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This article is the second in a series requested by several of my followers, especially those under 40 (U40). During this secular bear market, there is extreme choppiness with + 3% and -3% days being rather common. For the year, the market has been flat. In this past week, there was a global intervention in the banking system to prop up Europe. It was announced that the unemployment rate fell unexpectedly below 9%. It appears that the year will be positive, from a market standpoint, capped off by a Santa Clause Rally. How do you play such a market?

This year, I have deviated from my traditional buy and hold dividend growth stocks policy and have purchased cyclical stocks. Examples that I have enumerated lately have been INTC, NUE, RTN, RPM and ETN. I have used a 4% yield point for purchase and dripped the dividends. There is the possibility of cyclical trading of these stocks, but I buy and hold, dripping for the long term.

This series includes one traditional buy and drip dividend growth stock each week that I feel has merit and one high dividend growth rate stock, which I contend is better placed in a younger person's portfolio for long term dividend growth and price appreciation.

In today's article, I will look at 2 companies that should provide retirement security for investors. The first will be for the U40 crowd, while the second will be for the Over 50 (O50) crowd-- like myself. These stocks have strong fundamentals or large moats, good dividends, and provide safety of capital. (Data from First Call, Market Edge, Yahoo Finance, Fidelity , Zacks and David Fish's CCC charts).

  1. Raven Industries (NASDAQ:RAVN)--Technology Sector. Raven Industries, Inc., together with its subsidiaries, manufactures various products for industrial, agricultural, construction, and military/aerospace markets, primarily in North America. This Dividend Champion has 25 years of increasing dividends. The current yield is 1.19%*. The 5-year annual average dividend growth rate is 18.5%. The current p/e is 23.34. The projected earnings per share growth for next year is 18.3% and for the next 5 years is 13.3%. It should be noted that RAVN has just passed the $200 million sales level in 2006 and has just become a mid-cap stock with a market capitalization of $1.06B.

*It should be noted that RAVN does not meet my 4% yield point for strategic investment. This stock is being analyzed as a growth stock for younger investors to build up their portfolio through capital appreciation.

  1. Colgate-Palmolive Company (NYSE:CL)--Consumer Staples Sector. Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. It offers oral care products, including toothpaste, toothbrushes, and mouth rinses, as well as dental floss and pharmaceutical products. This Dividend Champion has 48 years of increasing dividends. The current yield is 2.54%*. The 5-year annual average dividend growth rate is 12.8%. The current p/e is 18.1. The projected earnings per share growth for next year is 9.94% and for the next 5 years is 11.9%.

    *It should be noted that this stock does not meet my minimum 4% yield point for strategic investment. I would wait to buy it until it raises the dividend and the p/e ratio comes down.

A chart comparing these two stocks over the last five years shows the cyclical nature of both stocks, when compared to SPY (S&P500 Index ETF).

We will now look at the dividend income stream for these two 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

RAVN

$.16

207.42

$33.19

CL

$.53

126.58

$67.09

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 (December 2010-December 2011).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur Total Value
Totals 210.20 $145.91 2.78
RAVN 09/28/11 $0.18 209.41 $37.69 $47.85 .79 $10,058.18
06/28/11 $0.18 208.73 $37.57 $55.17 .68 $11,553.40
03/29/11 $0.18 208.11 $37.46 $59.92 .63 $12,507.31
12/29/10 $0.16 207.42 $33.19 $48.21 .69 $10,032.91
Totals 129.99 $290.37 3.41
CL 10/21/11 $0.58 129.20 $74.93 $93.92 .80 $12,208.95
07/22/11 $0.58 128.35 $74.44 $87.62 .85 $11,320.08
04/21/11 $0.58 127.43 $73.91 $80.65 .92 $10,351.07
01/21/11 $0.53 126.58 $67.09 $79.00 .85 $10,066.91

At this point, I will add a table to illustrate the growth of dividends received and the steadily growing income over time.

Stock

Q1

Q2

Q3

Q4

RAVN

$33.19

$37.46

$37.57

$37.69

CL

$67.09

$73.91

$74.44

$74.93

In addition, I will illustrate the total value of this portfolio by quarter in the following graph:

It can be seen from the table that the income for the year was: $100.28 + $111.37 + $112.01 + $112.62= $436.28. On the initial investment of $20k, this was 2.18% yield—which does not meet my minimum 4% yield for a core dividend growth stock portfolio. However, RAVN is designed for a U40 portfolio and the capital gain is 100% over the 5 year period covered by the graph. The capital gain of this 1 year portfolio is totally due to CL, which appreciated 22% over the period. Once again, the stability of CL makes it applicable to the O50 crowd. Total ending portfolio balance was $22267.13 which was a gain over the $20k invested of $2267.13/$20000= 11.3%.

It can be seen from the 5-year cyclical chart of SPY vs these 2 stocks that they contend with a 50% market dip in different ways. The high growth rate of RAVN mutes the 40% dip of the recession and as soon as the economy starts to rebound, RAVN takes off for a 100% gain in the next 2 years. CL dips 10% and ends with a 40% gain over the 5 years.

How does RAVN grow so fast? They have been a technology driven company since they were formed in 1956 as a scientific balloon manufacturer in the space race. Starting in 2000 they went from low margin businesses, like pickup truck toppers to high tech farm equipment. Much of the post 2000 farming technology including GPS positioning of combines and tractors in field rows was developed by RAVN. They are also involved in Aerospace with their Aerostar division which launched an airship in 2005 which achieved powered flight in the stratosphere. In 2006 they announced the fifth year of consecutive record profits with a 30% per year average growth rate.

Conclusion: This is the second in a series on Retirement investing for young investors and older investors. Solid results have been obtained from large cap stocks, like CL which should anchor a retiree's portfolio. Growth in dividends last year was 18% for CL, which has driven up the price of the stock. This dividend growth was higher than the 12.2% 10-year dividend growth rate and shows a desire on the part of CL to be shareholder friendly. On the other hand, RAVN has grown in price from $2.3967 to $60 in the past 11 years for an average growth of 34% per year. The stock became cyclical in 2006 with an average around $30, but appears to be moving up again based on sales growth. I still allocate 30% of my portfolio to mid-cap stocks—like RAVN—to obtain the capital gain in addition to dividend growth. It is necessary to do your own due diligence on any investment. Diversification is especially important if one is retired. There is a premium today on high yield, as shown by the 3% 30-year treasury bond. Even a high growth stock like RAVN or AAPL are severely undervalued in the current market. It may be time to invest in a high growth dividend stock for future needs, as well as sound dividend payers, like CL. I have recommended higher yielding stocks, like T, PM and AGNC in the past, however diversification should be considered in the present secular bear market.

Source: Retirement Stocks For Under 40 And Over 50 Investors, Part 2

Additional disclosure: I may start a position in RAVN in the next 72 hours.