimer – long XOM, CVX, GIS & T

This guest post has been written by Mike from The Dividend Guy Blog. His blog is well known for high quality dividend investing articles, and for his most recent book: Dividend Growth: Freedom through Passive Income.

The first thing you should do when you want to build a portfolio is to place stocks that are on your radar into 3 different quadrants. This technique is used to compare each of them and make quick decisions based on your dividend growth investing strategy. What is cool about quadrants is that they are easy to use, easy to understand and don’t require much time (I know, I’m lazy sometimes ).

The idea of building a quadrant system is quite simple: first, you select two characteristics you want to compare (consider dividend yield and dividend payout ratio). Next, you compile the data for all your stocks with both characteristics. Once you have all the data, you simply have to position each stock according to their yield (on the X Axis) and their payout ratio (on the Y Axis). Here’s a quick example:

In this example, it is quite obvious that you would like to get as many of your stocks in the #4 quadrant (high dividend yield with low payout ratio). The less attractive quadrant is then #1 (low dividend yield with high dividend payout ratio). Within minutes, you can determine which stocks are a good addition to your portfolio and which are not.

Quadrants have been used over and over for several purposes. Companies use them to position their products (high end vs., low end, mass consumer vs., niche, etc), we will use them to position your stock. If you hope to live off dividends one day, you need to seek stocks that:

• Provide a healthy dividend at first
• Grow their dividend over time
• Grow their income over time (so they can keep up with their dividend and provide you with capital growth at the same time).

In order to find those stocks, you can use the following 3 different quadrants:

Dividend Yield Vs. Dividend Payout Ratio

The first quadrant we will look at is the one comparing the stock’s dividend yield to its ability to keep it (the dividend payout ratio). The first thing we look at as dividend investors is obviously the dividend yield. But instead of chasing blindly the yield as a dog running after a cat that just crossed a boulevard, you are better watching after the dividend payout ratio to make sure that you don’t see your dividend (or your dog) getting squished!

Because it’s always more fun when you have a true example, I’ve pulled out 10 stocks off the TSX 60 to show you how they compare on the quadrant. Here’s my data compilation:

As you can see, you have some pretty high and pretty low dividend yields and payout ratios.  That doesn’t mean, however, that all the low yields have a low payout ratio and vice-versa. This is what the quadrant will show you in a heartbeat:

From this perspective, the less attractive quadrant for me is the one over the 100% line. To be honest, I don’t really mind if the dividend yield is high or not at this point, because if they give more that they can then they’ll eventually have to cut on their dividend or sell assets to keep the miracle going.

In an ideal world, we would only pick stocks in the #4 quadrant as those stocks should provide high & sustainable dividend yield. Unfortunately, we only have one stock that fits in this category and it is Power Corp (POW). However, you also have some healthy dividend payers with decent payout ratio (T, BNS, NA & ECA). CNQ is not offering an interesting yield even though the company would be able to pay the distribution forever with such low payout ratio. As for HSE, it’s pretty close to not making the cut because of its high payout ratio but it should still provide some great dividends. I personally would need more time to analyze this one to see if I want this stock in my portfolio but it would not be my first pick either.

Dividend Yield Vs Dividend Growth

Once you have found companies that have sustainable dividend levels,  the second thing you want to look at is how their dividend yield compares to their dividend growth. A company dividend yield could be high because it has been devalued for specific reasons or because the stock is following a bigger trend (as it is the case in a bear market for example). However, if you can find high dividend yield payers with low payout ratios and showing 5 year dividend growth; then you are getting closer to a great dividend pick!

By comparing dividend yield and dividend growth over 5 years, you want to pick the highest yield with the highest dividend growth. Continuing the same example, here are my data for the following quadrant:

You can already guess that ERF will be out of my stock picks ;-). Please also note that I had to take Penn West (PWT) out of the following quadrant as 5 years of data wasn’t available as it was previously an income trust. Here’s the quadrant:

This time, the most interesting quadrant is #2 as it would provide stocks with high dividend yield and high dividend growth. Then again, we have POW sitting alone as an example in this category. However, we have HSE, ECA, T, BNS and NA (in this order) that are interesting. They all show an interesting dividend yield (more than 4%) while providing great dividend growth.

Another thing that needs to be highlighted is the ability of CNQ to increase its dividend significantly. Therefore, even if the dividend yield is minimal, it should catch your attention to see what happened with this stock and its dividend over time. For example, a quick research would have taught you that CNQ doubled its dividend in the past 5 years and also went from $0.05 to $0.36 dividend per share in the past 10 years. While the dividend yield is not really impressive today, the stock jumped by almost 1000% in 10 years. This is certainly something to think of before making your final decisions!

The Other Quadrants and How to Cross Reference Them

If you like this approach and would like to know more about the other quadrants you can use to pick your stocks and how to do cross referencing, you can take a look at my eBook: Dividend Growth: Freedom through Passive Income.

[easyazon-block asin=”B009CXT8AY” align=”none”]

Cheers,
Mike

The Dividend Guy

Company Overview

McDonald’s Corporation franchises and operates McDonald’s restaurants in the food service industry. These restaurants serve a varied, yet limited, value-priced menu in more than 100 countries worldwide. All restaurants are operated either by the Company or by franchisees.

Income Statement and Cash Flow

McDonald’s business model is rather simple. The company has two sources of revenue: 1) Sales from company operated McDonald’s restaurants, and 2) Rent and royalty payments from franchised stores. Sales from the company’s 6,399 operated stores account for 67% of revenue, with franchise fees for the remainder.

What makes this such a great business for investors is the low cost, predictable cash flow of the franchise model. Though McDonald’s usually owns the land and building, the locally-owned restaurant is responsible for operating costs and day to day management. Most franchise arrangements have 20 year minimums, so once a restaurant opens, MCD can rely on 20 years of low maintenance, reliable income.

