Wednesday, January 20, 2010

* 10 Dividend Stocks With Above Target Returns

Last week I noted that most dividend stocks are now trading in excess of their 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 a Money Market Account. The value calculated is the net present value (NPV) of the differences between the dividend earnings of this investment 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 are 10 high-rated stocks that have a NPV MMA Diff. above their target:

The Procter & Gamble Company (PG) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
NPV MMA Diff. % Above Target: 29.7% | 4 Star | Yield: 2.89% | [Analysis]

Johnson & Johnson (JNJ) engages in the manufacture and sale of various products in the health care field worldwide.
NPV MMA Diff. % Above Target: 54.2% | 4 Star | Yield: 2.99% | [Analysis]

AT&T Inc. (T) provides telephone and broadband service, and the company holds full ownership of AT&T Mobility (formerly Cingular Wireless).
NPV MMA Diff. % Above Target: 78.4% | 4 Star | Yield: 6.36% | [Analysis]

SYSCO Corporation (SYY), through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily for foodservice industry in the United States and Canada.
NPV MMA Diff. % Above Target: 20.11% | 4 Star | Yield: 3.48% | [Analysis]

Abbott Laboratories (ABT) is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products including: drugs, nutritional products, diabetes monitoring devices and diagnostics.
NPV MMA Diff. % Above Target: 83.7% | 4 Star | Yield: 2.88% | [Analysis]

Cardinal Health Inc. (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.
NPV MMA Diff. % Above Target: 218.4% | 4 Star | Yield: 2.16% | [Analysis]

RLI Corp. (RLI), based in Peoria, IL, provides selected property, casualty and surety insurance.
NPV MMA Diff. % Above Target: 401.3% | 4 Star | Yield: 2.03% | [Analysis]

Aflac Incorporated (AFL) engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
NPV MMA Diff. % Above Target: 534.6% | 4 Star | Yield: 2.19% | [Analysis]

Nucor Corporation (NUE) is engaged in the manufacture and sale of steel and steel products. As the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.
NPV MMA Diff. % Above Target: 1273.9% | 4 Star | Yield: 2.95% | [Analysis]

Becton, Dickinson and Co. (BDX) provides a wide range of medical devices and diagnostic products used in hospitals, doctors' offices, research labs, and other settings.
NPV MMA Diff. % Above Target: 345.7% | 5 Star | Yield: 1.94% | [Analysis]

Some might question 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 NUE, AFL, ABT, SYY, JNJ, PG. See a list of all my income holdings here.
(Photo: Steve Woods)

Tags: [ABT] [AFL] [BDX] [CAH] [JNJ] [NUE] [PG] [RLI] [SYY] [T]