5 Dividend Champions to Work Your Money as hard as You Worked for It! - EDMP -...

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5 Dividend Champions to Work Your Money as hard as You Worked

for It!
EDMP
By Chuck Carnevale
March 17, 2011

 
You worked hard over your lifetime to build a nest egg in order to fund your retirement.
Doesn't it make sense that now that you're retired your money should work as hard for you as
you worked for it? When you were working, you were accustomed to receiving a raise in pay
each year. Why should that end now, just because you are retired? It doesn't have to,
because investors today have the good fortune and opportunity to invest in blue-chip "Dividend
Champions" (companies that have increased their dividend every year for at least 25 years)
which are trading at historically low valuations.

You Deserve a Raise Each Year!

Even though you're retired, you still deserve a raise in pay each year. However, because
you're retired, your willingness to take risk is not as high as it once was. On the other hand,
not being willing to take any risk at all, can be a very risky strategy in its own right. The
looming threat of inflation would be devastating to a fixed income portfolio. The loss of
purchasing power, with no ability to counteract it would expose you to a diminishing standard
of living. In addition to purchasing power shrinkage due to inflation, a fixed income portfolio
also faces interest rate risk. The Fed fights inflation by raising interest rates, which causes the
principal value of previously issued bonds to drop.

With interest rates at historic lows today, long-term bonds could face price drops as great as
we saw when stock prices fell during the great recession of 2008. Shorter term bonds provide
no refuge, because their rates are currently too low to provide a meaningful level of income for
the average investor's asset base. As of March 15, 2011 the following yields on treasury
bonds, the safest of all fixed income instruments, says it all. A two-year Treasury Bond
yields .55%, a five-year Treasury Bond only yields 1.86% and the 10-year Treasury Bond
yields only 3.21%. To put this in perspective, the 10-year Treasury Bond is extremely
expensive today with a price to interest ratio of 31.15 (cost of 100 divided by 3.21% = 31.15).
This high price should serve as a warning sign to investors.

Therefore, assuming a certain amount of risk is both necessary and unavoidable. The key, is
to manage the level of risk you take in an intelligent and prudent manner. Risk has many
faces, and the prudent investor understands this, and considers them all, when they attempt to
build a properly structured investment portfolio. In our way of thinking, a properly structured
investment portfolio is one that is designed to protect principal on the one hand, and
purchasing power on the other. Therefore, the well structured portfolio should contain a capital
appreciation component and an increasing income component as well. Holding low yielding
bonds to maturity may protect nominal principle, but not purchasing power.

Five Dividend Champion, Blue-chip Stalwarts - On Sale

High-quality, blue-chip, dividend paying stalwarts are an asset class that prudent income
seeking investors should carefully consider. We have chosen five which we believe possess
the quality characteristics to reduce risk, while simultaneously offering the opportunity for
above-average long-term returns, to include an increasing dividend income stream. Since our
emphasis was on safety, high-quality was not enough, each selection also had to be available
at an historically attractive valuation.

As we will illustrate, valuation risk is a major risk that is often ignored. Simply stated, we
contend that high valuation increases risk, while low valuation reduces it. But even more
importantly, the principles of valuation defy the maxim that higher returns can only be achieved
by taking higher risk. When the principles of valuation are adhered to, the lower risk assumed
with low valuation actually increases future return potential. Lower risk with higher returns is
the "Holy Grail" for prudent investors.

Selection Criteria

In order to make our list, each company had to possess the following criteria:

 
 Industry-leading enterprise, a top-five company
 Long and consistent record of earnings growth
 History of low volatility (Beta below 1)

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 Value Line highest-quality rating (A++)

 25 or more years of consecutive dividend increases (Dividend Champion)
 Debt less than 50% of capital
 Calculated double digit returns based on consensus analyst earnings
estimates
 Valuation significantly below historical norms
 Dividend yield 3% or better

Fabulous 5: Dividend Champions on Sale

Five high-quality blue chips made the cut as follows: Abbott Laboratories (ABT), Kimberly-
Clark Corp. (KMB), Sysco Corp. (SYY), PepsiCo Inc. (PEP) and Procter & Gamble Co. (PG)
Since these are all high profile companies that are well known, we will spare the reader any
long discourse on each. Instead, we will provide a short introductory description followed by
three key F.A.S.T. Graphs™. Two of our graphs will deal with a review of history; a 20-year
earnings and price correlated graph followed by the calculated historical performance. The
third graph will represent our estimated earnings and return calculator based on the consensus
analyst estimates for the next five years earnings growth rate for each company. (For those
readers desirous of a more detailed analysis, a link to a short F.A.S.T. Graphs™ Alive™ video
will be provided on each company).

There are key takeaways that each reader should focus on as they review the various F.A.S.T.
Graphs™.  When reviewing the historical earnings and price correlated graphs, note how the
marketplace has traditionally priced each of these high-quality companies significantly above
their earnings justified valuations (the orange line). But most importantly, note how earnings
have remained relatively strong even through the great recession of 2008, yet price has fallen
dramatically below historical normal valuations. Therefore, you will find that each of these
selections are currently trading at valuations that are historically low, especially considering
their long-term operating excellence.