The past 10 years have had an annual revenue increase of 5.44%, and last year, 2010, saw a revenue increase of 5.86%. Part of this increase is from the 541 new restaurants opened in 2010, and the rest is from the strong comparable sales growth MCD has had. 5% global comparable sales growth in 2010 marks the 8th straight year of such increases.

EPS and FCF per share have also shown strong growth, averaging 15.4% and 22.9% over the last decade. 2010 saw an EPS increase of 11.4%, from $4.11 to $4.58. Analysts expect MCD to earn $5.05 in FY 2011 and $5.51 in FY 2012. This would be an increase of 10.3% and 9.1%, respectively. Analysts predict a 5 year growth rate of 9.4%.

Earnings growth comes from a combination of increased sales and margins, plus the effects of strong stock buybacks. MCD has averaged to take 4.7% of it’s stock off the market every year for the past decade. In 2009 the board approved 10 billion dollars in share repurchases, and to date, they have roughly 6.9 billion dollars left to use, with no expiration on the cash.

Cash flow has grown from 2.7 billion in 2001 to 6.3 billion in 2010. Combined with the share buybacks and slowly increasing capital expenditures, FCF per share has grown faster than EPS. The $3.86 of free cash flow in 2010 was more than enough to cover the $2.26 in dividends.

Margins have been trending upwards, a great sign for the business. I was having trouble finding a reliable gross margin number, but online research pegs it somewhere in the high 30’s – low 40’s, percentage wise. As with all food companies, rising commodity prices may affect MCD in the future, but if any company could deal with increasing raw material costs, it’s McDonald’s.

For one, they are one of the largest food buyers in the world, which gives them incredible leverage. Second, 75% of their grocery bill is comprised of only 10 different commodities. Their streamlined operation allow them offer a full menu with only a few ingredients, thereby reducing costs and simplifying purchasing. Third, they have pricing power. You can buy a hamburger anywhere, but you can only get a Big Mac at McDonald’s. This allows them the freedom to raise prices in order to offset higher food costs.

Dividends

MCD is a dividend powerhouse. They have increased their dividend every year since paying their first one in 1976, and I believe this will continue into the future. The current quarterly rate of $0.61 a share equals an annual dividend of $2.44, and the stock currently yields 3.3%.

Based on dividend history, we can expect an increase in the fourth quarter of 2011, so the yield is probably a bit higher. If we estimate a dividend increase of roughly 10% (similar to 2010 increase), that would mean an annual payment of $2.49, and a yield of 3.4%

10 year average annual growth rate is 28.58%, almost double the EPS growth rate. This was achievable with a mix of strong earnings growth and an increased payout ratio. Since 2001, the payout ratio has increased from 18% to 49%. I expect dividend growth to slow in the coming years, as the increases of the past decade are unsustainable, and the 5 year rolling dividend growth rate is trending down. A 10% growth rate going forward is reasonable. Any higher, and the payout ratios may head into dangerous territory.

Balance Sheet

McDonald’s has a healthy balance sheet.

The current ratio is 1.49, and debt is 44% of capital employed. This is a bit higher than I usually like to see, but interest coverage is a healthy 16.6, and they have over 2 billion in cash. They should have no problems servicing their debt.

Return on Equity has been trending upwards, and is rather high, at 34.5%. Some of this is attributable to the leverage of the company, but most of it is just great management. The past 3 years have kept ROE into the low 30’s, but for most of the 2000’s it was in the mid teens to low 20’s. The 10 year average is 21.2%, a very respectable number.

Stock Price Valuations

current price – 73.38
5 year low p/e – 14.1
p/e (ttm) – 16
p/e (forward) – 14.5
peg – 1.7
5 year high dividend yield – 3.6%
dividend yield – 3.3%

Conclusion

There is a lot to love about McDonald’s. 32,737 restaurants. World-wide brand appeal. A proven business model. Great management. A commitment to shareholder returns. Consistently strong growth. Quality assurance labs around the world to make sure every product is up to standards. And unbelievable brand loyalty. I know, because I am incredibly brand loyal. None of my road trips are complete without a sausage egg mcmuffin.

The future also looks bright for the Golden Arches. They have shown the ability to expand into new markets, while also adding value to their existing stores. There are 1,100 new store openings planned for 2011, and they should all add nicely to the bottom line.

Based on the average of the 5 year high yield, 5 year low p/e, and a discounted cash flow analysis (9% EPS growth, 10% return, over 10 years), McDonald’s is still an attractive buy in the low 70’s. I will add my position when, and if, funds are available and my allocation is balanced.

To get all my updates, please subscribe to my rss feed

Full Disclosure: I am long MCD. My Current Portfolio Holdings can be seen here

For Canadians, November is Financial Literacy Month! That’s right, a whole month dedicated to educating and helping Canadians to become more financially independent, and more aware of their finances.  This national media campaign is spearheaded by Glenn Cooke, of LifeInsuranceCanada.com. The goal for bloggers is to give their best financial tip.

My tip is why you should avoid mutual funds.

Over on the Dividend Ninja, as part of the Financial Literacy Month campaign I wrote about why you should start investing now. My point was to show how easily a nominal $25 per week invested, can grow into a sizeable portfolio of over $17,168 in only ten years. For that figure I assumed a very conservative annual total return of only 5%!

I also showed how Canadian investors can take advantage of four TD e-Series Index Funds to build a portfolio for only $100 per month, with a purchase of a fund each week at $25. I also showed readers why the TD e-Series funds are such a great deal! There are no commissions to purchase or sell, and the MER (Management Expense Ratio) is less than 0.33%. Unfortunately, these funds are not well known to Canadians, since they are not heavily marketed – in order to keep the costs low.

It’s a different story for Canadian investors who purchase actively managed mutual funds, and who are paying a premium in fees and being rewarded with underperformance. Although U.S. mutual funds have lower fees, almost half of what Canadians pay, here are the reasons why you should avoid mutual funds.

What the Fund?

