No. of Recommendations: 13
Hello there,

I'm in the process of converting the bulk of my portfolio to a more conservative DGI strategy (in preparation for an early retirement).

I've been a lurker on this board for many months and I've read through articles from Seeking Alpha posted by TMFMurph, including several by DVK and others. I've also studied the CCC lists updated by Dave Fish every month (very helpful and very generous of him to continuously post this information).

I've come up with a list of 18 DG stocks which I believe can make a good foundation for my "retirement" portfolio:

AFL
MO
CVX
KO
EPD
HAS
INTC
JNJ
KMB
KMP
MCD
MSFT
PEP
PG
SXL
SYY
TGH
WEC

I already own some of the above in various amounts (KO, MSFT, INTC, PEP, JNJ, HAS, AFL, MO), and since they're stable dividend growers, I thought it would make sense to keep and add to these positions. I've also included TGH and WEC on the list because I have small positions in these from my subscription to Income Investor and I don't mind adding to them knowing that they're covered by II and that they're also on David Fish's CCC list.

The average yield for the above basket of stocks is approximately 3.6%. I'm comfortable with this provided the yield keeps pace with inflation and hopefully grows faster over time. My priority is quality over chasing yield. I plan to build equal positions in all of the above over the course of a year or two and hold for at least 10 years or more. I want to sleep well at night knowing that if I had to turn off my computer screen, I could look back in 10 years and see that this basket of stocks maintained if not meaningfully exceeded its original cost value. Not that I intend to "set it and forget it", but I want to avoid active trading other than reinvesting dividends that I don't need to spend in any given year. I don't mind a few comparably aggressive DG stocks in the mix (as my time horizon should flatten risk over time), but overall, I want to build a portfolio with less volatility and with a very high probability of growing dividends for decades to come.

I still plan on maintaining a portfolio of growth stocks for fun, but it will gradually become a smaller percentage while the above DGI portfolio becomes my primary income stream for retirement.

I'd very much appreciate any comments on the above basket of stocks (or any others I should consider given the goals I've described; I'm happy to have a basket of 25 DG stocks or more).

Thank you for your time and feedback!

psamtani
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No. of Recommendations: 5
You should consider WMT, if you are interested in dividend growth, not just initial dividend yield which is around 2.5%. Over the last 5 yrs dividend growth is 16%. At this rate of growth dividend will double in 5 years. And the pay out ratio is a very manageable 32%.

And they just announced an 18% dividend hike to $1.88/yr. EPS forecast is $5.20 - $5.40, so payout ratio at midpoint of $5.30 will be 35%.
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No. of Recommendations: 2
A fine list of stocks.

Personally I would substitute PM for MO. Yes one loses 1.3% in dividend. But its Phillip Morris international presence which is unlikely to be affected by government actions against it, unlike in the US. The Asia & Africa market are likely to continue to boom. And while the EU has US like smoking bans; Europeans continue to light up.

PM:
2nd quarter 2008 dividend was .46/share increased in 3rd quarter 2008 to .54/share=17.3% increase.
3rd quarter 2009 dividend increased to .58/share=7.4% increase.
3rd quarter 2010 dividend increased to .64/share=10.3% increase.
3rd quarter 2011 dividend increased to .77/share=20.3% increase.
3rd quarter 2012 dividend increased to .85/share-9.7% increase

MO:
3rd quarter 2009 dividend increased to .34/share=5.9% increase.
1rd quarter 2010 dividend increased to .35/share=2.9% increase.
3rd quarter 2010 dividend increased to .38/share=8.6% increase.
3rd quarter 2011 dividend increased to .41/share=7.9% increase.
3rd quarter 2012 dividend increased to .44/share=7.3% increase.