When reviewing the historical performance associated with the earnings and price correlated
graph note the effect that beginning and ending valuation have on long-term capital
appreciation.  Otherwise notice how capital appreciation will closely correlate to earnings
growth adjusted for these valuation discrepancies. But most importantly, notice how the
dividend has increased each year in close correlation to earnings growth, regardless of stock
price volatility. Also notice that dividends are assumed paid so that the reader can ascertain
the true and specific impact and contributions that dividends provide.

Finally, when reviewing the estimated earnings and return calculator note how each of these
companies is currently at fair value or below (stock price touching or under the estimated
earnings justified valuation orange line) based on consensus analyst earnings estimates. As
you review the calculated return expectations based on the analyst estimates, consider that
the market has historically priced each of these companies higher than earnings justified
levels.  Consequently, it would be reasonable to assume that the market has typically applied a
quality premium to these high-quality stalwarts.

Abbott Laboratories (ABT): "is a broad-based global health care company devoted to the
discovery, development, manufacture and marketing of pharmaceuticals and medical products,
including nutritionals, devices and diagnostics."

(Follow this link for a short F.A.S.T. Graphs™ Alive video on Abbott Laboratories)

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Kimberly-Clark Corp. (KMB): "Kimberly-Clark and its well-known global brands are an
indispensable part of life for people in more than 150 countries. Every day, 1.3 billion people -
nearly a quarter of the world's population - trust K-C brands and the solutions they provide to
enhance their health, hygiene and well-being. With brands such as Kleenex, Scott, Huggies,
Pull-Ups, Kotex and Depend, Kimberly-Clark holds No. 1 or No. 2 share positions in more than
80 countries."

(Follow this link for a short F.A.S.T. Graphs™ Alive video on Kimberly-Clark Corp.)

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Sysco Corp. (SYY): "Sysco is the global leader in selling, marketing and distributing food
products to restaurants, healthcare and educational facilities, lodging establishments and other
customers who prepare meals away from home. Its family of products also includes equipment
and supplies for the foodservice and hospitality industries. The company operates 180
distribution facilities serving approximately 400,000 customers."

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(Follow this link for a short F.A.S.T. Graphs™ Alive video on Sysco Corp.)

PepsiCo Inc. (PEP): "PepsiCo offers the world's largest portfolio of billion-dollar food and
beverage brands, including 19 different product lines that generate more than $1 billion in
annual retail sales each. Our main businesses -- Quaker, Tropicana, Gatorade, Frito-Lay, and
Pepsi Cola -- also make hundreds of other enjoyable and wholesome foods and beverages
that are respected household names throughout the world."
(Follow this link for a short F.A.S.T. Graphs™ Alive video on PepsiCo Inc.)

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Procter & Gamble Co. (PG): "Four billion times a day, P&G brands touch the lives of people
around the world. The company has one of the strongest portfolios of trusted, quality,
leadership brands, including Pampers(R) , Tide(R) , Ariel(R) , Always(R) , Whisper (R), Pantene(R) ,
Mach3(R), Bounty(R), Dawn(R) , Gain(R), Pringles(R) , Charmin(R) , Downy(R), Lenor(R) , Iams(R),
Crest(R) , Oral-B(R) , Actonel(R) , Duracell(R), Olay (R), Head & Shoulders(R) , Wella(R), Gillette(R) ,
Braun(R) and Fusion(R) ."

(Follow this link for a short F.A.S.T. Graphs™ Alive video on Procter & Gamble Co.)

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Summary and Conclusions

We believe that the five companies covered in this article represent an unusual and rare
opportunity for investors seeking a safe and reliable growing income stream, coupled with the
potential for capital appreciation. Keep in mind that dividends come from earnings, and a
growing dividend can only result from growing earnings. Therefore, we feel it defies logic to
find these companies remaining at such attractive valuations considering the two-year rally in
the general stock markets. There are many lesser companies that do not possess the
attributes of quality and growth that these do, yet command much more lofty valuations.

In truth, there are other equities that offer a higher starting dividend yield than this group of
five.  However, we believe that prospective investors will be hard pressed to find investments
that possess the total package of the quality characteristics and growth prospects that this
group does. Since safety, or risk aversion, was a major concern of this article, we sought
dividend paying companies where their blended yield was close to, but exceeded the 3.21%
yield available from a 10-year Treasury Bond. The blended yield from an equal investment in
each of these five blue chips exceeds 3.5%, and based on the consensus of leading analysts
estimates for growth, could potentially increase at the rate of 9 3/4% per annum (average
estimated earnings growth rate). These estimates are based on these companies continuing
to trade at fair value, and does not consider the possible PE expansion if they were to return to
their historical normal valuation levels.

Therefore, we believe that these selections represent a strong foundation for further research
by investors seeking safety, capital appreciation and a growing income stream. There are
many other companies that possess most of the rigid selection criteria that this article
required.  However, other than this group of five, we found no others that met them all. Many

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were close, lacking only one or two of the criteria. Nevertheless, we encourage a
comprehensive research effort on each of these names before investments are made. But
hopefully, we have presented a sound starting point.

Long ABT, KMB, PEP, SYY, PG

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a
recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed
may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to
be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone
act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific
situation.

(c) EDMP
www.edmpinc.org

Website by the Boston Web Company

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