Back in July 2011, I chopped through all the complexities of mutual funds, index funds, and ETFs (Exchange Traded Funds) in Would The Real “Fund” Please Stand Up!If you aren’t up on the terminology, nor understand the difference between index funds, ETFs, or mutual funds, then be sure to check out this post. It’s a back to basics post for any investor.

Most people have a basic understanding of what Mutual Funds are, since they have invested in them at some point.  A mutual fund is basically a pool of funds collected from many investors for the purpose of investing in securities such as stocks and bonds. Most mutual funds are actively managed, in other words an investment manager decides on the securities to purchase, and manages the portfolio.

Why You Shouldn’t Buy

Most people start off with mutual funds, because it was what they know best through advertising, or by talking with their bank rep or directly through a mutual fund dealer. Mutual funds have long claimed to provide investors with professional management, above market performance, and a solid long-term investment strategy. Yet actively-managed mutual funds rarely deliver on any of these promises, and cost investors a small fortune in ongoing fees.

The main three reasons are:

• Upfront Fees: Commissions to Buy and Sell
• Hidden Fees: MER including Trailer Fees
• Underperformance

1. Upfront Fees

First, mutual funds are expensive in terms of the fees and commissions they charge upfront. What most people don’t realize is that many financial advisors are not financial planners, and are simply mutual fund dealers. Many mutual fund dealers charge hefty front-end and back-end commissions. These are usually laid out as front-end, back-end, and deferred-sales-charges depending on the length of time the funds are held. Here in Canada, these fees can vary anywhere from 2% to 6% of your capital, and are paid directly to the mutual fund company and dealer. That’s money out of your pocket!

2. Hidden Fees

Second, mutual funds are also expensive with the hidden fees that are not so obvious or readily disclosed to investors. These are primarily the MER (Management Expense Ratio), with the included Trailer Fees. In Canada, these particular mutual fund fees are much higher than they are in the U.S. and Canadian investors are simply getting burned.

The Trailer Fee ( part of the MER) is paid directly to the broker as a kick-back for selling the fund. Additionally trailer fees are also paid as an ongoing benefit to mutual fund dealers, depending on the value of a fund’s holding across the dealer’s client base. These are a small percentage, nonetheless add up over time. Essentially, the longer you hold your mutual fund, the more trailer fees you are paying to your advisor.

The MER, called the Management Expense Ratio. This is an annual and ongoing fee that is charged from the fund’s income and profits, to pay for the fund’s management and administration. That also includes all the costs of marketing and promotion. According to an article in the Globe and Mail back in March 2001 by Rob Carrick, The average Canadian equity mutual fund had a whopping annual MER of 2.43%!

When you combine the MER with the included trailer fee, the average Canadian investor is likely paying around 2.5%+ annual fees to own a mutual fund. These fees are paid on top of any other front-end or back-end commissions. The real irony is that investors pay all these fees, compounding year after year, whether the fund does well or performs poorly.

3. Underperformance

While mutual funds are a win for the companies who manage them and the brokers who sell them, most Canadian investors are paying a premium for underperformance. According to the 2011 ETF Landscape Review, only 15.1% of actively managed mutual funds in the Canadian Equity category were able to outperform the S&P/TSX Composite Index according to S&P.  When you consider the large annual MER fees, trailer fees, front-end or back-end commissions mutual fund companies charge, there is simply no excuse for paying for underperformance.  

One of my favourite bloggers, MoneyCone, recently examined the underperformance issue of U.S. mutual funds in The Fund That Beat The Market 9 Times Since 1999.

Award winning author Andrew Hallam, also covered the pitfalls of the mutual fund industry in depth, in his bestselling book [easyazon-link asin=”0470830069″]Millionaire Teacher[/easyazon-link]. According to his research, Canadians are at the last spot at 18 out of 18, paying the highest mutual fund fees in the entire world! (Millionaire Teacher, pg.54). Andrew quotes the fund fees that Canadians are paying at around 3.0%, compared to U.S. mutual fund fees of around 1.5%. I interviewed Andrew back in June 2011, before his book was officially published across North America, in The Millionaire Teacher.  If you are currently investing in mutual funds, and think you are doing fine, then I urge you to get a copy of Andrew’s book – you will be glad you did. 😉

Conclusion

In this day and age of low-cost ETFs (Exchange Traded Funds) and low cost Index Funds, paying a premium for underperformance with actively managed mutual funds just doesn’t make for good returns.  Actively managed mutual funds in Canada not only underperform and under-deliver, they cost a lot too!  Although U.S. investors pay at least half of what Canadians do, actively managed mutual funds still diminish your returns through ongoing fees, commissions, and underperformance. You can do much better with low-cost ETFs and low-cost Index Funds. 😉

Here is a list of the ten best dividend investing books that should be on your nightstand. These are some great dividend investing books that are worth reading. Did I miss any? Which ones are your favorite dividend investing books? Did I miss the mark? Are some of these duds? I’d love to hear what you think.

Top Ten Best Dividend Investing Books

1. The Single Best Investment: Creating Wealth with Dividend Growth by Lowell Miller – This witty guide advises readers to stop playing the stock market or listening to television gurus and instead put their money into dividend-paying, moderate-growth companies that offer consistent returns and minimum risk. Citing statistics that show companies initiating and raising dividends at the fastest rate in 30 years, this analysis declares once-stodgy dividends to be “the next new thing” and provides simple rules for choosing the best stocks, using traditional evaluation tools, reinvesting dividends, comparing stocks and bonds, and building a portfolio. Technical aspects of the stock market are explained in the final pages that include two new chapters and revised statistics as well as academic studies, historic back-tests, examples of real-time performance, and a list of resources for further research.

2. Dividend Stocks For Dummies by Lawrence Carrel – Dividend Stocks For Dummies gives you the expert information and advice you need to successfully add dividends to your investment portfolio, revealing how to make the most out of dividend stock investing-no matter the type of market. The book explains the nuts and bolts of dividends, values, and returns. It shows you how to effectively research companies, gauge growth and return, and the best way to manage a dividend portfolio. And, Dividend Stocks For Dummies provides strategies for increasing dividend investments.