So pick yer poison.<g>
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No. of Recommendations: 2
As I look at your list, I wonder why you have both KMB and KMP. For an electrical utility, you might look at Big D, and DUK, both of which have dividends greater than 4%. We DRIP D and add $50/mo to out holdings of DUK (which are small) as well as reinvest dividends and capital gains (if there are any). We have owned D for a couple of decades anyway, and it has more than doubled in price from where we started as well as pay goo and increasing dividends. SO might be another possibility with dividends above 4%. We own some of that also but do not DRIP.

brucedoe
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No. of Recommendations: 7
Hi psamtani!

Fine looking list...here are a few random thoughts:

If your KMP is held in a taxable account, you may want to switch it for KMR...whose distributions are paid in tax-deferred shares versus cash and are thus not taxed until you sell them.

( I think maybe brucedoe was confusing KMB ( Kimberly Clark ) with one of the KMI/P/R symbols, thus his question of "why both" )?


Also, you may want to add some more from the healthcare sector ( beyond JNJ ), maybe a REIT like HCN on a pullback ( they have periodic secondaries that usually result in short-term price pullbacks )..or maybe Vanguard's healthcare fund ( VGHCX ) which has low expenses and decent performance over the long haul. Demographics favor this sector, despite all the recent political junk and program changes.

Consider adding to utilities if SO ever has a major pullback...more population pressure in their geography than WEC/ others...but, IMHO, SO is overpriced now. Maybe wait until a rise in interest rates puts a scare in utility prices before adding much in this sector, since they are ( IMHO ) overbought.

Consider something in the resource/commodity space. One smaller name that has worked well for me is BIP....but it is pricey now. A larger name is FCX. Both are riskier and subject to commodity pricing risks, etc, but might help balance out things a bit.

Other names to consider if they ever come down to reasonable values might be: CL, MMM, DEO, MKC, among others.

Just ramblin' a bit....thoughts worth precisely what you paid for them. ;-)

Cheers!
Murph
Home Fool
( who doesn't speak for TMF....just himself
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No. of Recommendations: 8
psamtani

This is my 13th year of investing for reliable income in retirement. I've learned a good deal along the way, so if you don't mind my prescriptive insertions.... :-)

First thing you really should do is set your income investing goals. For some, this seems obvious, but in reality it isn't at all obvious. Your goals are based on income need AND on portfolio need in the years ahead. Your goals should cover the following topics: reliability, growth, portfolio stability, portfolio growth and liquidity.

1. How important is dividend reliablility (low risk of cuts or reductions)? This is the most important to those averse to income risk and those with high fixed expenses in retirement without other sources of income. Laddered Investment grade bonds, only the highest quality stocks (such as regulated utilities and investment grade preferreds), life annuities, laddered CDs...these will make up most of the porfolio.

2. Income growth? This is most important to those who retire young and whose other sources of retirement income are fixed for life. Investments will have to lean towards dividend corporations with growing revenues in growing industries, but will GENERALLY involve greater income reliability risk.

3. Portfolio value sustainability. For most, this is probably mostly psychological, as the assumption of saving for retirement is that during retirement you will 'decumulate' or draw down your savings over retirement years...which looks great on paper but is not human nature. Accumulating during working years doesn't suddenly stop at age 62 and reverse itself. Now, there is absolutely nothing wrong with decumulating, and the 'standard' portfolio draw-down of modern portfolio theory using the studies of Bengen and others is pretty much the norm out there. So to have sustained portfolio value as a goal really should require that you have a reason for it...such as using your portfolio to pay late-life high expenses, such as a nursing home...or perhaps providing support for a disabled family member in your late years, etc. Income investments consistent with this will be those that do not involve distributions of your portfolio back to you, such as life annuities or certain mutual funds. However, this will not be an issue with most income securities.

4. Portfolio growth. This will likely be important to those whose late life or estate need is for high valuation. If this is a goal, you probably need to stick with total return investing, as you will need to monitor and buy/sell based on security valuation. And you'd avoid all fixed income and slow growth investments.

5. Liquidity. How important is the ability to convert investments in to cash quickly and at little cost or risk of loss of principal? A need for high liquidity necessitates sticking with broadly traded securities and avoiding most fixed income.

