Our Dividend Income Paycheck - Part 3

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Includes: GIS
by: Bob Wells

In Part One of this series I presented the core 40 stocks that make up our monthly dividend income paycheck. In Part Two, I presented the additional 10 stocks that helped to boost our yield until we could move cash from my wife's 401K into Dividend Growth stocks. We are aiming to have this completed by the end of the year. Our goal is to have our "buy and monitor" portfolio of 50 Dividend Growth stocks in place to start 2013.

Since we have a business plan for our portfolio that set our standards for both the purchase and sell of any stock in our portfolio, we feel confident moving forward.

At the end of Part Two of this series, I reached out for assistance in determining what Dividend Growth stocks readers recommended for purchase today at today's prices and values.

I was overwhelmed at the response we received. I can assure you, your responses added much to my education as well as a lot of work moving forward. Well over 50 stocks were offered up for our consideration. While all had merit and were worthy candidates for our due diligence few made it to our formal watch list. Some were passed over for yield. Any stocks not yielding 3% was not considered. Others lacked consistency in dividend payout or had suffered dividend cuts in the past ten years. Others had high betas and had suffered losses great than the S&P back in 2008.

I spent hours on this important project. First I checked to see whether the stock was included as a Dividend Champion, Challenger or Contender commonly referred to around here as a CCC stock. Next I back tested for solid safe performance between the years 2002 - 2011. I used Fast Graphs, Morningstar, S&P and Merrill to help determine whether the stocks under consideration were fairly valued.

At the same time, comments on the article continued to come in. Among those comments was my first exposure to chowder's "12 percent Rule". I have since applied this rule to each stock we are considering.

Now by now most of you are familiar with chowder and his sidekick Percy. Chowder is a regular contributor here at Seeking Alpha and a strong advocate for a portfolio that blends yield from safe and solid companies with an equal measure of consistent growth in the dividends produced. He recommends that folks consider "The 12% Rule" when evaluating a Dividend Growth stock. As part of due diligence, consider stocks where the yield plus average 5 year Dividend Growth Rate (DGR) equals 12%.

Let's apply this rule to one of the stocks we are currently considering, General Mills (NYSE:GIS). GIS currently yields 3.4% and enjoys a 5 year Dividend Growth Rate of 11.4%. When we add them up they total 14.8%. Since this is a number greater than 12%, General Mills qualifies under this standard. Fast Graphs shows it fairly valued with a PE below its historical norm. It is a buy from Morningstar, S&P and Merrill. We added this solid stock to our portfolio yesterday morning.

Here's a chart of some of your suggestions currently on our watch list:

Stock

Ticker

Yield %

5-Year

DGR

%

"12 % Rule"

Notes

Clorox

CLX

3.6

14.7

18.3

General Dynamics

GD

3.2

15.5

18.7

Owen & Minor

OMI

3.1

14.9

18.0

Alliance Resource Partner

ARLP

7.3

13.6

20.9

Meredith Corp.

MDP

4.4

12.4

17.0

Air Products and Chem.

APD

3.2

10.7

13.9

Buckeye Partners LP

BPL

7.95

5.9

13.8

MLP

Click to enlarge

Well, that's it for now. Please continue to share your ideas and suggestions for our income stream portfolio. Finally, a special thanks goes out to chowder for all of his assistance as we continue to put our retirement portfolio in place.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CLX, APD, GD, MDP, OMI, ARLP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: I am not a professional investment advisor or financial analyst. You need to do your own research and due diligence before you decide to trade any securities or other products.