3. The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns by Charles B. Carlson – In The Little Book of Big Dividends, dividend stock expert Chuck Carlson presents an action plan for dividend-hungry investors. You’ll learn about the pitfalls, how to find the opportunities, and will learn how to construct a portfolio that generates big, safe dividends easily through the BSD (Big, Safe Dividends) formula. If you’re a bit adventurous, Carlson has you covered, and will teach you how to find big, safe dividends in foreign stocks, preferred stocks, ETFs, real estate investment trusts, and more.

4. The Ultimate Dividend Playbook: Income, Insight and Independence for Today’s Investor by Josh Peters – Many people believe that the key to success in the stock market is buying low and selling high. But how many investors have the time, talent, and luck to earn consistent returns this way? In The Ultimate Dividend Playbook: Income, Insight, and Independence for Today’s Investor, Josh Peters, editor of the monthly Morningstar DividendInvestor newsletter, shows you why you don’t have to try to beat the market and how you can use dividends to capture the income and growth you seek.

5. Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market by Kelley Wright – A timely follow-up to the bestselling classic Dividends Don’t Lie. In 1988 Geraldine Weiss wrote the classic, “Dividends Don’t Lie“, which focused on the Dividend-Yield Theory as a method of producing consistent gains in the stock market. Today, the approach of using the dividend yield to identify values in blue chip stocks still outperforms most investment methods on a risk-adjusted basis. Written by Kelley Wright, Managing Editor of Investment Quality Trends, with a new Foreword by Geraldine Weiss, “Dividends Still Don’t Lie” teaches a value-based strategy to investing, one that uses a stock’s dividend yield as the primary measure of value. Rather than emphasize the price cycles of a stock, the company’s products, market strategy or other factors, this guide stresses dividend-yield patterns.

6. Get Rich with Dividends: A Proven System for Earning Double-Digit Returns by Marc Lichtenfeld – A comprehensive guide to dividend investing that shows how to obtain double-digit returns with ease. Dividends are responsible for 44% of the S&P 500′s returns over the last 80 years. Today they present an excellent opportunity, especially with investors who have been burned in the dot com and housing meltdowns, desperate for sensible and less risky ways to make their money grow. Designed to show investors how they can achieve double-digit average annualized returns over the long-term, Get Rich with Dividends: A Proven System for Earning Double-Digit Returns is the book you’ll need to get started making money in any market.

7. Dividends Don’t Lie: Finding Value in Blue-Chip Stocks by Geraldine Weiss – Investment-newsletter publisher Weiss and business journalist Lowe suggest that wealth is an all-but-sure result of investing according to recurring stock market cycles. In their technically detailed, conservative analysis, the authors recommend careful study of high grade issues with steady dividend-increase records. Investors should buy shares when the stock is undervalued in relation to dividend yield, then sell (reinvesting elsewhere) when a bullish trend drives the share price up to an overvalue level.

8. The Strategic Dividend Investor by Daniel Peris – The Strategic Dividend Investor shows you why, over the long run, investing in companies with high and rising distributions is far superior to “playing the market.” Responsible for $4.5 billion in dividend-anchored portfolios, Daniel Peris demonstrates that, for most investors, buying a stock in the hope of making a quick buck by selling it in a few weeks or months is far from the best way to create wealth. Instead, you should use the stock market as a means of receiving a share of excess profits—dividends—from corporations in which you own stock. Over time, those payments—and the growth of those payments—represent the vast majority of stock market returns.

9. The Dividend Growth Investment Strategy: How to Keep Your Retirement Income Doubling Every Five Years by Klugman Roxann – Over half of all Americans have money in the stock market, most of it in mutual funds. But most mutual funds underperform the stock market, and they are taxed. The taxes and fees destroy compounding of investments and diminish the retirement nest egg. Anne Scheiber’s method, the Dividend Growth Investment Strategy (DGIS), beats the mutual fund in returns fivefold after thirty years, though both approaches achieve 14 percent annual growth. The Dividend Growth Investment Strategy examines and compares the various investment strategies of stocks, bonds, and mutual funds and shows in hard figures why DGIS is the better investment strategy. The DGIS maximizes growth of the nest egg while producing income that doubles every five years. It also minimizes anxiety over market downturns and inflation because investors can ride the market “roller coaster” by keeping their capital growing, while riding the stock market “escalator” through dividend growth returns, all the while avoiding taxes on their dividends.

10. Income Investing Secrets: How to Receive Ever-Growing Dividend and Interest Checks, Safeguard Your Portfolio and Retire Wealthy by Richard Stooker – Learn how to make money whether the stock market goes up, down or sideways. Discover how to avoid the financial pitfalls and emotional stress of depending upon the stock market to deliver market price appreciation to you — capital gains. They come — sometimes, but they also disappear. The Dow Jones Industrial Average is now about at the high it first broke ten years ago. The buy and hold strategy requires a lot of patience these days. Income Investing Secrets advocates rewarding yourself right away with regular income from stock dividends and bond interest. It shows you the best, most dependable types of income-producing investments — and how to minimize risk.

Is there an honorable mention that should be added? What did I miss? Let me know in the comment section below!

After first learning of DGI (Dividend Growth Investing), I immediately realized this strategy was perfect for my investing goals and more importantly, my risk tolerance.

See, I’m a pretty risk averse guy and I DO NOT LIKE losing money!  Downturns in the market makes me sick.  But with with Dividend Growth Investing, your goals change.  It’s no longer about getting lucky and buying a stock right before it doubles to quickly sell.

With Dividend Growth Investing, you aren’t gambling with the hopes that a company stock price goes up. Instead, you’re investing in the company understanding that they are going to reliably pay you every year through dividends.  And, since we focus on Dividend Growth Investing, we look to invest in companies that have long histories of paying their stockholders a dividend raise every year as well.

