I’ve read a lot of comments about the potential dividend bubble for the past 12 months. Some investors are afraid to see so much money leaving bonds and money market funds to be piled into dividend paying stocks. Most investors are craving for revenue and dividend stocks are pretty much the answer to this desire… unless they continue to starve with their bonds and CDs paying less interest than I pay my kids!

But the fact remains: dividend investing is far more solid than a simple bubble created by a few retirees looking to receive a big fat check every month. While this investing strategy might look like flavor of the year since 2009, I can tell you it will continue to work out for decades to come.

Dividend Investing has Outperformed the S&P 500 Since The Very Beginning

You can do some research on the internet, the conclusion will always include the same fact: dividend growth stocks generate a better return than pure capital appreciation. In fact roughly 50% of the total stock market return comes from dividend payout. Trying to select pure growth stocks without dividends is like claiming you can ignore 50% of the stock market return in your portfolio.

But following a few case studies and buying dividend stocks for that sole reason would be a bit simplistic… even borderline stupid. It’s your money after all, are you here to make money or to gamble it on some geek studies?

Let’s dig deeper to see if there is a reason why dividend stocks are better than any others…

Dividend Payouts Require Cash Flow

By definition, a dividend is paid from a company’s after tax money. Therefore, the company must first generate sales, then earn sustainable profits, pay its taxes, save/invest for the future… and then pay dividends to its investors. There is no point of bleeding the company’s cash flow into dividends simply to please investors. Most companies paying a dividend because they make money and believe they will continue to do so in the upcoming years. Isn’t this the first reason why you would buy shares of a business in the first place: because your investment will generate positive future cash flow? A company paying dividends strongly believes in its ability to do so.

Dividend Growth Requires Profit Growth

Thinking that any stock paying a distribution is a good fit for your portfolio would be, here again, kind of ridiculous. There are multiple reasons to pay dividends besides having a sound balance sheet:

It may want to attract more investors, pushing the stock value higher.

It may be done to please a major investor who wants its money back.

The management might have overestimated their capacity to growth their business in the future.

The management might have underestimated competition.

Since picking just any stock with a dividend yield is not sound investing practice, the second step would be to pick a stock with a positive dividend growth for at least five years. You can become quite picky and require stocks with up to 25 consecutive years of dividend growth. They are called the Dividend Aristocrats.

A constant dividend growth requires, by definition, a constantly growing profit. Therefore, if you pick a company that increases its dividend payouts by 5% for the past 10, 15 or 25 years, chances are its profits are following the same trend. I’m asking you once again: wouldn’t you like to buy a company that believes whole-heartedly in its ability to generate future positive cash flows PLUS showing a strong history of profit growth? We are getting closer to what any investor would call a “perfect investment”, right?

Profit Growth Requires Sales Growth

It is true that a company could cut its costs for a few years and generate profit growth this way. This is a good solution to cut fat but management must make sure it doesn’t cut too much and jeopardize future growth.

This is why I like to combine both sales and earnings per share on the same graph. I want to make sure that both are on an uptrend. A company making more profit but showing a slowdown in sales or, worse, a decline will lift a red flag. On the other hand, a company with both sales and profits going up will definitely lead to more dividend growth in the future. This is how you can beat the market.

Here’s McDonald’s (MCD) example where sales, profits and dividends are growing while the payout ratio is decreasing (due to a bad year in 2008 where the payout ratio was much higher than previous years).

Sales Growth Requires Competitive Advantage

What’s the best reason why a company’s sales grow? The company has a competitive advantage. It can be a total leadership in its market, new innovative products, better locations, better process, strong branding, etc, etc, etc.

A company without a competitive advantage can’t really push its sales higher over several years. It will rapidly hit the ceiling and will have to cut on their costs to increase its profit. It will eventually hit them as you can’t continue to grow simply by cutting costs.

By selecting a dividend growth stock, you select a company with strong cash flows coming from increasing profits generated from more sales. Sales growth is often linked to a competitive advantage. Aren’t we drawing the picture of a perfect company for any investor by now?

