Shiny Fish---Not

Dividends have regained some stature over the past few years, first because dividend-paying stocks held up better during the recent bear market, and subsequently as President Bush championed a tax cut on dividend income. Additionally, with a series of corporate scandals souring investor confidence, many companies have tried to woo back investors with generous dividend hikes. Judging from the zillions of words splashed through the media regarding investing and individual companies; however, we don't think dividend investing is anywhere close to becoming a way of life. At best, it is a curiosity, and that is fine with us. As long as investors play the trading game, we are almost assured of being able to find bargains among dividend-paying companies. A perfect example of this is the definition of the word dividend itself. If you look up the word in the Microsoft dictionary(http://encarta.msn.com/dictionary_/dividend.html) you will find the first definition is bonus. That is decidedly not the first meaning in any long-established dictionary. In most dictionaries, the root of the word is described as dividere, to cut. In essence, the modern meaning of the word is unexpected bonus, ie., the peace dividend, while the ancient meaning of the word is "my cut" of the profits. In short a lot of people are walking around thinking that dividends are a bonus, while we see them with the steely-eyed focus of an accountant. The dividend is our cut--what we are due--not a shiny fish that jumped in our boat. As long as Microsoft and other modern dictionaries continue to list bonus as the first meaning of the word dividend, we are safe in our reliance on using our "cut" to value and appraise companies we own and are considering.

Sweet Idea

We have recently begun to nibble on Nestle-NSRGY, $69.59 (ADR), the Swiss food giant. Nestle is under the radar for most US investors because it is not followed by many US research firms(only two), and it's daily trading volume is relatively low. Having said this, it is a powerhouse of a company. Nestle does approximately equal business in the US, Europe, and the Far East. It is a leader in Ice Cream (Dryers and Hagen-Dazs), Candy (Lifesavers, Nestle, and Kit Kat), Pet Food (Purina and Alpo), bottled water (Perrier, San Pellegrino, Arrowhead, Calistoga), and Coffee (Taster's Choice and Nescafe). It also has holding in Alcon and L'Oreal. Nestle earns our Dividend Star status by having increased its dividend for at least the last 10 years in a row. It has a current dividend yield of just over 2%, and the dividend has grown by over 17% per year over the past 5 years. It is trading at 17X 2005 earnings, and they recently announced they will initiate a program to retire shares. Finally, it is one of the few companies in the world to earn the AAA rating for financial strength. Of particular note, our research shows it is negatively correlated to rising interest rates. That means, historically, its price has risen in periods of rising interest rates. Sweet, very sweet.

We Can Hear You Now!

We have held Verizon, the telecom co., for the past few years with little to show for it. We have done so because we believed that it was emerging as the dominant phone company in the US. It's been a tough hold because, during this time, VZ has not increased its dividend. Let's see dying industry, no dividend hikes--this sounds like the anti-Rising Dividend stock, not the real thing. We have held VZ for three reasons: 1. Telecommunication is an essential service, which is a hallmark of Rising Dividend Investing, 2. They have had massive free cash flow all along, so we knew they could have been increasing the dividend if they had wanted to. 3. Point 2 usually does not carry much weight with us, but in the case of VZ, they were using the cash flow to pay down debt, which we think is a good proxy for a dividend hike. This past week, VZ announced a 5.2% increase, their first such increase since 1997. With their debt now almost half what it was just a few years ago, we believe more dividend hikes are coming. With its current dividend yield of 4.4% and the 5.2% hike, it will post a dividend return for the coming year of 9.6%. We wouldn't be surprised if the total return for the stock did the same.

