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This is part VII of the dividend champion series. In Part VI we looked at four companies that consecutively increased their dividends for 35 years or more - all but a select few can ever hope to join this prestigious club. Dividend investors generally hold for the long haul and thus the best time to deploy large amounts of money is when the market experiences a strong pull back. If you want to lock in substantial gains, you will have to be patient and wait for these strong pull backs before deploying large chunks of fresh money.

Another technique that can be used to lower your entry price is to sell covered calls; the premium you earn lowers your net per share cost. Another good technique is to sell naked put options. This technique should only be used if you are bullish on the stock and have the money to purchase the shares if they trade below your strike price. The trick is to sell out of the money puts. If the stock does not trade below the strike price, then you will walk away with the premium. If it does trade below, you get to buy the stock you wanted to buy but at a much lower cost.

Here is an example. If you sold the Wells Fargo (NYSE:WFC) April 2012 25 put for 1.30 and the stock trades below 25 on the last trading day, then you will be assigned the shares at 25. Your net cost though would be 23.70 (25-1.30). This technique works great on stocks with a high beta as you are able to charge significantly higher premiums.

Our favorite play is Procter & Gamble (NYSE:PG). It has been paying dividends for over 120 years, has consecutively increased its dividends for 58 years, it has a decent revenue growth rate of 8.9%, a ROE of 19.23%, a very decent five-year dividend growth rate of 11.21% and a total return for the past three of 18.5%. Lastly, it sports a solid levered free cash flow rate of $7.66 billion. The only negative is that net income for the past two years has been dropping, but it generates so much cash that it should have no problem making its dividend payments for years to come.

Three other noteworthy players are Pfizer Inc ( (NYSE:PFE), Halliburton Company (NYSE:HAL) and Wells Fargo & Co which have yields of 3.7%, 1.1% and 1.9%, respectively.

Pfizer has been paying dividends since 1901, has increased them consecutively for 44 years, has a three-year total return of roughly 36.23%, a five-year dividend average of 4.9%, a quarterly earnings growth rate of 300%, a quarterly revenue growth rate of 7.5%, a ROE of 11.5%, and a very large levered free cash flow rate of $17.06 billion.

Pfizer Inc per share data

Pfizer Inc valuation ratios

  1. Earnings 1.45
  2. Sales 8.88
  3. Cash Flow 2.62
  1. Price Earnings 14.90
  2. Price/Sales 2.44
  3. Price/Book 1.85
  4. Price/Cash Flow 8.30

Halliburton has been paying dividends since 1947, has a three-year total return of 103%, a quarterly earnings growth rate of 25%, a quarterly revenue growth rate of 40%, a ROE of 24.5%, and a levered free cash flow rate of $ 538 million. It also has a price to tangible book of 2.83, price to cash flow of 8.10, and a five year EPS growth rate of -2.34. Net income for the past three years is as follows. 2008 $1.53 billion, 2009 $1.14 billion and in 2010, it jumped to $1.83 billion. For 2011, net income so far stands at roughly $1.93 billion.

Wells Fargo has been paying dividends since 1939, has a three-year total return of 3.65%, a quarterly earnings growth rate of 21%, a quarterly revenue growth rate of 2.2%, a ROE of 11.74%, and a profit margin of 28.3%.

Wells Fargo also sports the following ratios: Price to tangible book of 1.53, price to cash flow of 9.70, price to free cash flow of 4.10 and a five-year sales growth rate of 20.3. Net income for the past three years is as follows: 2008 $2.65 billion, in 2009 it experienced a massive spike up to $12.2 billion and in 2010, it remained virtually unchanged at $12.3 billion. For 2011, net income so far stands at $12.1 billion.

We also provided enterprise values and levered free cash flow rates. The enterprise value is a combination of the market cap, debt, minority interests, preferred shares less total cash and cash equivalents. This provides a better picture because it is a more accurate representation of a company's value in contrast to simply looking at the market cap. Free levered cash flow rates provide investors with a better picture of the company's ability to generate cash in contrast to EPS.

