3 Mid-Cap Stocks For The Retiree Part 3

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 |  Includes: CHD, MDY, ROST, WSO
by: Norman Tweed

<< Return to Part 2

After the eventful summer, with the Earthquake, Hurricane Irene, the recent tornadoes and the stock market pullback, it is time to look on the positive side of things here in Bumpass, Virginia. The business cycle is nearing its end for now and there is one last gasp left in it, as can be seen by the past two weeks of market uptick. Normally, I am a dividend growth investor, favoring 4% yield + 10% dividend growth rate. However, for this special occasion, I will look at total return of three mid-cap dividend growth stocks. When nearing the end of the business cycle, one must be especially careful to shift to cash with the trading portion of the portfolio when there are signs of froth. Have a target price at which you will sell the securities and don't be greedy, they all fall in the crash.

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As can be seen from the MidCap Chart, the business cycle is 6 years in length, trough to trough. Note how in 2006, there was a 1 year reprieve of topping before the crash of late 2007. By using mid-cap dividend growth stocks to play this bounce, one is able to decide that when there are signs that the crash is coming, whether to hold or sell a portion. I try to maintain 30% cash during the bottom, to buy bargains on the way back up. Thus, I only sell up to the 30% cash limit. The other alternative is to hold the stocks through the trough, which I have done. In part 2 of this series, I selected three stocks from the industrial, basic materials, and healthcare sectors. In this segment, I have selected stocks from additional sectors. (Data from First Call, Yahoo Finance and David Fish's CCC charts). The following companies are evaluated further in my Instablog .

  1. Watsco (NYSE:WSO) -- Industrial sector. This company distributes air conditioning, heating and refrigeration equipment and parts. This Dividend Contender has 10 years of increasing dividends. The current yield is 3.8%. The 5-year annual average dividend growth rate is 26.9%. The current p/e is 22.4. The projected earnings per share growth rate for next year is 17.48%. However, the 5-yr earnings per share growth is projected to be -9%, due to the ending of this business cycle.

  2. Church & Dwight (NYSE:CHD) -- Consumer Staples sector. This company makes various household products, including Arm and Hammer baking soda. This Dividend Contender has 15 years of increasing dividends. The current yield is 1.5%. The 5-year annual average dividend growth rate is 20.9%. The current p/e is 22.67. The projected earnings per share growth rate for next year is 9.63% and the 5-yr earnings per share growth is projected to be 18.1%.

  3. Ross Stores (NASDAQ:ROST) -- Consumer Cyclical sector. This Dividend Contender has 17 years of increasing dividends. The current yield is 1.12%. The 5-year annual average dividend growth rate is 25%. The current p/e is 14.8. The projected earnings per share growth rate for next year is 18.79% and the 5-yr earnings per share growth is projected to be 33.5%.

A chart comparing these three stocks over the last five years shows the cyclical nature of WSO and MDY vs. the more consistent growth of CHD and ROST.

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Although these are more growth oriented stocks, we will look at the dividend income stream for these three stocks. With equal positions of $10k each purchased 1 year ago, these stocks produced a quarterly income stream as shown in the following table:

Stock

Quarterly Dividend Rate

Number of Shares

Quarterly Income

WSO

$.52

174.30

$90.64

CHD

$.085

143.55

$12.20

ROST

$.16

179.27

$28.68

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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 (October 2010-October 2011).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur
Totals 178.88 $385.15 6.29
WSO 10/12/11 $0.57 178.88 $101.96 $59.67 1.71
07/13/11 $0.57 177.35 $101.09 $65.98 1.53
01/12/11 $0.52 175.88 $91.46 $62.16 1.47
10/13/10 $0.52 174.30 $90.64 $57.37 1.58
Totals 288.73 $110.21 2.00
CHD 08/11/11 $0.17 288.73 $49.08 $41.41 1.19
05/12/11 $0.17 144.07 $24.49 $83.05 .29
02/16/11 $0.17 143.74 $24.43 $73.05 .33
11/10/10 $0.09 143.55 $12.20 $65.89 .19
Totals 180.77 $147.65 2.02
ROST 08/31/11 $0.22 180.77 $39.77 $76.55 .52
06/03/11 $0.22 180.27 $39.66 $79.11 .50
02/16/11 $0.22 179.71 $39.54 $71.16 .56
12/03/10 $0.16 179.27 $28.68 $65.13 .44
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*It should be noted that CHD had a 2/1 split on June 2, 2011.

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. The total dividends were $385.15 + $110.21 + $147.65=$643.01. On the initial investment of $30,000 this works out to be 2.14% yield. It can be seen that this yield does not meet my minimum 4% for strategic investment in core dividend growth stocks. However, these stocks were selected for price resilience during a market crash and the total return including the reinvested dividends was (178.88* $59.67) + (288.73*$41.41) + (180.77*$76.55)=$36,468.02/$30,000=21.56%. These results have been graphed:

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(Click to enlarge)

Conclusion: It is possible to maintain capital during market crashes, while growing the income stream. If one were to miss the sell point, these stocks have historically recovered quickly from market crashes. 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 CHD, ROST.