Wednesday, November 9, 2011

2011 Dividend Machines DIVIDEND YIELD


                In this post, income investors, I will relate to you the methodology I used to select the 52 companies that met the criteria to be considered dividend machines and I will tell you what measures I will use to determine how well we did.

To review, four criteria must be met in order for a company to be profiled as a dividend machine:

1.      Must pay a dividend of at least three percent.
2.      Must earn more money as measured by EPS (earnings per share) than is paid out in dividends.
3.      Must have increased the dividend every year for at least five years.
4.      And, must have a strong balance sheet as measured by a D/E (debt to equity) ratio of less than 1 or equal to the industry standard.

My experience managing other people’s money as well as my own is that happy retirees and therefore happy clients were those whose portfolios created equal to or greater income that the client needed to live on.    That experience and my retirement from managing other people’s money, led me to the idea to write about income investing.  

The first rule of income investing is to place your investments in things that create income.  This may seem obvious, but most financial advisers work more on growth.  I concentrate on income.   I wanted to keep these posts simple and well focused so I eliminated writing about real estate for income and elected to concentrate on  the three sources of income that I found worked will for ordinary investors.   One is dividends from companies that I call dividend machines these are companies with low risk.  A second source of income used for income investors is covered call income from companies that pay a dividend and have strong balance sheets but may not meet the high hurdle of being a dividend machine.  Finally, bond interest income has been a major source of income for investors, but lately they are so expensive that the number of posts on this subject is minimal.

Keeping it simple was a goal and therefore, I approached finding dividend machines using only the four criteria listed above.  I wanted to find a new dividend machine every week.   This is based on the fact that 52 companies is good number to own for a large portfolio.    Knowing not all portfolios are large, I wanted to find companies with a large range of prices and with good diversification.  In this way, those of you with smaller portfolios have many choices. 

 I wanted to find out if we really could invest with such a simple philosophy and plan of action.  Let’s see how I did.  Between now and the end of the year, I will report to you how we did.   Here is the data I will analyze.  

1.       How much money we invested based on buying 100 shares of each of the 52 companies profiled.
2.       The buy price range.
3.       Total dividends produced per year by these 52 companies.
4.       The average dividend yield of these 52 companies.
5.       The earnings per share of these 52 companies.
6.       The average percent payout of earnings that dividends represent.
7.       Diversification by industry.
8.       Did we have any losers of 10% or greater?
9.       Did we have any winners of 10% or greater?
10.   Did any of these companies raise the dividend during the 52 weeks that I call the 2011 dividend machines?

Stay tuned and follow along.  I will resume profiling dividend machines for 2012 with the first company profiled on January 2, 2012.

Very Truly Yours,