calculated fair value. However, capital appreciation is not the primary reason for investing in dividend stocks. Dividend fundamentals are what drive my purchase decision, and if I could only look at one metric it would be the Net Present Value of the Money Market Differential (NPV MMA Diff.)
Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a less risky money market account? When I look for worthy dividend investments, one of my first tests is to determine if the investment will perform better than a MMA over time. I use the NPV MMA Diff. calculation to help make this determination.
The basis of the NPV MMA Diff. calculation is a hypothetical $1,000 investment in a dividend stock and a Money Market Account. The value calculated is the net present value (NPV) of the differences between the dividend earnings of the stock and the interest income from the MMA over 20 years. Other assumptions include: 1.) dividends grow at a consistent dividend growth rate, 2.) dividends are reinvested, 3.) share price appreciation is not considered, 4.) interest income is reinvested in the MMA. Once calculated, The NPV MMA Diff. is compared to a target amount.
The target is based on the number of consecutive years of dividend increases. The formula is: Target = Base - (Years x Increment) + Minimum where Base=3,000, Increment=100, Minimum=500. Thus 0 years yields a $3,500 target and 30 years yields a $500 target. The MMA rate is an estimate of the average rate earned over a 20 year period. This rate is periodically validated by looking at a 20 year Treasury rate. For more information on calculating the NPV MMA Diff, see the D4L-PreScreen spreadsheet.
Below is a list of 4 and 5 Star stocks that have a NPV MMA Diff. above their target and a yield at or above 2.5%:
Wal-Mart Stores, Inc. (WMT) is the largest retailer in the world, Wal-Mart operates a chain of over 10,000 discount department stores, wholesale clubs, supermarkets and supercenters. WMT is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion.
NPV MMA Diff. % Above Target: 625.8% | 5 Star | Yield: 2.5%
Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite. MSFT is a member of the S&P 500.
NPV MMA Diff. % Above Target: 155.9% | 4 Star | Yield: 2.7%
Exxon Mobil Corp. (XOM), formed through the merger of Exxon and Mobil in late 1999, is the world's largest publicly owned integrated oil company. XOM is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion.
NPV MMA Diff. % Above Target: 191.7% | 4 Star | Yield: 2.8%
Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. GPC is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion.
NPV MMA Diff. % Above Target: 34.3% | 4 Star | Yield: 2.8%
General Dynamics (GD) is the world's fourth largest military contractor and also one of the world's biggest makers of corporate jets. GD is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.
NPV MMA Diff. % Above Target: 23.4% | 4 Star | Yield: 2.9%
Occidental Petroleum Corporation (OXY) is one of the largest oil and gas companies in the U.S., OXY has global exploration and production operations. Its subsidiary, OxyChem, is one of the largest U.S. merchant marketers of chlorine and caustic soda. OXY is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.
NPV MMA Diff. % Above Target: 632.5% | 4 Star | Yield: 2.9%
Chevron Corporation (CVX) is a global integrated oil company (formerly ChevronTexaco) with interests in exploration, production, refining and marketing, and petrochemicals. CVX is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion.
NPV MMA Diff. % Above Target: 143.3% | 4 Star | Yield: 3.4%
Meredith Corp. (MDP) publishes a suite of magazines and websites focused on food, parents and women (Better Homes and Gardens) and operates 12 local TV stations. MDP is and a member of the Broad Dividend Achievers™ Index.
NPV MMA Diff. % Above Target: 565.8% | 4 Star | Yield: 3.4%
WGL Holdings Inc. (WGL) provides natural gas service in the Washington, DC, metropolitan area and surrounding regions, including Maryland and Virginia. WGL is, a member of the Broad Dividend Achievers™ Index and a Dividend Champion.
NPV MMA Diff. % Above Target: 22.6% | 4 Star | Yield: 3.9%
Some might ask, 'why not just target yields that are higher than the MMA Rate?' That ignores the most powerful concept of Dividend Income Investing - Dividend Growth. Compound interest (interest on interest) is a powerful concept, but growing, compound dividends is the income investor's most powerful ally.
Full Disclosure: Long WMT, MSFT, XOM, GPC, GD, CVX in my Dividend Growth Stock portfolio and long MDP in my High-Yield portfolio. See a list of all my dividend growth holdings here.
- International Diversification May Be Closer than You Think
- 10 Dividend Stocks With A 10% Yield In 10 Years
- Free Cash Flow Payout vs. Dividend Payout
- 9 Dividend Stocks Trading at a Double-Digit Discount
- 6 High-Dividend, Low P/E Value Stocks
Tags: [WMT] [MSFT] [XOM] [GPC] [GD] [OXY] [CVX] [MDP] [WGL]
Popular Posts - Last 7 days
Presented below are my dividend stock and ETF/CEF holdings. This is not a recommendation to buy these securities. I have classified some of...
Monday, October 31, 2011 will mark my fourth full year of writing as Dividends4Life . It is hard to believe another year has passed. Like th...
Like many that came before me, I am on a journey to construct a portfolio that will provide me... Dividends 4 Life
There are income investors and Dividend Growth investors. While the distinction is rather simple, it slips past many casual observers. Inco...
Dividends are not paid with sales, earnings, EPS, EBIT or EBITDA. Instead dividends are paid with cash. As an investor, you want to pay clos...
Investing in dividend growth stocks is a long-term proposition. One of the beauties of following a dividend growth strategy is that you don...
D4L-Premium Services is designed to provide the busy dividend growth investor with a wealth of relevant information. Each week the D4L-Prem...
Linked here is a detailed quantitative analysis of Illinois Tool Works Inc. (ITW). Below are some highlights from the above linked analysis...
There is perceived safety in size . Giant corporations aren't randomly grown. Instead, they are carefully built through superior manag...
Have you ever noticed those that most vehemently attack a buy-and-hold strategy really don’t understand how the strategy works? They confus...