Investing in Companies with Competitive Advantage is the Key in Becoming a Successful Investor

Regardless of your investment strategy, you will be investing for several years. Most investors have money allocated to investments for more than ten years. If you don’t want your face pressed up against your trading screen for the next ten years, you might want to select a more passive investing approach than day trading.

The best way to become a successful investor for the next decade is to find companies with competitive advantage. It is sometimes hard to define what kind of advantage is sustainable or not. This is why I focus on dividend growth stocks to make sure I pick businesses with all the qualities mentioned in this article.

With simple filters like dividend growth, dividend payouts, earnings per share and sales growth, you can easily find strong companies with a competitive advantage.

No need to do extensive research to know if a company is coming with “the next big thing”.

No need to hope for a homerun with your next pick; most of your stocks will be singles or doubles with dividends.

No need to track your portfolio on a daily basis, dividend investing is meant for the long term.

When you think about it, dividend stocks beat the overall market in general simply because they are rewarded by investors for their sustainable business model. A model allowing them to pay dividends for years.

A Word of Caution – Not All Dividend Stocks Were Created Equal

It’s not because a company shows strong dividend metrics that it is automatically a buy. For example, Radio Shack (RSH) was showing strong dividend metrics not so long ago and everything collapsed rapidly since their business model wasn’t a great match for today’s economy.

It is important to design a strong dividend growth model approach before picking anything from your filtered list. Don’t forget there are Dividend Traps to avoid!

Let’s jump right into the links!

1. Analyzing And Investing In Community Banks @ Barel Karsan.

2. Realty Income Corp (O) Dividend Stock Analysis @ DGS.

4. Recent Buy @ Divided Mantra.

5. How to Generate Energy Dividends Despite the Peak Oil Non-Sense @ DGI.

6. Why you need to start investing when you’re young @ Retire by 40.

7. Investing Conflicts? Understand Your Investment vs International Allocation @ The Passive Income Earner.

8.  Why Share Buybacks And Repurchase Plans Aren’t Always Great Ideas @ The Dividend Pig.

9. Should The Government Force Us To Save Money? @ IS.

10. The Summer Road Trip Edition.

Some investors sell in May and go away while others think the current rally can’t continue forever. “The stock market is high enough, there is a correction ahead”. I guess I’m one of those investors who believes strongly that the rally will continue throughout the rest of the year.

As I wrote in my article “Stock Squeeze! Look For All The Money You Can Invest in The Stock Market”, I believe we are in a perfect situation for investors:

• Money is moving from bonds to equity (pressure on the demand for stocks)
• Companies’ profits keep climbing (so you are not paying for a bubble, but for real cash)
• Share buyback programs are becoming very popular (even more pressure on the demand for stocks)
• Dividend yield is higher than the 10 yr bond yield
• Interest rates to stay put (which means it’s easier for company to manage their debts)

These are the reasons why stocks have climbed so high so far. The interesting part is they are all very true and there is no reason why stocks should slow down. While several companies are riding the wave since the beginning of the year, others are still trailing. I’ve picked 6 stocks to be good buys for the upcoming months. Five of them are part of my 2013 Best Dividend Stock portfolio showing an investment return of 19.67% and a dividend yield of 3.05% since the beginning of the year.

#1 Chevron (CVX)

Chevron’s sales growth is very interesting for a mature company operating in a mature business. The #2 player in the world for oil energy shows a very strong dividend record and its business model produces both growth and profitability year after year.

CVX shows a low P/E ratio combined with stable sales and, most importantly, constant dividend growth. If an investor is looking for a relatively safe investment and is looking for a dividend yield over 3%, CVX will quickly fall onto his radar screen. A dividend growth as stable as CVX’s is far from being ignored by dividend investors:

I guess the only reason why the stock hasn’t surged yet is the overall concern about the global economy. It is true that the barrel of oil has been stagnating for the past two years but Chevron continues to increase its dividend. Since the current payout ratio is under 30%, it is safe to think that many good dividend payouts are to come ahead.

