Wednesday, August 18, 2010

* My Top 6 Performing Dividend Stocks Just Might Surprise You

As I have stated many times, my goal is to create an ever growing income stream from dividend stocks. Secondarily, it is my desire to beat the S&P 500 over time. With that said, I rarely look at the capital performance of individual stocks. However, I recently sorted my portfolio by Total Gain % (total gain/basis) and was mildly surprised at the top performers.

It is important to note that dividends paid are not factored in the Total Gain % calculation. Therefore, the total return is actually higher than the numbers reported. The holding periods differ for each, so I have noted the purchase dates.

6. Realty Income Corp. (O) - Yield: 5.4% | Total Gain: 24.91%
Purchases: 5/2006, 11/2006, 12/2006, 2/2007, 6/2007
Realty Income Corporation engages in the acquisition and ownership of commercial retail real estate properties in United States.

5. Canadian National Railway Company (CNI) - Yield: 1.7% | Total Gain: 26.14%
Purchases: 11/2007, 7/2008
Canadian National Railway Company (CNI) operates Canada's largest railroad, linking customers in Canada, the U.S., and Mexico through approximately 20,400 miles of track.

4. Integrys Energy Group, Inc. (TEG) - Yield: 5.7% | Total Gain: 26.22%
Purchases: 11/2008, 2/2009
Integrys Energy Group, Inc., serves about 485,000 regulated electric and 1,674,000 regulated gas customers. The company also operates an unregulated retail marketing business.

3. CenturyLink, Inc. (CTL) - Yield: 8.1% | Total Gain: 27.87%
Purchases: 11/2008, 1/2009, 5/2009
CenturyLink, Inc. acquired larger telecom peer Embarq in a stock deal in July 2009. Combined, the company provides voice service to 7 million customers and Internet service to 2 million customers in both rural towns and larger cities, like Las Vegas.

2. Emerson Electric Co. (EMR) - Yield: 2.8% | Total Gain: 35.87%
Purchases: 7/2009, 10/2009
Emerson Electric Co. designs and supplies product technology and delivers engineering services and solutions to a wide range of industrial, commercial and consumer markets around the world.

1. 3M Co. (MMM) - Yield: 2.5% | Total Gain: 73.72%
Purchases: 3/2009
3M Co. is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications.

Each of these gains were a direct result of applying a value approach to dividend investing by taking advantage of opportunities when the stock is trading well below its fair value. A dividend growth and value strategy are well aligned often provide the conservative investors with a double benefit. Consider the MMM case:

I purchased MMM near its low in March 2009 at $48.88. At the time I calculated MMM's Mid-2 fair value to be $84.06 and saw no fundamental reason for the stock to be trading so low. Trading at 41% of its fair value, MMM had tremendous potential for capital gain. However, I don't purchase stocks for my income portfolio based on capital gain potential. Fortunately, the same forces providing capital gain opportunities were at work on the income side. The low price produced an eye-popping 4.25% yield on the day the stock was purchased. This was for a stock that had only yielded in the mid 2% range, on average, over the prior 10 years.

In the interest of full disclosure, I think it only fair to also mention the stocks at the other end of the spectrum. Again there were several surprises here also:

6. Harleysville Group Inc. (HGIC) - Yield: 4.6% | Total Loss: (3.39%)
Purchases: 1/2010
Harleysville Group Inc. is a regional holding company for property and casualty insurance companies that operates in 32 states, primarily in the eastern half of the U.S.

5. Eli Lilly & Co. (LLY) - Yield: 5.4% | Total Loss: (3.89%)
Purchases: 10/2008, 1/2009
Eli Lilly and Company discovers, develops, manufactures and sells prescription drugs that offers a wide range of treatments for neurological disorders, diabetes, cancer, and other conditions. The company also sells animal health products.

4. Nucor Corporation (NUE) - Yield: 3.7% | Total Loss: (4.16%)
Purchases: 10/2008, 7/2009, 11/2009
Nucor Corporation 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.

3. Johnson & Johnson (JNJ) - Yield: 3.7% | Total Loss: (5.91%)
Purchases: 2/2008, 4/2008, 6/2009, 12/2009
Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.

2. Colgate-Palmolive Co. (CL) - Yield: 2.8% | Total Loss: (8.54%)
Purchases: 5/2010
Colgate-Palmolive Company (Colgate) is a consumer products company, whose products are marketed throughout the world. Colgate’s Oral Care products include toothpaste, toothbrushes, oral rinses, dental floss and pharmaceutical products.

1. Paychex Inc. (PAYX) - Yield: 5.0% | Total Loss: (34.43%)
Purchases: 11/2007, 1/2008,
Paychex Inc. provides payroll accounting services to small- and medium-sized concerns throughout the U.S.

As noted above, Total Loss % is only measuring capital loss. With the exception of PAYX, the other stocks are well positioned for quick turnaround. LLY and NUE have a positive return when dividends are factored in. HGIC and JNJ have small negative returns as a result of the more recent purchases. CL's negative return is also result of its recent purchase. Having a portfolio where your bottom stocks' performance isn't really that bad, is one of the things I love about dividend stock investing.

Full Disclosure: Long O, CNI, TEG, CTL, EMR, MMM, HGIC, LLY, NUE, JNJ, CL, PAYX. See a list of all my income holdings here.

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