For example, I had never heard of Nautilus Inc (NLS) before today, but their stock is up over 30% over the last month (the time of writing this).  That would be a stock that I would have been on the lookout to trade before I was introduced to Dividend Growth Investing.  However, instead of finding the Nautilus stocks of the world, I would typically find the Hydrogenics Corp (HYGS) of the market which is down a little over 11% YTD and pays no dividend.

These types of companies no longer interest me.  I’m much more interested in the $26.56 dividend AT&T (T) and $13.30 dividend General Mills (GIS) paid me this week.  My only goal is to find dividend aristocrats with a long history of uninterrupted dividend payments and buying them at fairly valued (or even better, undervalued) prices (relative to their dividend yield range).

Once again, the key is buying these dividend aristocrats at undervalued prices.  Companies have business cycles.  And, like all cycles, there are peaks and troughs. More importantly, they have high/low dividend yields ranges.

The objective is to buy these companies when they are paying a high dividend yield according to their range.  Some recent examples of some companies that are paying close to their undervalued yield range are the big boys in the Oil and Gas industry:

Chevron (CVX) and Exxonmobil (XOM)  are both huge companies with long dividend histories and huge (literally) ocean sized moats.

So why isn’t everybody doing this?  Well, a lot of people are.  At the moment, it’s not an easy task to find high quality companies with prices that are in line with the high end of their yield range (or undervalued).

This is because of the artificially low interest rate environment we’ve been in for the last six years.  The majority of the high quality stocks have been bid up to all time highs because institutional investors, foreigners, and folks like us who have have been throwing money anywhere they can find a decent yield.  But, good values do pop up, and the values will certainly avail themselves once interest rates begin to rise.

I aim to invest in companies who will pay my way through retirement with dividends.  If I’m able to pay all of my expenses with my dividends payments and never have to sell shares to raise capital, then I’m set for life.

But, the real reason of why I’m using dividend investing as the cornerstone of my early retirement plan is to diminish portfolio anxiety.  I’m no longer worried about my portfolio balance.  It’s a treat to look at my portfolio spreadsheet to see what I’m going to make this month in my reliable and predictable dividend holdings.

Are you investing in dividends? What draws you to dividend investing? We’d love to hear from you in the comment section below.

Disclaimer – long XOM, CVX, GIS & T

Company Overview

McDonald’s Corporation franchises and operates McDonald’s restaurants in the food service industry. These restaurants serve a varied, yet limited, value-priced menu in more than 100 countries worldwide. All restaurants are operated either by the Company or by franchisees.

Income Statement and Cash Flow

McDonald’s business model is rather simple. The company has two sources of revenue: 1) Sales from company operated McDonald’s restaurants, and 2) Rent and royalty payments from franchised stores. Sales from the company’s 6,399 operated stores account for 67% of revenue, with franchise fees for the remainder.

What makes this such a great business for investors is the low cost, predictable cash flow of the franchise model. Though McDonald’s usually owns the land and building, the locally-owned restaurant is responsible for operating costs and day to day management. Most franchise arrangements have 20 year minimums, so once a restaurant opens, MCD can rely on 20 years of low maintenance, reliable income.

The past 10 years have had an annual revenue increase of 5.44%, and last year, 2010, saw a revenue increase of 5.86%. Part of this increase is from the 541 new restaurants opened in 2010, and the rest is from the strong comparable sales growth MCD has had. 5% global comparable sales growth in 2010 marks the 8th straight year of such increases.

EPS and FCF per share have also shown strong growth, averaging 15.4% and 22.9% over the last decade. 2010 saw an EPS increase of 11.4%, from $4.11 to $4.58. Analysts expect MCD to earn $5.05 in FY 2011 and $5.51 in FY 2012. This would be an increase of 10.3% and 9.1%, respectively. Analysts predict a 5 year growth rate of 9.4%.

Earnings growth comes from a combination of increased sales and margins, plus the effects of strong stock buybacks. MCD has averaged to take 4.7% of it’s stock off the market every year for the past decade. In 2009 the board approved 10 billion dollars in share repurchases, and to date, they have roughly 6.9 billion dollars left to use, with no expiration on the cash.

Cash flow has grown from 2.7 billion in 2001 to 6.3 billion in 2010. Combined with the share buybacks and slowly increasing capital expenditures, FCF per share has grown faster than EPS. The $3.86 of free cash flow in 2010 was more than enough to cover the $2.26 in dividends.

Margins have been trending upwards, a great sign for the business. I was having trouble finding a reliable gross margin number, but online research pegs it somewhere in the high 30’s – low 40’s, percentage wise. As with all food companies, rising commodity prices may affect MCD in the future, but if any company could deal with increasing raw material costs, it’s McDonald’s.

For one, they are one of the largest food buyers in the world, which gives them incredible leverage. Second, 75% of their grocery bill is comprised of only 10 different commodities. Their streamlined operation allow them offer a full menu with only a few ingredients, thereby reducing costs and simplifying purchasing. Third, they have pricing power. You can buy a hamburger anywhere, but you can only get a Big Mac at McDonald’s. This allows them the freedom to raise prices in order to offset higher food costs.

Dividends

MCD is a dividend powerhouse. They have increased their dividend every year since paying their first one in 1976, and I believe this will continue into the future. The current quarterly rate of $0.61 a share equals an annual dividend of $2.44, and the stock currently yields 3.3%.

Based on dividend history, we can expect an increase in the fourth quarter of 2011, so the yield is probably a bit higher. If we estimate a dividend increase of roughly 10% (similar to 2010 increase), that would mean an annual payment of $2.49, and a yield of 3.4%

10 year average annual growth rate is 28.58%, almost double the EPS growth rate. This was achievable with a mix of strong earnings growth and an increased payout ratio. Since 2001, the payout ratio has increased from 18% to 49%. I expect dividend growth to slow in the coming years, as the increases of the past decade are unsustainable, and the 5 year rolling dividend growth rate is trending down. A 10% growth rate going forward is reasonable. Any higher, and the payout ratios may head into dangerous territory.