#2 Kelloggs (K)

I like well-diversified companies that show stable growth, can you tell? After a reorganization in 2011 which affected profits, Kelloggs seems to be in a great position to meet financial analysts’ expectations in 2013. The purchase of Pringles is performing better than expected. Earnings per share are going up slowly but surely and dividend payouts are following the same path. K is another solid stock to build your core portfolio.

On May 1^st, Kelloggs, kept its membership in the “share buyback group” and announced another $1 Billion share repurchase program. Sales are expected to grow by 7% while EPS should continue increase by 5 to 7% by the end of 2013. The company is also expecting to raise its dividend by 4.5% in the third quarter of 2013.

#3 McDonald’s (MCD)

Being a dividend aristocrat, MCD has been proving to the stock market that it can continue to show constant growth even in mature markets. Their presence in emerging markets combined with the renovation of both their restaurants and their menus were key to their success.

The stock has been trailing behind the index so far this year due to relatively slow sales growth for the past twelve months (see graph). However, MCD recently announced sales up by 2.6% in May compared to previous year. McDonald’s is proud to add various meals to its menus in order to insure growth in a rough global economy.

Their main challenge remains the consumer eating habits slowly switching to healthier food but McDonald’s prime business advantage is definitely their restaurant locations. With a dividend payout ratio under 60% (currently standing at 54%), the company has a lot of room to continue increasing its dividend.

#4 Walmart (WMT)

Walmart’s dividend yield may be relatively low (2.46% as at June 10^th) but their 7 year dividend growth rate of 14.9% tells you will be earning over 3% in dividend yield on your capital soon enough. The stock has been trailing behind most dividend stocks since the beginning of the year and it is still valued at a reasonable price (P/E of 15.06).

The earnings per share, revenues and dividend increases follow accordingly maintaining a more than reasonable payout ratio of a little over 30%

In addition to a healthy business model, Walmart also has a healthy balance sheet. They are still sitting on a lot of cash and this is why WMT will contribute to this stock squeeze: it has recently announced another $15 Billion share buyback program. There is definitely more room for WMT to grow over the upcoming months.

#5 Andrew Peller (ADW.A)

For my two last picks to benefit from the current stock squeeze, I decided to check out the northern side of the border and select two Canadian companies.

Andrew Peller produces, bottles and markets wine in Canada. The best known brands and award winning labels are Peller Estates, Trius, Hillebrand, Thirty Bench, Sandhill, Copper Moon, Calona Vineyards Artists Series and Red Rooster. ADW’s main market is Western Canada and Ontario.

Awards, gains in market share and strong sales were the three characteristics for 2012 at Andrew Peller. The EPS is growing faster than the dividend payout which is always a good thing. A low P/E ratio for a company showing consistent financial metrics is definitely a good indicator.

The stock is showing a year-to-date return of 22% but it is still traded at a P/E ratio of 12.83 which is relatively low. There is definitely room for this company to continue growing… as we continue to drink more wine!

If you are looking for more Canadian stocks, I got a great deal ($50 rebate!) for the Dividend Guy Blog’s Readers to subscribe to The Successful Investor newsletter;

#6 Black Diamond Group (BDI)

Black Diamond Group rents modular structures to provide services and camps for temporary workforces and work structures. Black Diamond also offers a wide variety of oilfield accommodation equipment. Their services go from temporary offices to full-service lodges. Their slogan makes me smile: “We were HERE before HERE was HERE”. Their main market is obviously Western Canada.

Black Diamond focuses on predictable and recurring cash flows from long term projects. The company is showing high speed growth both in terms of sales and profits. It keeps a relatively high dividend growth policy at the same time as ensuring sales growth. BDI is not limited to oil sand exploitation and seeks to grow its business in the USA as well. Their fleet size is continuously increasing but its % utilization remains over 80%.

The company continues to show strong numbers with slower growth in the oil sand industry. If the demand for this product would grow, BDI will be among companies who will benefit the most.

More to Come

As of today, I’m fully invested in the stock market as I strongly believe in my stock squeeze strategy. There is definitely more room for the stock market to continue going up and breaking new records. As long as profits are climbing, there is no need to worry. What do you think about these stock picks? Do you hold any of them?