Earnings can be manipulated through the use of accounting gimmicks, but it's much harder to fake cash flow. Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa. Traders seeking higher yields with slightly higher risks might find the following article of interest: 4 MLPs Offering Excellent Yields, where several MLPS with yields as high as 9.2% are examined.

Stock

Yield

Market Cap

Forward PE

EBITDA

Quarterly revenue growth

Beta

Revenue

Cash flow

Consecutive Dividend

Increases

PG

3.10

183B

14

18.5B

8.9

0.5

84.3B

12.95B

58

MO

5.5

60.9B

13

6.76B

-3.0

0.34

16.4B

3.61B

46

JNJ

3.5%

179B

12

19.4B

6.8%

0.55

64.4B

14.6B

49

T

5.8

179B

15

39.0B

-0.3

0.55

125.5B

36.7B

28

Procter & Gamble Co. (PG)

It has an enterprise value of $215 billion, a quarterly revenue growth rate of 8.9%, a ROE of 18.23%, a five-year dividend growth rate of 11.21.%, a five-year dividend average of 2.6%, a total three-year return of 18.5% and has been paying dividends since 1891. It has a levered free cash flow rate of $7.66 billion.

Net income for the past three years is as follows: In 2008, it came in at $13.4 billion, in 2009 dropped to $12.7 billion and in 2010, it dropped even more to $11.79 billion. Net income for 2011 so far stands at $8.4 billion. Unless the income for the next quarter is above $3.4 billion, net income will drop for three years in a row.

  1. Price to sales 2.18
  2. Price to tangible book -7.68
  3. Price to cash flow 12.70
  4. Price to free cash flow 54.00
  5. 5 year sales growth 1.91%
  6. Inventory turnover 5.10
  7. Asset turnover 0.60

  1. ROE 18.23%
  2. Return on assets 7.24%
  3. 200 day moving average $63.47
  4. Total debt $33.8B
  5. Book value $23.27
  6. Dividend yield 5 year Average 2.60%
  7. Dividend rate $2.10
  8. Payout ratio 52%
  9. Dividend growth rate five-year average 11.21%
  10. Consecutive dividend increases 58 years
  11. Paying dividends since 1891
  12. Total return last 3 years 18.5%
  13. Total return last 5 years 17.3%

Altria Group Inc ( (NYSE:MO)

It has an enterprise value of $71.5 billion, a quarterly revenue growth rate of -3.0%, a ROE of 72%, a five-year dividend growth rate of -11.%, a five-year dividend average of 8.4%, a total three-year return of 121% and has been paying dividends since 1928. It has a levered free cash flow rate of $4.66 billion.

Net income for the past three years is as follows: In 2008, it came in at $4.93 billion, in 2009 dropped to $3.2 billion and in 2010, it moved up to $3.9 billion. Net income for 2011 so far stands at $2.5 billion.

  1. Price to sales 3.72
  2. Price to tangible book -4.74
  3. Price to cash flow 16.40
  4. Price to free cash flow 196.70
  5. Five-year sales growth -25%
  6. Inventory turnover 4.50
  7. Asset turnover 0.40

  1. ROE 72.12%
  2. Return on assets 10.94%
  3. 200 day moving average $27.14
  4. Total debt $13.69B
  5. Book value $2.15
  6. Dividend yield five-year average 8.4%
  7. Dividend rate $2.28
  8. Payout ratio 94%
  9. Dividend growth rate 5 year average -11.3%
  10. Consecutive dividend increases 46 years
  11. Paying dividends since 1928
  12. Total return last 3 years 121%
  13. Total return last 5 years 81%

Johnson & Johnson (NYSE:JNJ)

It has an enterprise value of $179 billion, a quarterly revenue growth rate of 6.8%, a ROE of 19.8%, a five-year dividend growth rate of 9.13%, a five-year dividend average of 3.0%, a total three-year return of 21% and has been paying dividends since 1944. It has a levered free cash flow rate of $10.74 billion.