Balance Sheet

McDonald’s has a healthy balance sheet.

The current ratio is 1.49, and debt is 44% of capital employed. This is a bit higher than I usually like to see, but interest coverage is a healthy 16.6, and they have over 2 billion in cash. They should have no problems servicing their debt.

Return on Equity has been trending upwards, and is rather high, at 34.5%. Some of this is attributable to the leverage of the company, but most of it is just great management. The past 3 years have kept ROE into the low 30’s, but for most of the 2000’s it was in the mid teens to low 20’s. The 10 year average is 21.2%, a very respectable number.

Stock Price Valuations

current price – 73.38
5 year low p/e – 14.1
p/e (ttm) – 16
p/e (forward) – 14.5
peg – 1.7
5 year high dividend yield – 3.6%
dividend yield – 3.3%

Conclusion

There is a lot to love about McDonald’s. 32,737 restaurants. World-wide brand appeal. A proven business model. Great management. A commitment to shareholder returns. Consistently strong growth. Quality assurance labs around the world to make sure every product is up to standards. And unbelievable brand loyalty. I know, because I am incredibly brand loyal. None of my road trips are complete without a sausage egg mcmuffin.

The future also looks bright for the Golden Arches. They have shown the ability to expand into new markets, while also adding value to their existing stores. There are 1,100 new store openings planned for 2011, and they should all add nicely to the bottom line.

Based on the average of the 5 year high yield, 5 year low p/e, and a discounted cash flow analysis (9% EPS growth, 10% return, over 10 years), McDonald’s is still an attractive buy in the low 70’s. I will add my position when, and if, funds are available and my allocation is balanced.

To get all my updates, please subscribe to my rss feed

Full Disclosure: I am long MCD. My Current Portfolio Holdings can be seen here

The article McDonald’s Analysis: I’m Still Lovin’ It appeared first on The Dividend Pig

For Canadians, November is Financial Literacy Month! That’s right, a whole month dedicated to educating and helping Canadians to become more financially independent, and more aware of their finances.  This national media campaign is spearheaded by Glenn Cooke, of LifeInsuranceCanada.com. The goal for bloggers is to give their best financial tip.

My tip is why you should avoid mutual funds.

Over on the Dividend Ninja, as part of the Financial Literacy Month campaign I wrote about why you should start investing now. My point was to show how easily a nominal $25 per week invested, can grow into a sizeable portfolio of over $17,168 in only ten years. For that figure I assumed a very conservative annual total return of only 5%!

I also showed how Canadian investors can take advantage of four TD e-Series Index Funds to build a portfolio for only $100 per month, with a purchase of a fund each week at $25. I also showed readers why the TD e-Series funds are such a great deal! There are no commissions to purchase or sell, and the MER (Management Expense Ratio) is less than 0.33%. Unfortunately, these funds are not well known to Canadians, since they are not heavily marketed – in order to keep the costs low.

It’s a different story for Canadian investors who purchase actively managed mutual funds, and who are paying a premium in fees and being rewarded with underperformance. Although U.S. mutual funds have lower fees, almost half of what Canadians pay, here are the reasons why you should avoid mutual funds.

What the Fund?

Back in July 2011, I chopped through all the complexities of mutual funds, index funds, and ETFs (Exchange Traded Funds) in Would The Real “Fund” Please Stand Up!If you aren’t up on the terminology, nor understand the difference between index funds, ETFs, or mutual funds, then be sure to check out this post. It’s a back to basics post for any investor.

Most people have a basic understanding of what Mutual Funds are, since they have invested in them at some point.  A mutual fund is basically a pool of funds collected from many investors for the purpose of investing in securities such as stocks and bonds. Most mutual funds are actively managed, in other words an investment manager decides on the securities to purchase, and manages the portfolio.

Why You Shouldn’t Buy

Most people start off with mutual funds, because it was what they know best through advertising, or by talking with their bank rep or directly through a mutual fund dealer. Mutual funds have long claimed to provide investors with professional management, above market performance, and a solid long-term investment strategy. Yet actively-managed mutual funds rarely deliver on any of these promises, and cost investors a small fortune in ongoing fees.

The main three reasons are:

• Upfront Fees: Commissions to Buy and Sell
• Hidden Fees: MER including Trailer Fees
• Underperformance

1. Upfront Fees

First, mutual funds are expensive in terms of the fees and commissions they charge upfront. What most people don’t realize is that many financial advisors are not financial planners, and are simply mutual fund dealers. Many mutual fund dealers charge hefty front-end and back-end commissions. These are usually laid out as front-end, back-end, and deferred-sales-charges depending on the length of time the funds are held. Here in Canada, these fees can vary anywhere from 2% to 6% of your capital, and are paid directly to the mutual fund company and dealer. That’s money out of your pocket!

2. Hidden Fees

Second, mutual funds are also expensive with the hidden fees that are not so obvious or readily disclosed to investors. These are primarily the MER (Management Expense Ratio), with the included Trailer Fees. In Canada, these particular mutual fund fees are much higher than they are in the U.S. and Canadian investors are simply getting burned.

The Trailer Fee ( part of the MER) is paid directly to the broker as a kick-back for selling the fund. Additionally trailer fees are also paid as an ongoing benefit to mutual fund dealers, depending on the value of a fund’s holding across the dealer’s client base. These are a small percentage, nonetheless add up over time. Essentially, the longer you hold your mutual fund, the more trailer fees you are paying to your advisor.

The MER, called the Management Expense Ratio. This is an annual and ongoing fee that is charged from the fund’s income and profits, to pay for the fund’s management and administration. That also includes all the costs of marketing and promotion. According to an article in the Globe and Mail back in March 2001 by Rob Carrick, The average Canadian equity mutual fund had a whopping annual MER of 2.43%!

