Dividend Investors Rejoice: Join the "1 Check a Month" Club

With the future for Social Security looking bleak and the days of pension plans fast dwindling, investors must use their own savings to generate income during their golden years. But two challenges income investors face these days are rock-bottom interest rates and being stuck with a cash flow schedule that's not on your schedule. So what's a Foolish investor to do?

On the battlefield of basis points
Limited options exist if you're clamoring for investment income to bridge the gap between what comes in each month -- Social Security and (maybe) a pension -- and what is spent. Here's what options look like these days for a 10-year, $100,000 income investment.

Investment

Current Yield

Interest Received Over 10 Years

Value in 10 Years

Treasury bill 1.72% $17,200 $100,000
Investment-grade bond 3.52% $35,200 $100,000
High-yield bond 7.07% $70,700 $100,000

Source: New York Times, Bloomberg.

Of course, an advantage with bonds is you invest $100,000 and -- at best -- your $100,000 is returned to you at maturity. The disadvantage: You receive not a penny more.

Don't fret
We receive our retirement income monthly and we pay our bills monthly, so why shouldn't our investments pay us the same way? One hassle-free way to achieve this is by buying a basket of rock-solid companies that pay their dividends in different months from one another.

I've harvested a basket based on the following criteria:

  • Diversified companies with strong, competitive positions -- Brand dominance or special niches help these tenacious companies sustain long-term profitability.
  • Strong yields -- Companies shelling out dividend yields at or greater than 3%.
  • Stable dividend histories -- Companies that have paid dividends for at least a decade.

Five companies that fit these criteria are listed below.

Company

Annual Dividend Yield

Dividend Payout Months

Sysco (NYSE: SYY  ) 3.7% January, April, July, October
Clorox (NYSE: CLX  ) 3.6% February, May, August, November
Applied Materials (Nasdaq: AMAT  ) 3.2% March, June, September, December
Vodafone (Nasdaq: VOD  ) 6.6% February and August
BHP Billiton (NYSE: BBL  ) 3.6% March and September

Source: Yahoo! Finance.

Collectively, this bundle of stocks is diversified across four sectors -- consumer goods, tech, telecom, and industrials -- and pays you income every month. Typically, we think of utilities and REITs for dividends, but this five-pack includes neither.

And remember that $100,000 mentioned earlier? Had it been invested a decade ago in these five stocks equally, you'd have pocketed a cool $70,000 in dividends plus $130,000 in capital appreciation on top of your original 100 G's. Of course, there's no telling what this basket will do over the next decade. But the dividends alone from these five stocks beat the pants off the S&P 500 in the same period.

Let's take a closer look at the companies.

Sysco
Sysco distributes food products and equipment to more than 400,000 customers including restaurants, schools, hotels, and hospitals. Sysco stands to benefit when discretionary spending increases as more people dine out. For the most recent quarter, sales were up nearly 6%, but earnings were down due, in part, to pension plan withdrawals. Despite this, its stock returned 9% over the past year. Sysco has increased its dividend nearly 7% annually during the past five years.

Clorox
Home to brands Glad, Brita, Burt's Bee's, Tilex, and Formula 409, 99-year old Clorox cleans up nicely with a maximum five-star rating from our CAPS community. CEO Don Knauss reported 4% top-line sales growth in the most recent quarter attributed in part to successfully passing higher input costs to consumers. Clorox has grown its dividend 11% annually during the past five years.

Applied Materials
This semiconductor equipment manufacturer has significantly increased revenue and net income in the past two years. Applied Materials is focusing business on chips for mobile devices after experiencing headwinds in its solar cell manufacturing segment. While it's becoming less rare to find dividend-paying tech companies, it's challenging to find one paying a solid 3%-plus yield. Applied upped its dividend nearly 9% last year.

Vodafone
Vodafone has sold most of its investments in wireless companies it didn't control including those in Asia and Poland. The cash raised from these sales has been used to support its dividend and reduce debt further improving Vodafone's already strong dividend growth outlook and healthy balance sheet. And Verizon Wireless, the joint venture between Vodafone and Verizon Communications, may soon receive regulatory approval on a lucrative cable deal.

