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We have reached the final weeks of 2011. At this time, the S&P500 (SPY) shows a loss of 1.1% for the year and the 10-year treasury bond yield is 1.86% (144 basis point loss for the year). It has not been a great year for stocks globally, especially with the European Credit Crisis. On a positive note, the US Congress agreed to a 2-month extension of payroll tax cuts and avoided another shutdown. Now that Christmas is upon us, it is time to look forward to the New Year!

This week I have selected 2 dividend growth stocks in the transportation industry. This is the first sector to come out of the trough of the business cycle and these stocks should perform well in 2012. My third stock selection is in the technology sector, which faces many headwinds in 2012, including the downtrend in the semiconductor cycle, flood damage in Thailand to hard drive plants, and a recession in Europe. (Data from First Call, Market Edge, Yahoo Finance, Fidelity, and David Fish's CCC charts).

  1. United Parcel Service, Inc. (UPS) --Transportation industry (Consumer Cyclical Sector). United Parcel Service, Inc., a package delivery company, provides transportation, logistics, and financial services in the United States and internationally. This company has 2 years of increasing dividends. The current yield is 2.89%*. The 5-year annual average dividend growth rate is 6.47%. The current p/e is 17.41. The projected earnings per share growth for next year is 13.21%. The projected earnings per share growth for the next 5 years is -2.3% reflecting the downturn in the business cycle. *It should be noted that the yield does not meet my minimum 4% yield for initial purchase. In addition, the p/e exceeds the earnings per share growth rate for next year. For a younger investor looking for long-term growth, this stock could be purchased at a price reflecting the current earnings per share growth rate ($63.40).
  2. Union Pacific Corporation (UNP) --Transportation industry (Consumer Cyclical Sector). Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, provides rail transportation services in North America. It has approximately 31,953 route miles linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways, and provides several corridors to Mexican gateways. This Dividend Challenger has 5 years of increasing dividends. The current yield is 2.4%*. The 5-year annual average dividend growth rate is 14.9%. The current p/e is 15.7. The projected earnings per share growth for next year is 19.3%. The projected earnings per share growth for the next 5 years is 15.5%. *It should be noted that the yield does not meet my minimum 4% yield for initial purchase. The 5-year earnings per share growth justifies the p/e and this stock is fairly valued. It would be appropriate for a long-term dividend growth stock.
  3. Intel Corporation (INTC) --Technology Sector. Intel Corporation engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. It offers microprocessor products used in notebooks, netbooks, desktops, servers, workstations and storage. This Dividend Challenger has 8 years of increasing dividends. The current yield is 3.6%*. The 5-year annual average dividend growth rate is 14.5%. The current p/e is 10.1. The projected earnings per share growth rate for next year is .84% and for the next 5 years is 23.3%. *It should be noted that the yield does not meet my minimum 4% yield for strategic purchase. The 5-year earnings per share growth more than justifies the 10.1 p/e. I will set a limit price of 4% yield (presently $21). If the dividend is increased, that price will rise to the 4% yield price.

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

(Click charts to expand)

We will now 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

UPS

$.52

133.74

$69.54

UNP

$.38

106.71

$40.55

INTC

$.181

463.6

$83.91

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 137.78 $281.20 4.04
UPS 11/09/11 $0.52 136.74 $71.11 $68.99 1.03 $9,505.10
08/18/11 $0.52 135.61 $70.52 $62.28 1.13 $8,516.44
05/12/11 $0.52 134.67 $70.03 $74.34 .94 $10,081.40
02/10/11 $0.52 133.74 $69.54 $74.77 .93 $10,069.28
Totals 108.86 $207.49 2.15
UNP 11/28/11 $0.60 108.20 $64.92 $98.53 .66 $10,725.72
08/29/11 $0.48 107.64 $51.13 $90.84 .56 $9,828.75
05/26/11 $0.48 107.14 $50.89 $103.24 .49 $11,112.31
02/24/11 $0.38 106.71 $40.55 $93.71 .43 $10,040.34
Totals 479.75 $367.34 16.15
INTC 11/03/11 $0.21 475.63 $99.88 $24.20 4.13 $11,610.05
08/03/11 $0.21 471.09 $98.93 $21.81 4.54 $10,373.42
04/04/11 $0.18 467.49 $84.62 $23.50 3.60 $11,070.64
02/03/11 $0.18 463.60 $83.91 $21.57 3.89 $10,083.76

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

UPS

$69.54

$70.03

$70.52

$71.11

UNP

$40.55

$50.89

$51.13

$64.92

INTC

$83.91

$84.62

$98.93

$99.88

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: ($69.54+$40.55+$83.91)+($70.03+$50.89+$84.62)+($70.52+$51.13+$98.93)+($71.11+$64.92+$99.88)= $856.03. On an investment of $30k, this was 2.85% yield. Although this does not meet my minimum 4% yield, the transportation stocks are more growth oriented, which can be seen from the 5-year graph of SPY vs UPS and UNP (It should be noted that UNP had 100% price gain over the 5-year period). It can be seen from the Total Portfolio chart that the ending portfolio value was $31,840.87. This computed out to a capital gain of $1840.87 or 6.13%.

When compared with SPY, the total return with dividends reinvested was 6.13% vs -1.11% for 2011. In the choppy secular bear market that we find ourselves in, preservation of capital with good income growth is desirable. In this study, only INTC and UNP showed the effects of dividend growth. UPS had just raised its dividend from $.47/quarter to $.52/quarter at the end of 2010.

Conclusion: With the coming cyclical downturn in 2013 for the United States and the global recession, led by Europe in 2012, dividend growth stocks with long histories of raising dividends and capital preservation are critical values. UNP and INTC were able to pull the entire portfolio into positive territory through price appreciation, while paying dividends over the last 5 years. I believe that INTC will increase its dividend and rise in price in 2012, even with all the headwinds and I will be adding to my position when it reaches the 4% yield point. UPS and UNP should also produce good returns in 2012. It is critical that each investor does his or her own due diligence before making any investment.



Disclosure: I am long INTC.

Source: 3 Stocks For The New Year