When you combine the MER with the included trailer fee, the average Canadian investor is likely paying around 2.5%+ annual fees to own a mutual fund. These fees are paid on top of any other front-end or back-end commissions. The real irony is that investors pay all these fees, compounding year after year, whether the fund does well or performs poorly.

3. Underperformance

While mutual funds are a win for the companies who manage them and the brokers who sell them, most Canadian investors are paying a premium for underperformance. According to the 2011 ETF Landscape Review, only 15.1% of actively managed mutual funds in the Canadian Equity category were able to outperform the S&P/TSX Composite Index according to S&P.  When you consider the large annual MER fees, trailer fees, front-end or back-end commissions mutual fund companies charge, there is simply no excuse for paying for underperformance.  

One of my favourite bloggers, MoneyCone, recently examined the underperformance issue of U.S. mutual funds in The Fund That Beat The Market 9 Times Since 1999.

Award winning author Andrew Hallam, also covered the pitfalls of the mutual fund industry in depth, in his bestselling book [easyazon-link asin=”0470830069″]Millionaire Teacher[/easyazon-link]. According to his research, Canadians are at the last spot at 18 out of 18, paying the highest mutual fund fees in the entire world! (Millionaire Teacher, pg.54). Andrew quotes the fund fees that Canadians are paying at around 3.0%, compared to U.S. mutual fund fees of around 1.5%. I interviewed Andrew back in June 2011, before his book was officially published across North America, in The Millionaire Teacher.  If you are currently investing in mutual funds, and think you are doing fine, then I urge you to get a copy of Andrew’s book – you will be glad you did. 😉

Conclusion

In this day and age of low-cost ETFs (Exchange Traded Funds) and low cost Index Funds, paying a premium for underperformance with actively managed mutual funds just doesn’t make for good returns.  Actively managed mutual funds in Canada not only underperform and under-deliver, they cost a lot too!  Although U.S. investors pay at least half of what Canadians do, actively managed mutual funds still diminish your returns through ongoing fees, commissions, and underperformance. You can do much better with low-cost ETFs and low-cost Index Funds. 😉

The article Why You Should Avoid Mutual Funds appeared first on The Dividend Pig

Here is a list of the ten best dividend investing books that should be on your nightstand. These are some great dividend investing books that are worth reading. Did I miss any? Which ones are your favorite dividend investing books? Did I miss the mark? Are some of these duds? I’d love to hear what you think.

Top Ten Best Dividend Investing Books

1. The Single Best Investment: Creating Wealth with Dividend Growth by Lowell Miller – This witty guide advises readers to stop playing the stock market or listening to television gurus and instead put their money into dividend-paying, moderate-growth companies that offer consistent returns and minimum risk. Citing statistics that show companies initiating and raising dividends at the fastest rate in 30 years, this analysis declares once-stodgy dividends to be “the next new thing” and provides simple rules for choosing the best stocks, using traditional evaluation tools, reinvesting dividends, comparing stocks and bonds, and building a portfolio. Technical aspects of the stock market are explained in the final pages that include two new chapters and revised statistics as well as academic studies, historic back-tests, examples of real-time performance, and a list of resources for further research.

2. Dividend Stocks For Dummies by Lawrence Carrel – Dividend Stocks For Dummies gives you the expert information and advice you need to successfully add dividends to your investment portfolio, revealing how to make the most out of dividend stock investing-no matter the type of market. The book explains the nuts and bolts of dividends, values, and returns. It shows you how to effectively research companies, gauge growth and return, and the best way to manage a dividend portfolio. And, Dividend Stocks For Dummies provides strategies for increasing dividend investments.

3. The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns by Charles B. Carlson – In The Little Book of Big Dividends, dividend stock expert Chuck Carlson presents an action plan for dividend-hungry investors. You’ll learn about the pitfalls, how to find the opportunities, and will learn how to construct a portfolio that generates big, safe dividends easily through the BSD (Big, Safe Dividends) formula. If you’re a bit adventurous, Carlson has you covered, and will teach you how to find big, safe dividends in foreign stocks, preferred stocks, ETFs, real estate investment trusts, and more.

4. The Ultimate Dividend Playbook: Income, Insight and Independence for Today’s Investor by Josh Peters – Many people believe that the key to success in the stock market is buying low and selling high. But how many investors have the time, talent, and luck to earn consistent returns this way? In The Ultimate Dividend Playbook: Income, Insight, and Independence for Today’s Investor, Josh Peters, editor of the monthly Morningstar DividendInvestor newsletter, shows you why you don’t have to try to beat the market and how you can use dividends to capture the income and growth you seek.

5. Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market by Kelley Wright – A timely follow-up to the bestselling classic Dividends Don’t Lie. In 1988 Geraldine Weiss wrote the classic, “Dividends Don’t Lie“, which focused on the Dividend-Yield Theory as a method of producing consistent gains in the stock market. Today, the approach of using the dividend yield to identify values in blue chip stocks still outperforms most investment methods on a risk-adjusted basis. Written by Kelley Wright, Managing Editor of Investment Quality Trends, with a new Foreword by Geraldine Weiss, “Dividends Still Don’t Lie” teaches a value-based strategy to investing, one that uses a stock’s dividend yield as the primary measure of value. Rather than emphasize the price cycles of a stock, the company’s products, market strategy or other factors, this guide stresses dividend-yield patterns.

6. Get Rich with Dividends: A Proven System for Earning Double-Digit Returns by Marc Lichtenfeld – A comprehensive guide to dividend investing that shows how to obtain double-digit returns with ease. Dividends are responsible for 44% of the S&P 500′s returns over the last 80 years. Today they present an excellent opportunity, especially with investors who have been burned in the dot com and housing meltdowns, desperate for sensible and less risky ways to make their money grow. Designed to show investors how they can achieve double-digit average annualized returns over the long-term, Get Rich with Dividends: A Proven System for Earning Double-Digit Returns is the book you’ll need to get started making money in any market.