BHP Billiton
As the trend of urbanization unfolds in developing countries, it's fueling high demand for building blocks of modern society like iron ore and copper. BHP Billiton is one of the world's leading suppliers of these materials. Its multiple business segments produce more than a dozen commodities; this diversification lets the company navigate volatile commodity pricing better than its peers. The company increased its dividend 17% annually during the past five years. And its low 21% payout ratio means BHP Billiton has lots of room to further grow its dividend.

Foolish bottom line
Consider this five-pack of dividend-paying darlings so you can get paid on your terms.

If you're interested in rounding out your income-generating portfolio with more great stocks, check out our free report. It's jam-packed with nine dividend stocks including one medical equipment company that boasts not only a 98% customer satisfaction rating, but also doubled its dividend payout since 2006. This report won't be available forever, so get your free copy today.

Fool contributor Nicole Seghetti owns shares of Applied Materials and BHP Billiton. You can follow her on Twitter @NicoleSeghetti. The Motley Fool owns shares of Clorox. Motley Fool newsletter services have recommended buying shares of Vodafone Group and Sysco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 15, 2012, at 11:59 PM, jordanwi wrote:

    Clorox has a 4 star CAPS rating?

  • Report this Comment On August 15, 2012, at 11:59 PM, jordanwi wrote:

    Sorry to be a stickler, nice article. Great ideas.

  • Report this Comment On August 20, 2012, at 10:32 PM, MHedgeFundTrader wrote:

    The Treasury bond market has just suffered one of the most horrific selloffs in recent memory, taking the yield on ten year paper up from 1.38% to an eye popping 1.83% in weeks, a three month high.

    Yields have just risen by an amazing 38%. This has dragged the principal Treasury bond ETF (TLT) down from $132 to $120. Those who were pining to get into this safe haven at a better entry point now have their chance.

    Rumors for the plunge have been as numerous as bikinis on an Italian beach. Some have pointed to a suspected unwind of China’s massive $1 trillion in Treasury bond holdings. Others point to the incredibly thin summer market trading conditions. Add to that a relentlessly heavy new issue calendar by the government. After all, they have a $1.4 trillion budget deficit to finance this year. That works out to $4 billion a day.

    Long term strategists point to more fundamental reasons. The spread between the ten year yield and the S&P 500 dividend yield is the narrowest in history. Even after the recent slump, equity yields still beat bonds by 20 basis points. This has never happened before. The smarter money began shifting money out of bonds into stocks months ago.

    However, I think that an excellent trading opportunity is setting up here for the brave and the nimble. There is a method to my madness. Here are my reasons:

    *US corporate earnings are slowing at a dramatic pace. Some 40% of those reporting in Q2 delivered revenues misses. They made up the bottom line by firing more people. This is the worst performance since early 2008. Remember how equity ownership worked out after that?

    *The high price of oil is now starting to become a problem and will inflict its own deflationary effects. If we maintain the 24% price hike we have seen in recent months, that will start to present a serious drag on the economy.

    *Fiscal Cliff? Has anyone heard about the fiscal cliff? This 4% drag on GDP growth, another name for a recession, is looming large.

    *Don’t forget that the rest of the world economy is going to hell in a hand basket. The China slowdown continues unabated, and a hard landing is still on the table. Europe is in the toilet. Japan’s growth is on life support.

    *The Chinese aren’t selling. They told me so. They are merely reallocating a larger portion of their monthly cash flow to Europe where yields are a multiple higher. They are doing this because I told them to. This helps support the Euro. Keeping the currency of its largest trading partner strong to preserve exports is in its best interest.

    *QE3? Remember QE3? Even if the Federal Reserve doesn’t implement this expansionary monetary policy, Europe will. And the Fed will probably join in 2013 when we head into the next recession.

    *Paul Ryan for VP? If elected, his death wish for the Federal Reserve will send asset prices everywhere plummeting, including stocks and bonds. Since Romney’s fumbled announcement, Treasury bond yields have soared by 25 basis points.

    There are many ways to play this game. Just pick your poison. The obvious pick here is to buy the (TLT) just over the 200 day moving average at $119. You could buy an October $120-$125 (TLT) call spread in the options market for a quick bounce. If you really want to get clever, you can sell short the $110-$115 call spread, which has a breakeven in terms of the ten year Treasury yield of 2.10%.

    The safe haven trade is not gone for good. It’s just enjoying a brief summer vacation.

    - The Mad Hedge Fund Trader

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