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Fall has started here in Bumpass, Virginia with the corn crop being harvested (what's left of it after Hurricane Irene). The schools have restarted in trailers after the earthquake, and the weather has cooled down. Just when things were looking up, the stock market has tanked on the Federal Reserve's assessment of the economy. What should the potential retiree do now? My answer is “stay the course” by implementing the income stream reinvestment program using dividend growth stocks, diversified by Sector.

In the first two articles in this series, I detailed 6 stocks for 6 sectors of the S&P 500. You can find part 1 of the series, here, part 2 of the series can be found here. This article will list three more stocks in three different sectors.

In this installment, I have chosen the energy, healthcare and utilities sectors (Data from First Call, Yahoo Finance and David fish's CCC charts). Three stocks in this retiree's portfolio are:

  1. Chevron (CVX) – Energy sector. This Dividend Contender has 24 years of consecutive dividend increases. The current yield is 3.44%. The 5-year annual average dividend growth rate is 10.2%. The current p/e is 8.4. The projected earnings per share growth rate for next year is -2% and 3.6% annual average for the next 5 years.
  2. Abbott Laboratories (ABT) – Healthcare sector. This Dividend Champion has 39 years of consecutive dividend increases. The current yield is 3.8%. The 5-year annual average dividend growth rate is 9.7%. The current p/e is 12.1. The projected earnings per share growth rate for next year is 7.97% and 13.4% annual average for the next 5 years.
  3. Dominion Resources (D) – Utilities sector. This Dividend Challenger has 8 years of consecutive dividend increases. The current yield is 4.12%. The 5-year annual average dividend growth rate is 6.4%. The current p/e is 15. The projected earnings per share growth rate for next year is 3.49% and 7.7% for the next 5 years.

During the present market turmoil, preservation of capital is paramount. The above dividend growth stocks provide a high enough yield to place a floor under the stock price. The companies have long enough histories of earnings growth to weather this downdraft, in my opinion. The chart below (click to enlarge) comparing these three stocks over the last 5 years shows the cyclical nature of all three stocks.

However, the growing yields have kept price fluctuation in relative check since 2009. Note how CVX rebounded quickly from the crash of 2009, while ABT was cyclical but steady along the no change line, however with growing dividends. The utility D showed the greatest fluctuation, but came back to neutral by 2010 and rose above neutral, due to its perceived bond substitution.

Once again, diversification smooths out the portfolio valuation, through major market crashes.

We next focus on the income stream seen by the investor in 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:

Stock

Quarterly Dividend Rate

Number of Shares

Quarterly Income

CVX

$.78

121.24

$87.29

ABT

$.44

188.04

$82.74

D

$.46

237.92

$108.97

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 pur
Totals 124.16 $368.30 3.92
CVX 08/17/11 $0.78 124.16 $96.85 $97.68 .99
05/17/11 $0.78 123.21 $96.10 $100.41 .96
02/14/11 $0.72 122.30 $88.05 $96.95 .91
11/16/10 $0.72 121.24 $87.29 $82.48 1.06
Totals 193.17 $350.73 6.89
ABT 07/13/11 $0.48 193.17 $92.72 $52.77 1.76
04/13/11 $0.48 191.35 $91.85 $50.45 1.82
01/12/11 $0.44 189.60 $83.42 $47.58 1.75
10/13/10 $0.44 188.04 $82.74 $53.18 1.56
Totals 245.70 $468.55 10.22
D 08/24/11 $0.49 245.70 $121.13 $49.58 2.44
05/25/11 $0.49 243.16 $119.88 $47.18 2.54
03/02/11 $0.49 240.51 $118.57 $44.79 2.65
11/24/10 $0.46 237.92 $108.97 $42.03 2.59

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 ABT that with falling stock prices, the dividend stream rises more rapidly!

The total dividends were $368.30+$350.73+$468.55= $1187.58. On the initial investment of $30,000 this works out to be 3.96% 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 (dividend reinvesting) 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 their own due diligence on any investment.

Disclosure: I am long ABT, D, and I may initiate a position in CVX in the next 72 hours.

Source: Dividend Growth Stocks Perfect For Retirees - Part 3