The summer of 2011 has been particularly rough here in Bumpass, Virginia. We suffered a 5.8 magnitude earthquake—which shut down the schools due to structural damage, followed by Hurricane Irene. There are many unknown risks that we face everyday. Why have a risky portfolio of stocks for your retirement?
Once you are retired, you must live with the income stream that you have developed over a lifetime of working. With the marvelous data available today on the Internet, it is possible to minimize your risk, while ensuring a vibrant income stream produced by well selected dividend growth stocks. In the first article in this series, I listed three stocks in three of the S&P 500's 10 Sectors. This article will list three more in different sectors.
In this installment, I have chosen the consumer discretionary, basic materials, and consumer staples sectors (Data from First Call, Yahoo Finance and David Fish's CCC charts) . Three stocks in this retiree's portfolio are:
Mcdonalds (NYSE:MCD) – Consumer Discretionary sector. This Dividend Champion has 34 years of consecutive dividend increases. The current yield is 2.8%. The 5-year annual average dividend growth rate is 27.5%. The current p/e is 17.55. The projected earnings per share growth rate for next year is 10% and 15.7% annual average for the next 5 years.
NuCor (NYSE:NUE) – Basic Materials sector. This Dividend Champion has 38 years of consecutive dividend increases. The current yield is 4.16%. The 5-year annual average dividend growth rate is 36.9%. The current p/e is 22.99. The projected earnings per share growth rate for next year is 34.73%, but negative for the next 5 years, due to the coming end of the business cycle.
Procter & Gamble (NYSE:PG) – Consumer Staples sector. This Dividend Champion has 55 years of consecutive dividend increases. The current yield is 3.37%. The 5-year annual average dividend growth rate is 11.6%. The current p/e is 15.7. The projected earnings per share growth rate for next year is 7.09% and 6.7% for the next 5 years.
During the present market turmoil, preservation of capital is paramount. The above dividend growth stocks provide a margin of safety through high dividend growth rate and above average yield. The companies have long enough histories of earnings growth to be resilient during the coming end of this business cycle. A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks. Note how MCD paid no attention to the great recession and kept rising in price, while increasing the dividend each year. PG was flat, but NUE was very volatile, dropping nearly 50% in late 2008 from its rapid rise earlier in that year (this was the time of $147 oil and subsequent crash).
The lesson to be learned from this graph is the necessity of diversification for more constant returns.
(Click charts to enlarge)
However, what did the investor see from a dividend income stream for these stocks. With equal positions of $10k each purchased 1 year ago, these stocks will produce a quarterly income stream as shown in the following table:
Quarterly Dividend Rate
Number of Shares
In order to investigate the growth of the portfolio, due to dividend reinvestment, I will once again create a spreadsheet for only the last year (September 2010-September 2011).
|Stock||Date of reinvest||Div Rate||# Shares||Dividend||Drip price||# Shares purchased|
The Spreadsheet shows the growing income stream for the four quarters under the heading Dividend. It can be seen from the totals at the top of each column that the dividend stream was rising for each stock, each quarter. It can also be seen, especially with NUE that with falling stock prices, the dividend stream rises more rapidly! The total dividends were $330.47+373.86+333.47=$1037.8. On the initial investment of $30,000 this works out to be 3.46% yield. It can be seen that this yield does not meet my 4% minimum yield for strategic investment. However, these stocks were selected at a time when my minimum yield for purchase was 3.5%. These results have been graphed:Click to enlarge
Conclusion: It is possible to save for retirement or college through drip investing. The yield on selected dividend growth stocks with long records of increasing dividends provides safety of principal while compounding dividends each quarter. These three stocks were selected with safety of principal in mind, during a time of global financial turmoil. It is critical that one does one's own due diligence on any investment.