Disclaimer: I hold shares of CVX, MCD.

Lately, I was looking at my portfolio and noticed something that sucks: I bought 2 stocks right before they dropped on the market. My recent buys of McDonald’s (MCD) and Disney (DIS) were done while their stocks were near their peak and are down by 5-6% each as of this morning. Could it simply be a coincidence? Part of the answer is yes, but there is also another reason why… and this is an investing rookie mistake that I could have easily avoided…

Rookie Mistake #1: Look at the Ex-Dividend Date Before Buying a Stock

I bought MCD on May 28^th at a price of $102.15 (amount converted in Canadian dollars). Two days after, MCD hit its Ex-dividend date. The investor who holds the stock on the Ex-dividend date is the one who will receive the dividend payment. So I did buy MCD almost right before the Ex-Dividend date, this means that I will receive MCD dividend payout shortly. However, once the Ex-dividend date passes, the stock usually drops as the money that was sitting on the bank account is leaving MCD to be distributed. This adds pressure on the stock price to drop for two reasons:

#1 Investors may wait until they cash in a last dividend and then sell the stock. If you were to sell a company right before the Ex-Dividend date, you may want to wait a few more days and cash a few more dollars.

#2 Since there is less money in the company balance sheet the day after the dividend payment is made, the stock technically worth less compared to its value the day before.

Let’s take a look at what happened to the stock over the past 30 days:

Note to myself: wait until the ex-dividend date is passed to buy a stock. Since I’m not dripping MCD, I will receive cash, but my investment return on this particular stock will be shown as negative for a while.

Rookie Mistake #2: Be Blinded by a High Yield Dividend Stock

Most dividend investors select stocks to earn revenues. There is no point of building a dividend growth portfolio if you are not looking for the dividend payout, right? This is why beginner investors tend to look for the highest dividend yield possible thinking they are smart cookies to build a portfolio paying 6% dividend or even more!

If you are part of these investors, I would suggest thinking about this strategy twice: we are in a “near-zero interest rate” environment where it is almost impossible to buy quality bonds paying decent interest rates. So why do you think a company would pay a dividend over 5% in such an environment? If you can’t find a logical explanation for a company paying triple what can be found on the market, this is probably because the dividend sustainability is at stake.

Note: never trust a high yield dividend stocks, ask more questions!

Rookie Mistake #3: Focus on One Industry

Regardless of your investing strategies, you should always look to diversify your portfolio. This is true for dividend investors, ETF coach potato portfolios and even for growth traders. The problem with dividend investing is that you will tend to find the best dividend paying stocks amongst the same industries. If I take the Canadian market as an example; most dividend investors will take on three sectors: Financials (Banks, REITs, and Insurance companies), Resources (oil!) and Telecoms. This puts your portfolio at great risk as if one of these sectors runs into difficulties (there is a slowdown in the mortgage industries, China buys less resources than expected and new mobile competitors may enter the telecom market soon), your whole portfolio is at risk.

For US investors, the temptation would be to fill your portfolio with utilities which are great dividend payers with strong balance sheets. I was recently on a crusade to buy techno stocks as well as they have elevated levels of cash in their bank accounts and a will to increase dividends. This is why I bought Seagate Technologies (STX), Intel (INTC) and Apple (AAPL). I recently sold STX since I considered I had too many techno stocks in my portfolio. While these three companies are not evolving in exactly the same industries, they are all linked together in one way or another. Poor sales of PCs will affect both STX and INTC for example.

Note: Try to diversify your portfolio as much as you can. Your return over time will be more stable and you will likely earn better dividend distributions.

Rookie Mistake #4: Sit on Your Portfolio

Investors making money with their trades become often complacent about their investments and think their stocks will continue to rise forever. Some of them fall in love with companies because of a high return and while the stock stagnates or slowly drops, they look into their brokerage account to show the positive total return of the company from the goods years and find comfort.

The truth may be different; the company you bought 2, 3, 5 years ago could have been a very good investment but it is maybe time to sell it and look for other opportunities. Don’t sit and enjoy the past returns, think about the future of each stock. This is why I’m looking at my holdings quarterly to make sure my portfolio is following my dividend growth model. If a company fails to meet my basic requirements, I consider selling it in the upcoming months. I usually try to find a replacement stock to make both trades the same week.