Net income for the past three years is as follows: In 2008, it came in at $12.9 billion, in 2009 it dropped slightly to $12.2 billion and in 2010, it moved up slightly to $13.3 billion. Net income for 2011 so far stands at $9.3 billion.

  1. Price to sales 2.78
  2. Price to tangible book 6.57
  3. Price to cash flow 12.40
  4. Price to free cash flow 52.70
  5. 5 year sales growth 3.03%
  6. Inventory turnover 2.90
  7. Asset turnover 0.60

  1. ROE 19.18%
  2. Return on assets 9.75%
  3. 200 day moving average $64.69
  4. Total debt $18.36B
  5. Book value $22.52
  6. Dividend yield five-year average 3.0%
  7. Dividend rate $2.28
  8. Payout ratio 54%
  9. Dividend growth rate five-year average 9.13%
  10. Consecutive dividend increases 49 years
  11. Paying dividends since 1944
  12. Total return last 3 years 21%
  13. Total return last 5 years 14%

AT&T Inc (NYSE:T)

It has an enterprise value of $236 billion, a quarterly revenue growth rate of -0.3%, a ROE of 10.54%, a five-year dividend growth rate of 5.35%, a five-year dividend average of 5.2%, a total three-year return of 25% and has been paying dividends since 1881. It has a levered free cash flow rate of $8.3 billion.

Net income for the past three years is as follows: In 2008, it came in at $12.1 billion, in 2009 net income remained virtually unchanged and came in at $12.8 billion and in 2010, it jumped to $19.8 billion. Net income for 2011 so far stands at $10.6 billion.

  1. Price to sales 1.43
  2. Price to tangible book -9.46
  3. Price to cash flow 5.90
  4. Price to free cash flow 41.80
  5. Five-year sales growth 12.59%
  6. Inventory turnover N/A
  7. Asset turnover 0.50

  1. ROE 10.54%
  2. Return on assets 4.64%
  3. 200 day moving average $29.21
  4. Total debt $71.23B
  5. Book value $19.17
  6. Dividend yield five-year average 5.2%
  7. Dividend rate $1.76
  8. Payout ratio 87%
  9. Dividend growth rate five-year average 5.35%
  10. Consecutive dividend increases 28 years
  11. Paying dividends since 1881
  12. Total return last 3 years 25%
  13. Total return last 5 years 7.3%

Conclusion

The most successful dividend investors wait for strong pullbacks before committing large sums of money to the market. The charts are clearly indicating that the market is very unstable and that a large correction could be in the works in the near future. The Dow could trade below its Oct 2011 lows. Many of our recent predictions regarding the market have come to pass. On the 16th we made the following comments:

On a short-term basis, the Dow has put in a bottom and is getting ready to challenge the 12,000 ranges again. However, there is a chance that the recent lows could be tested before the rally gathers steam. Going out a little further, the cycles suggest that the Dow should be able to rally until early next year and there is a fairly good chance that the Dow could trade to the 12,800 range and the and the SPX could trade to the 1305-1330 plus range with the possibility of mounting an intra-day spike to the 1340 range. The dollar is overbought and has generated a few sell signals on the hourly time frames, so a pullback here would help drive commodities and the general market higher.

In a recent article that was written on the 26th but published on the 27th of December, we made the following comments:

Going forward, we think that the markets could put in a short term top around the 27-29th of this month. The pullback should provide traders with a good opportunity to open up long positions.

While we still feel that the SPX could trade to the 1300-1320 ranges, our advice to long term traders would be to sit on the sidelines waiting for opportune moments to present themselves before deploying large sums of money into this market. Fixed income investors can hedge themselves to some degree by selling covered calls. A more aggressive option would be to purchase long term puts to hedge your portfolio against a potentially strong sell off.

All charts were supplied by dividata.com.

Source: Dividend Champs With Records Of Consecutive Dividend Increases

Additional disclosure: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details, do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.