My other recommendation is to manage income risk by limiting exposure to any single security and to income groups. For me, this is no more than 3% of my income from any single stock/bond/REIT/MLP and no more than 20% of my portfolio income from any single income group, where an "income group" are a collection of securities that generate revenue from the same market. Examples are consumer non-cyclicals, utilities (regulated), equity retail REITs, health services equity REITs, preferred stock (I group these due to their rules of dividend suspension), midstream MLPs, pharma, pure financials and so on. But note that my % calcs are based on portfolio income, NOT portfolio valuation, as I do not have portfolio valuation as an income goal, although others might.

Finally, you don't mention it, but monitoring your income securities is critical to be able to recognize and throw out income securities that are no longer meeting your minimum income requirements. Income requirements could be a minimum expected annual dividend growth rate, minimum free cash flow coverage, minimum revenue growth for the year, and so on.

I have other thoughts, but this post is getting a bit long..... :-)

BruceM
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No. of Recommendations: 1
You have a very good list.

You might also consider Walgreen Co (WAG).
They have increased dividends every year for a very long time.

3M (MMM) would be another one to consider.

Discl: I own them both.

Bill
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No. of Recommendations: 4
Thank you everyone for your valuable feedback!

rnam, I do own a small position in WMT in my current portfolio, but I didn't consider adding to it for my DG retirement portfolio because I wasn't too sure if a retail stock is something I can own and hold indefinitely? But the dividend growth rates you mention are very appealing indeed. I will look into it. Thank you.

tjscott0, it's funny you suggest PM instead of MO (someone else mentioned the very same thing to me recently for the same reason you site). I have MO on my list because I already own it and I figure it's easier to add to an existing position. But perhaps I'll consider a 50/50 stake in each?

brucedoe, I was uncertain re your post until TMFMurph clarified it :)

TMFMurph, I own KMP in a taxable account. I'll look into KMR. Thank you. Re healthcare, I agree with you. I own PFE in my current portfolio (I've owned it for over 10 years); I know it no longer qualifies as a DG stock since the company suspended/cut their dividends a few years ago (which is why I didn't include it on my list). I'm hesitant re HCN because it only shows up on David Fish's CCC list with a dividend growth history of 6 years. Any other healthcare DG stock suggestions are welcome and appreciated (ones with a strong track record for dividend payments and growth)? I own DEO in my current portfolio, but I didn't consider it for my DG portfolio because it doesn't show up on Dave Fish's CCC list (I only want stocks in my DG portfolio which have a proven history of dividend payments and dividend growth, while simultaneously being able to maintain or grow their value over long periods of time; DEO may qualify for the later, but does it meet the criteria for the former)?

BruceCM, I think your post deserves a separate response (this is already getting too long :) Later tonight or tomorrow.

Wradical (Bill), I considered WAG and MMM (they are both Champions on David Fish's CCC list). Full disclosure, in addition to reading the posts on this board and the Seeking Alpha articles posted by TMFMurph, I also bought the "Top 40 Dividend Growth Stocks 2013" ebook from David Van Knapp's website. MMM was dropped from his list this year and I believe WAG was low on his list based on the point system he uses? I know they are still worthy DG stocks, and if I stretch my DG portfolio to 20-25 stocks, I will certainly consider them again.

Best,
psamtani
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No. of Recommendations: 0
Above somebody mentioned adding another Health Care stock besides JNJ. I own MDT and it is a fine dividend growth stock as well.
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No. of Recommendations: 1
Good on ya. Your list and the followup discussion gives me plenty to ponder.

I'd wager you're set to beat 95% (or more) of investors if you can stay the course with that list derived from Mr. Fish's CCC spdsheet.

I'd further wager the followup points offered mostly amount to fine tuning on the remaining 5%.


In other news, I doubled down on BP today on the news and drop to $40-ish. That divi won't make a CCC list for years again but meantime I'm enjoying the e-mail notifications of payment.
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No. of Recommendations: 0
...Any other healthcare DG stock suggestions are welcome and appreciated (ones with a strong track record for dividend payments and growth)?...