Note: Building your portfolio is only the beginning, following your stocks and managing your investments is a continuous adventure.

Have You Made Any Rookie Mistakes?

The funny thing about investing is that you can always be susceptible of making a rookie mistake even if you have been trading for several years. I was too busy to make my trades and completely forgot about the ex-dividend date and made that rookie mistake.

Have you made any rookie mistakes with your portfolio recently?

Disclaimer: I’m hold shares of MCD, DIS, INTC, AAPL

Time to check out the dividend links:

1. Dividend Stock Analysis – Suncor Energy (SU) @ The Passive Income Earner.

2. Dividend Income Update – May 2013 @ Dividend Mantra.

3. How to Buy Your First Rental Property @ Studenomics.

4. Dividend Income Update – May 2013 @ Retire by 40.

5. Is the Dividend Craze Over? @ DGI.

6. Invest To Live @ Dividend Ladder.

7. Becton, Dickinson and Co. (BDX) Dividend Stock Analysis @ DGS.

8. Do Amazon’s ($AMZN) Grocery Plans Make Sense? @ IS.

9. Clash of the Cultures @ Barel Karsan.

10. Carnival of Financial Planning.

If I tell you that you could invest in a stock paying 19.38% in dividend yield, would you do it? RED FLAG

If I tell you this stock cut its dividend back in February 2012 and never increased it afterwards, would you invest? RED FLAG

If I tell you this company invests in Agency Securities, would you invest? Do you even know what agency securities are? RED FLAG

I have been asked by several readers in May to do some research and write about American Capital Agency Corp. Without looking at the company too much, I ran my numbers analysis to see what the company looks like. Here’s my stock analysis chart:

My first thought was: Man! The numbers are odd! No 5 year data (dividend, sales, EPS)… this means this stock wasn’t on the market for the past five years. Then, dividend growth is negative over a year. To be honest, I would have sold the stock right away without counting. But let’s continue to see what is interesting (or not) with a 19% dividend yield stock (you already know what I think of high yield dividend stocks though…).

The Price to Earnings Ratio is very low while the payout ratio is through the roof…. And the debt to capital ratio is ridiculously high…. Oh wait! This is not a stock, it’s a REIT!

This explains why the P/E ratio is low (as REITs are not as valued as stocks because of their limited growth potential). This also explains why the payout ratio is through the roof and the company is using so much leverage. American Capital Agency Corp (AGNC) is an “original” REIT per se. Instead of classically invest in commercial strips, rental properties, offices, etc like normal REITs do, AGNC invests in Agency Securities only.

What are Agency Securities?

Agency securities are securities issued by the US government agencies or its credit farm (Fannie Mae and Freddy Mac). In other words, AGNC is investing in mortgage backed asset securities (RED FLAG!!!).

I guess the positive side of this story is that mortgages are backed by USA agencies. So technically, the default risk is pretty minimal. However, the negative side of this story is the constant pressure the FED is applying on the interest rate since 2009.

We are pretty far from an interest rate rally if you want my opinion and the previous QE3 severely hit AGNC’s balance sheet. Since interest rates are at a bottom, chances are that AGNC may cut their dividend again by the end of 2013. This would be another dark red flag right there. In fact, at this point, the flag is not red anymore; we are now seeing a black Pirate flag! Hahaha!

The Math Behind This Company is Darn Complicated

I wanted to learn more about this company and how it makes money. This is when I started my research on the web, reading their financial statements (this is where I found that management who cut their dividend a year ago claims it is “strong and consistent”…ahem!), and going forward on other websites to see what has been written about it.

I found a very interesting article over at Seeking Alpha. The author wrote a simple update on the company after its Q1 update this year. The “simple” update is over 7,000 words long. It is filled with excel charts, calculations and explanations on them. While I salute the work that has been done there (I definitely don’t have the kind of skill and patience to write such an article), I was reading this piece and thinking the whole time “the stock market is filled with great buying opportunities that are so easy to understand, why bother investing in this this complicated business model??”. I guess the answer to my question is “19% of dividend yield!”. In my opinion, this should never be a good answer.

