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The new year is shaping up to be volatile, especially with the European debt crisis continuing. The weather has been warmer than usual in January, here in Bumpass, Virginia and the modular high school has been completed—now the earthquake displaced high school students can go back to 5 day per week classes. There appears to be growing demand for freight, both on railroads and by truck. Although it is a slow pickup for the economy, it is picking up. Therefore, I will present 3 more stocks in the consumer cyclical sector this week. The consumer cyclicals are the first sector to revive after the business cycle downturn. Auto parts stocks take advantage of pent up demand caused by postponement of maintenance during the bottom of the business cycle. (Data from Yahoo Finance, and David Fish's CCC charts).

It is important to have a plan for your retirement, even when you are young. If one starts in their 20's, it is possible to accumulate a solid retirement portfolio by the time you are ready to retire. An additional benefit of starting at a young age is the choices of stocks that you are presented. If one waits until they are in their 40s, the dividend growth field is restricted to higher yielding stocks. Dividend growth rate becomes less and less important with each passing year. Now that I have been retired for 12 years, I look at 4% minimum yield and have begun buying higher yielding securities, because I need the income immediately. Dividend growth rate becomes an inflation hedge and yield has become a crucial metric. If one has several decades to grow the dividend and the capital, a lower initial yield coupled with a high dividend growth rate is feasible.

  1. CLARCOR (NYSE:CLC) -- Consumer Cyclical Sector. CLARCOR Inc. and its subsidiaries provide filtration products, filtration systems and services, and consumer and industrial packaging products worldwide. This Dividend Champion has 47 years of increasing dividends. The current yield is .93%*. The 5-year dividend growth rate is 9.6%, while last year's dividend growth rate was 9.4%. The current p/e is 22.74. The projected earnings per share growth rate for next year is 11.4%, while for the next 5-years it is 14.3%. *It should be noted that the yield does not meet my 4% minimum for initial investment. A younger investor can count on the long history of raising dividends to assure them that the dividend growth should be maintained.

  2. Genuine Parts Company (NYSE:GPC) -- Consumer Cyclical Sector. Genuine Parts Company distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. This Dividend Champion has 55 years of increasing dividends. The current yield is 2.81%*. The 5-year dividend growth rate is 6.3%, while the dividend growth rate last year was 10.4%. The current p/e is 18.45. The projected earnings per share growth rate for next year is 11.5%, while for the next 5-years it is 8.9%. *It should be noted that the yield does not meet my 4% minimum for initial investment. A younger investor can count on the long history of raising dividends to assure them that the dividend growth should be maintained.

  3. Munroe Muffler Brake (NASDAQ:MNRO) -- Consumer Cyclical Sector. Monro Muffler Brake, Inc. provides automotive under car repair and tire services. The company offers a range of services on passenger cars, light trucks, and vans for brakes; mufflers and exhaust systems; and steering, drive train, suspension, and wheel alignment. This Dividend Challenger has 7 years of increasing dividends. The current yield is .9%*. The 5-year dividend growth rate is 26.1%, while last year's dividend growth was 37.8%. The current p/e is 25.55. The projected earnings per share growth rate for next year is 16.4%, while for the next 5 -years it is 21.8%. *It should be noted that the yield does not meet my 4% minimum for initial investment. A younger investor can count on the long history of raising dividends to assure them that the dividend growth should be maintained.

A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks, when compared to SPY (S&P500 Index ETF). It should be noted that MNRO was quick to recover from the Great Recession and appreciated 150% over the last 5 years.


(Click to enlarge)

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

CLC

$.11

230.2

$24.17

GPC

$.45

189.57

$85.31

MNRO

$.08

310.07

$24.81

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 232.44 $100.50 2.24
CLC 10/06/11 $0.12 231.80 $27.82 $43.77 .64 $10,173.81
07/06/11 $0.11 231.29 $24.29 $47.75 .51 $11,068.56
04/06/11 $0.11 230.76 $24.23 $45.09 .54 $10,429.04
01/05/11 $0.11 230.20 $24.17 $43.44 .56 $10,024.06
Totals 195.97 $345.67 6.40
GPC 12/07/11 $0.45 194.50 $87.52 $59.35 1.47 $11,631.07
09/07/11 $0.45 192.89 $86.80 $53.96 1.61 $10,495.19
06/08/11 $0.45 191.19 $86.03 $50.50 1.70 $9,740.99
03/09/11 $0.45 189.57 $85.31 $52.75 1.62 $10,085.12
Totals 313.07 $105.83 3.00
MNRO 12/09/11 $0.09 312.35 $28.11 $39.22 .72 $12,278.61
09/01/11 $0.09 311.63 $28.05 $38.57 .73 $12,047.47
06/03/11 $0.08 310.84 $24.87 $31.60 .79 $9,847.38
03/04/11 $0.08 310.07 $24.81 $32.25 .77 $10,024.56

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

CLC

$24.17

$24.23

$24.29

$27.82

GPC

$85.31

$86.03

$86.80

$87.52

MNRO

$24.81

$24.87

$28.05

$28.11

Totals

$134.29

$135.13

$139.14

$143.45

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


(Click to enlarge)

It can be seen from the table that the income for the year was $552.27. On an investment of $30k, this was 1.8% yield. It can also be seen from the Total Portfolio Value chart that the ending portfolio value was $34,083.49. This computed out to a gain for $$4083.49 or 13.61%. The capital gain was due mostly to MNRO and GPC. I like to diversify a sector with several stocks and treat the whole like a mini ETF.

When compared to SPY, these auto parts stocks outperformed capital gain wise. SPY was flat for the year with 2% dividends, while these three stocks provided 13.61% capital gain. Since the dividends were reinvested, the 1.8% yield went into that capital gain.

Conclusion: The economic environment globally is sour at present. However, it appears that there is an uptick in the business cycle, both in the U.S. and the world. Financial stocks have performed well so far in 2012 and I believe the next sector in rotation (consumer cyclicals) has started to rise. Are these three stocks overpriced? From my Tweed factor*, all except for MNRO have too high a p/e ratio, not justified by dividend growth or earnings per share growth rates. None of these stocks meet my minimum 4% yield point for strategic investment. Younger investors could purchase these stocks for long term retirement savings. I would invest in MNRO first. Even at current prices, the dividend growth rate justifies the p/e. A more conservative investor should wait for a pullback to a p/e of 21.2 ($32.97), similar to September 2011. GPC has a high p/e of 18.45. Based on earnings projections for the next 5 years, I would say that a p/e closer to 8.9 would be conservative ($31.59) vs current price of $64.15. It should be noted that the price fell below $30 in 2009 and was as low as $46 in the last year. CLC would be a good value at a p/e coincident with the 5 year earnings per share growth rate 14.3 ($38) vs current price of $52.98. The stock came close to that point in the last year.

*Tweed Factor — ttm p/e< yield+5-yr dividend growth rate. This is a conservative simplified version of the PEGY ratio.

Source: Retirement Portfolio Using Dividend Reinvestment: 3 Auto Parts Stocks