Maybe a look at BDX?

Cheers!
Murph
Home Fool
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No. of Recommendations: 0
Thank you everyone for your valuable feedback!

I would like to add my thanks, as well.

I will be retiring in the next couple of years--or at least working less. I began lurking on this board to get ideas on changing my investments to dividend stocks. This was the best series of posts yet.

Thank you all so much. And I will continue lurking.

Karen
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No. of Recommendations: 2
Thanks again for the additional comments.

NewAlchemist, when I saw your suggestion of MDT, the ticker symbol looked familiar, so I scanned through my current portfolio and was happy to see that I already own it. It's a recommendation on the MF Pro service which I subscribe to. The yield at present is only 2.3%, but it has a 35 year history of paying and growing dividends, and its 5 and 10 year dividend growth rates have been double digits (16.5% and 15.5% respectively if I'm reading David Fish's CCC chart correctly). If that's the case, this will make stock #19 on my DG list.

TMFMurph, I looked up BDX. Solid DG stock (41 years of dividend payment and growth history). Dividend growth rates have also been in the double digits. Yield is only 2.3 at present (same as MDT above). This stock is not on DVK top 40 DG stocks for 2013 and it's also not followed by any of the MF services, so I may hold off on it for my DG portfolio. Plus, I've never heard of the company (Becton Dickinson & Co)? Not that name recognition should be a main criteria for selection, but all things being equal, when the market is in turmoil, I find it more comforting when I own a business with a name I recognize.

While we're on healthcare stocks, I noticed that AZN, NVS and BAX are all on David Fish's CCC list and also on DVK's top 40 DG stocks for 2013 (I hope it's okay that I mention this; I know DVK publishes this info for sale on his website, but since I'm only posting a few of the ticker symbols without any of his commentary, I hope I'm not crossing any lines). I didn't include these on my DG portfolio list because their dividend history is not as long (under 10 years except for NVS which has a dividend history of 11 years), plus their yields are under 3% (except for AZN which has a yield of 6.3% with a dividend history of 9 years as per Dave Fish's CCC list). If anyone has a case to make for these 3 healthcare stocks, I'll dig deeper. Otherwise, I'll leave them out for now as well.

I have a question on researching dividend growth rates, do most people here use the DGR figures from David Fish's CCC list (along with the projected 5 year dividend growth model he provides)? This is what I'm doing and it's very helpful, but I'm wondering if I should be doing more due diligence (David Fish just makes it too easy, not that I'm complaining :)

BruceM, response to follow in next post!

psamtani
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No. of Recommendations: 1
I have a question on researching dividend growth rates, do most people here use the DGR figures from David Fish's CCC list (along with the projected 5 year dividend growth model he provides)? This is what I'm doing and it's very helpful, but I'm wondering if I should be doing more due diligence (David Fish just makes it too easy, not that I'm complaining :)

Dividend payment history and dividend growth rates are important screening tools. Stocks with interrupted (read: cut or reduced) dividend histories, or low dividend growth rates tend to suggest what the company will do with future dividends. This is not always accurate, as we saw recently with CTL, but it is accurate most of the time.

One of the features DF's spreadsheet of Dividend Champions/Contenders provides is the rate of change of dividend growth. This is from the column labeled "A/D" (Acceleration/Deceleration). A ratio grater than 1 means the dividend growth rate has increased over the past 5 years. <1 means its slowed.

The best metric, to me, in the ability to predict future diviend growth has to do with what % of the company's free cash flow is being paid out in dividends. The trend in this ratio is what is most important.

BruceM
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No. of Recommendations: 5
BruceM, thanks much for your thoughtful response. I'd be happy to hear more of your thoughts and prescriptive insertions :) Especially coming from someone who's been successfully following a DGI strategy for 13 years!