I Would Not Invest in AGNC

The stock doesn’t show growth for the past 5 years, in fact it wasn’t there 5 years ago.

The stock cut its dividend in 2012 and still shows possibilities of cutting its dividend again this year.

In a record low interest environment, doesn’t a 19% yield seem a bit fishy?

I can’t get my head around the complicated calculations to know if the company is able to sustain its dividend or not.

I don’t like mortgage back securities due to what happened back in 2008. I can’t trust something that was born from a bubble.

Well… I think it’s enough for today, isn’t it? Are there any AGNC supporters? I’d like to hear your point of view on this stock. Who’s in?

At the beginning of each month, I produce a recap of the dividend yield and ex dividend dates of the TSX 60. In addition to this recap, I decided to briefly cover the result of my Best 2013 Dividend Stock Book. This book includes 30 stock analyses (20 US and 10 CDN) for only $2.99. So far, my results are:

20 US Dividend Stocks: +19.67% (beating the index by 6.26%)

10 CDN Dividend Stocks: +6.34% (beating the index by 1.81%)

If you want to read more, just continue past the TSX 60 Dividend Yield & Ex-Dividend Date charts…

TSX 60 Dividend Yield & Ex-Dividend Date

Best 2013 Dividend Stocks Results

At the beginning of the year, I produced a list of Best dividend stocks for 2013 (click on the link to get my metrics and see the list). Out of this exhaustive list, I pulled out 30 stocks to be my “favorite” picks among these lists. They are not stock recommendations and I strongly suggest you do your own analysis and read the financial statements. This book is simply a compilation of my own stock analysis for 30 stocks that are being held in my portfolio or are on my watch list.

I’ve broken down the results per market:

Best 2013 US Dividend Stocks Results

The average portfolio is showing an amazing return of 19.67% that is 6.26% over my benchmark (VIG with 13.41%). Oh! Did I mention that my portfolio also produced 1% more in dividend yield than VIG? .

After such high returns over the first five months of the year, you may ask if there is still room in this list to make more money by the end of the year. I recently bought shares of McDonald’s (MCD) and the stock is only up by 9.48% which is below the benchmark. Since MCD has been trailing this so far this year, I think this is one of the stocks that could benefit from the present stock squeeze situation. Another interesting stock to consider from this list is Kellogg. While most food stocks jumped this year, Kellogg is another company trailing with an YTD performance of +11.09%. I’m pretty sure it can continue to grow in the upcoming months. As an example, Western Union (WU) has jumped by 10% last month after announcing strong revenue guidance for 2014.

If you want to learn more about those companies, you should buy my book for only $2.99:

Best 2013 Canadian Dividend Stocks Results

I continue to offer strong performances on both the US and Canadian stock markets. The Canadian stock list is beating its benchmark by 1.81% (6.34% vs 4.53% for XDV). BTI is now showing a 18.75% YTD return and raised its dividend back in March by 17%. I would expect a better performance of my banking stocks National Bank (NA) and Royal Bank (RY) as they both beat analyst estimates while BMO and BNS were trailing behind.

Readers, which stock is your favorite among my lists?

Summer is finally creeping up on us and it’s time to jump on some links!

1. Dividend Growth Investing And The Joy Of Doing Nothing @ Dividend Mantra.

2. Understanding Dividends vs Distribution @ The Passive Income Earner.

3. The Risks of High Yielding Investments @ Dividend Ninja.

4. How Warren Buffett made his fortune @ DGI.

5. Going For A Premium Valuation @ Dividend Ladder.

6. Time For A Fresh Look At Facebook ($FB) @ IS.

7. Automatic Data Processing Inc. (ADP) Dividend Stock Analysis @ DGS.

8. What are I Bonds and Why I’m Buying @ Retire by 40.

9. Are You Too Scared to Invest Real Money in Stocks? Try This! @ Studenomics.

10. Carnival of Personal Finance #415 – Memorial Day Edition.