7. Dividends Don’t Lie: Finding Value in Blue-Chip Stocks by Geraldine Weiss – Investment-newsletter publisher Weiss and business journalist Lowe suggest that wealth is an all-but-sure result of investing according to recurring stock market cycles. In their technically detailed, conservative analysis, the authors recommend careful study of high grade issues with steady dividend-increase records. Investors should buy shares when the stock is undervalued in relation to dividend yield, then sell (reinvesting elsewhere) when a bullish trend drives the share price up to an overvalue level.

8. The Strategic Dividend Investor by Daniel Peris – The Strategic Dividend Investor shows you why, over the long run, investing in companies with high and rising distributions is far superior to “playing the market.” Responsible for $4.5 billion in dividend-anchored portfolios, Daniel Peris demonstrates that, for most investors, buying a stock in the hope of making a quick buck by selling it in a few weeks or months is far from the best way to create wealth. Instead, you should use the stock market as a means of receiving a share of excess profits—dividends—from corporations in which you own stock. Over time, those payments—and the growth of those payments—represent the vast majority of stock market returns.

9. The Dividend Growth Investment Strategy: How to Keep Your Retirement Income Doubling Every Five Years by Klugman Roxann – Over half of all Americans have money in the stock market, most of it in mutual funds. But most mutual funds underperform the stock market, and they are taxed. The taxes and fees destroy compounding of investments and diminish the retirement nest egg. Anne Scheiber’s method, the Dividend Growth Investment Strategy (DGIS), beats the mutual fund in returns fivefold after thirty years, though both approaches achieve 14 percent annual growth. The Dividend Growth Investment Strategy examines and compares the various investment strategies of stocks, bonds, and mutual funds and shows in hard figures why DGIS is the better investment strategy. The DGIS maximizes growth of the nest egg while producing income that doubles every five years. It also minimizes anxiety over market downturns and inflation because investors can ride the market “roller coaster” by keeping their capital growing, while riding the stock market “escalator” through dividend growth returns, all the while avoiding taxes on their dividends.

10. Income Investing Secrets: How to Receive Ever-Growing Dividend and Interest Checks, Safeguard Your Portfolio and Retire Wealthy by Richard Stooker – Learn how to make money whether the stock market goes up, down or sideways. Discover how to avoid the financial pitfalls and emotional stress of depending upon the stock market to deliver market price appreciation to you — capital gains. They come — sometimes, but they also disappear. The Dow Jones Industrial Average is now about at the high it first broke ten years ago. The buy and hold strategy requires a lot of patience these days. Income Investing Secrets advocates rewarding yourself right away with regular income from stock dividends and bond interest. It shows you the best, most dependable types of income-producing investments — and how to minimize risk.

Is there an honorable mention that should be added? What did I miss? Let me know in the comment section below!

The article Top Ten Best Dividend Investing Books You Should Be Reading appeared first on The Dividend Pig

After first learning of DGI (Dividend Growth Investing), I immediately realized this strategy was perfect for my investing goals and more importantly, my risk tolerance.

See, I’m a pretty risk averse guy and I DO NOT LIKE losing money!  Downturns in the market makes me sick.  But with with Dividend Growth Investing, your goals change.  It’s no longer about getting lucky and buying a stock right before it doubles to quickly sell.

With Dividend Growth Investing, you aren’t gambling with the hopes that a company stock price goes up. Instead, you’re investing in the company understanding that they are going to reliably pay you every year through dividends.  And, since we focus on Dividend Growth Investing, we look to invest in companies that have long histories of paying their stockholders a dividend raise every year as well.

For example, I had never heard of Nautilus Inc (NLS) before today, but their stock is up over 30% over the last month (the time of writing this).  That would be a stock that I would have been on the lookout to trade before I was introduced to Dividend Growth Investing.  However, instead of finding the Nautilus stocks of the world, I would typically find the Hydrogenics Corp (HYGS) of the market which is down a little over 11% YTD and pays no dividend.

These types of companies no longer interest me.  I’m much more interested in the $26.56 dividend AT&T (T) and $13.30 dividend General Mills (GIS) paid me this week.  My only goal is to find dividend aristocrats with a long history of uninterrupted dividend payments and buying them at fairly valued (or even better, undervalued) prices (relative to their dividend yield range).

Once again, the key is buying these dividend aristocrats at undervalued prices.  Companies have business cycles.  And, like all cycles, there are peaks and troughs. More importantly, they have high/low dividend yields ranges.

The objective is to buy these companies when they are paying a high dividend yield according to their range.  Some recent examples of some companies that are paying close to their undervalued yield range are the big boys in the Oil and Gas industry:

Chevron (CVX) and Exxonmobil (XOM)  are both huge companies with long dividend histories and huge (literally) ocean sized moats.

So why isn’t everybody doing this?  Well, a lot of people are.  At the moment, it’s not an easy task to find high quality companies with prices that are in line with the high end of their yield range (or undervalued).

This is because of the artificially low interest rate environment we’ve been in for the last six years.  The majority of the high quality stocks have been bid up to all time highs because institutional investors, foreigners, and folks like us who have have been throwing money anywhere they can find a decent yield.  But, good values do pop up, and the values will certainly avail themselves once interest rates begin to rise.

I aim to invest in companies who will pay my way through retirement with dividends.  If I’m able to pay all of my expenses with my dividends payments and never have to sell shares to raise capital, then I’m set for life.

But, the real reason of why I’m using dividend investing as the cornerstone of my early retirement plan is to diminish portfolio anxiety.  I’m no longer worried about my portfolio balance.  It’s a treat to look at my portfolio spreadsheet to see what I’m going to make this month in my reliable and predictable dividend holdings.

Are you investing in dividends? What draws you to dividend investing? We’d love to hear from you in the comment section below.

Disclaimer – long XOM, CVX, GIS & T

The article Dividend Growth Stocks – the Cornerstone of my Early Retirement Plan appeared first on The Dividend Pig