I understand that each of us have different circumstances and goals, so what's right for me may not necessarily work for others; but it's great to have a forum like this where we can learn from each other and fine tune our strategy to best fit our needs.

In my situation, I'm fortunate that I've had a good run of 20 plus years of owning my own business which has allowed me to build a nest egg such that I hopefully will not need to draw down my investment capital in retirement; provided of course I have an investment strategy that, in my case, will give me a yield of 3% to 4% at present and will grow over time to keep ahead of inflation. I still have my business and although I've slowly handed over the reigns to others and am taking a less active role, I don't anticipate my income stream from the business to stop overnight. That said, I'm planning my DG strategy with no future business income in mind (as a worse case scenario); the likelihood is that I will continue to receive some profit from the business for a few more years if not more.

A few years ago, before I started seriously considering an early retirement, and before I discovered DGI on this board, I thought that when it came time to eventually thinking about retirement, I would probably start switching over from stocks to municipal bonds as the primary vehicle for preserving my nest egg and giving me income.

When I discovered this board and started reading some more, a light bulb when on in my head :) I thought a DGI strategy sounds perfect for me. I was familiar with dividend stocks and own several in my portfolio, but I never bought a stock because of its dividend, and I never considered dividend growth at all. That was the magic ticket for me. Not so much the dividend itself, but the fact that it could grow to keep pace with, if not exceed, the rate of inflation!

Then I had to wrap my head around preserving my nest egg value so that it could continue to generate income for the rest of my life. I've been investing in stocks for over 15 years (up until recently, I had over a 100 stocks in my portfolio; but I'm gradually selling some off to make room for DG stocks). Before discovering DGI, I thought municipal bonds would be the safest means for me to preserve my capital. My thoughts were that I would build a ladder of municipal bonds and my capital would be safe because I would be holding the bonds to maturity and collecting the interest all the while. I vaguely thought about inflation, but never gave it much serious thought at the time.

Fast forward to last year when I started doing some more research on this and learning about DGI. I knew from my investment experience with stocks, that if you learn to have the temperament to hold for long periods of time, that a basket of well diversified stocks will fair well over time (sure, some will do poorly; but your winners will hopefully far make up for those). That's been my experience (mostly with the help of MF). So when I learned that there are stocks that have consistently paid and GROWN their dividends for decades, and that many of these are household names, I thought why not just hold a basket of these for the rest of my life. If I did my due diligence up front and picked a basket of 20 to 25 DG stocks, with names like Coke, Pepsi, J&J, PG, McD's, etc., I can't imagine that most of these businesses will not be around in 10, 20 or even 30 years (and most likely will have grown my nest egg on top of the growing dividends I'd be getting every year)! Maybe a few of them will do poorly (and one or two may even go out of business or suspend their dividend for some reason or the other; I've been through this with PFE and I've still come out ahead). On the average, I believe this methodology should be sound?

This goes to your question Bruce about monitoring my DG portfolio. I'm sure I'll keep tabs on the portfolio, but my aim is to have minimal management. I've learned that when you react to news re a company, that news is already reflected in the stock price, so when a company announces that it will suspend its dividend for example, the stock price will react accordingly. If you hold a basket of 20 plus DG stocks, hopefully one or two dividend cuts will not materially affect your average yield. And if you've picked good companies upfront, hopefully the business will bounce back over time. This is why I'm focusing on quality over yield. I'm happy to invest in businesses with decades long track records of paying and growing dividends, rather than take a risk on a high yield REIT or other investment that I would have to monitor more carefully. A big part of my goal is avoiding very active management, and I understand I will have to accept a smaller yield up front to achieve this.

That said, I agree that keeping tabs on the income stream is very important, and if I needed a more aggressive yield up front, this would probably be more critical for me. I know I still need to be wary, even with the most conservative of DG portfolios, and I appreciate your point re this.

Another very important benefit for me of a DGI strategy is the favorable tax rate offered to dividends vs. other forms of income (I understand there are exceptions for MLP's, although these can still have some tax benefits over REIT's).