Of Interest Rates and Dividends

We are continually asked if rising dividend stocks are more sensitive to rising interest rates than growth stocks. This is a good question for the times at hand because, as we have made clear elsewhere, we believe interest rates will trend higher in the coming year. The short answer is all securities are impacted by rising interest rates, at some level, because interest rates are in the denominator of all valuations formulas. But having said that, a good rule of thumb is that rising dividend stocks with higher than average yield and slow dividend growth (utilities and some REITs) are very sensitive to increases in long-term interest rates, while lower yielding, higher dividend growth stocks (ie, Johnson&Johnson and Procter and Gamble) are less sensitive to rising interest rates. The latter group, indeed, in many cases, have a negative correlation to rising interest rates--meaning that rising rates actually benefit them. This relative insensitivity to interest rates is one reason health-care, household products, packaged food, and some retail companies are considered to be "defensive" stocks. We have been adding companies from these sectors to our Rising Dividend Portfolio. We are seeing some shift to these kinds of companies in recent weeks. We believe there is more to come.

Coke OK

Coca Cola reared its tired old head and reported better-than-expected earnings this week, which lifted the stock almost 3%. Sales were a bit soft, but the good earnings were a welcome sight for the sore eyes that have watched Coke's demise over the last four years. Coke also announced a 12% hike in their dividend. The hike got very little news, but we think the dividend action is more important than the earnings report. Coke has been showing modestly improving earnings and dividends for the last year or so. But Coke has a history of painting their earnings, so the good earnings alone would not be all that impressive to us. The fact that they increased the dividend in line with earnings growth and at a higher rate than they did a year ago, gives us just the hint that Coke may, indeed, be turning it around. We have said that before and been wrong. This time the atmosphere surrounding the earnings report was much more upbeat than any for a long time. Coke is very cheap and a fallen angel on Wall Street. If they can put together a few more quarters of good sales and earnings, we suspect the Wall Street crowd who abandoned KO will come roaring back. We guess $50 per share is pretty easy pickings. We have said that before too. Hang in there!

Dividend Star

We believe that in the case of many companies -- so goes the dividend, so goes the stock. This is an easy thing to say, but it flies in the face of the efficient market theory crowd who believe that it is impossible to predict stock prices. They hold that, while it may be said that stocks in general will grow 9-10% per year, it is not possible to ascertain the value of any particular stock. We think that is balderdash, what ever that means. Johnson and Johnson (JNJ) is a good example of what we call a dividend star. They have paid a dividend every year since 1944. They have increased their dividend for 40 consecutive years. JNJ's 10-year compounded dividend growth rate is 15%, their 5-year growth rate is 15.4%. Over the past 18 years, the stability of JNJ's dividend has been approximately 90%. During the same time, the correlation between its price and dividend has been 93%. JNJ is uniquely a company that from a historical perspective we can say, so goes the dividend, so goes the stock. As of 2/7/2005, our dividend model indicates the fair value of JNJ is approximately $75. JNJ is currently trading at $65. You do the math.

S&P 500 and Dow Jones 30 Dividend Growth

The figures for dividend growth of the major indices for the calendar year are now finalized and the data is very interesting. Dividend growth for the average stock in the S&P 500 in the past year was 10.02%. That was a big improvement over the 5-year and 10-year averages of 5.9% and 7.2%, but we still cannot claim, from a cash flow perspective, that investors are getting their money's worth, because during this same time, earnings grew by 24%, 7.3%, and 10.3%. Dividend investors fared better in the Dow Jones 30 stocks, where 1,5, and 10-year dividend growth was 14.7%, 11.9%, and 11.1%, respectively. There have been some big headlines about dividend increases and special payouts, such as Microsoft's $3.00 per share payment, but the Rising Dividend Investor believes dividends are still being ignored by the majority of companies. We are asked all the time what we think about the fact that dividends are really catching on? We respond by saying that dividends are getting more news, but we are not convinced that dividends are becoming a way of life at many companies. We believe, in many cases, dividends are still just a way for companies to throw us a bone, when what we really want and deserve is for them to tie their dividend to their expected trend of free cash flow growth. Companies have strategic plans and sales and earnings projections; we want more companies to make a public dividend projection. Then, we've got something to work with. At present we can count only a handful of companies that have made such a bold pronouncement. We will be talking about them in the weeks ahead.