This post has already gone on far too long and I see that I haven't addressed all of the points you raised, so I'll make the rest of this quick (since much of reasoning is provided above):

Liquidity: I suppose this is more important for me from a psychological perspective. Plus, I may want to splurge on something down the road. I figure there's little need for me to lock in my funds when I can achieve my goals with a diversified basket of DG stocks.

Portfolio Sustainability and Growth: Although I'm hoping to simply live off the income generated by my DG portfolio, psychologically no one wants to see their nest egg drop in value over time. So, it is important to me to preserve my principal and to grow it modestly over time. To achieve this goal, I plan to take a long term view of the portfolio (at least 10 years, and ideally longer). Time and a diversified basket of stocks should minimize long term capital risk. At least that's my hope (from past experience).

Okay, I better end now! If you've read this far, please feel free to poke holes at my methodology, comment, criticize, share, challenge my assumptions, etc. I want to make sure I'm thinking through this soundly before diving in, and I figure there's no better place for this than here!

Thanks again for listening.

psamtani
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No. of Recommendations: 1
...do most people here use the DGR figures from David Fish's CCC list (along with the projected 5 year dividend growth model he provides)? This is what I'm doing and it's very helpful, but I'm wondering if I should be doing more due diligence (David Fish just makes it too easy, not that I'm complaining :)

Hi again psamtani!

David Fish's data base IS awesome...but on rare occasions, even he can make a mistake, so, typically, I will check other sources for the 1-3-5 year dividend growth data. Most financial sources have this data ( some more accurate than others, especially when dealing in ADR's of foreign companies with uneven dividends, etc ), plus most online brokerages have research/screening data bases that feature these numbers.

Trust, but verify! ;-)

Cheers!
Murph
Home Fool
( and genuine fan of David Fish )
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No. of Recommendations: 12
Thanks for the kind words, but I want to point out one important aspect to the Dividend Growth Rates in the CCC document. If you look at the formulas, you'll realize that these numbers are based on completed calendar years. Currently, 2012 is compared with those prior years' full-year payments. So the most obvious weakness is that, as the year progresses, they will be less current, though accurate for the periods cited.
Why do I mention this? Because other sources will show DGRs that they attempt to make current on an ongoing basis, using various methods, sometimes unknown to the user. For example, they may use (as a base) the most recent four quarters' payments or they may use the current annual (indicated) rate. So, in a sense, they may be more current, but they also may fall prey to some "glitches," such as including Special Dividends or placing an accelerated payment in the wrong period. It's not that they are being sloppy; they're just trying to be automated.
Bottom line: No matter what the source, consider the method used (if known) and verify (if possible). The same can be said for any data being used, of course.
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No. of Recommendations: 2
Murph

You are quite right about my confusion.

As to your comment about SO being overbought, I think that is true about most utilities now. See my post http://boards.fool.com/though-corrections-are-always-possibl... and scroll to the utilities comments. The overbought nature of utilities is really quite alarming.

brucedoe
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No. of Recommendations: 1
...
As to your comment about SO being overbought, I think that is true about most utilities now. See my post http://boards.fool.com/though-corrections-are-always-possibl...... and scroll to the utilities comments. The overbought nature of utilities is really quite alarming.


Hi brucedoe!

I could not agree more....and look for them to fall at some point....I just don't know when. ;-)

Currently, I hold DUK, SO, NEE and NGG positions, all of which I have on hold ( versus add or sell ).

Cheers!
Murph
Home Fool
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No. of Recommendations: 0
but I want to point out one important aspect to the Dividend Growth Rates in the CCC document. If you look at the formulas, you'll realize that these numbers are based on completed calendar years.

Are you able to account for those that pulled forward a 2013 div to 2012 to avoid a possible tax bite for shareholders?
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No. of Recommendations: 4
If you are willing to wait 10 years and take a little risk, BP is yielding 5.4%. Lots of pressure and uncertainty due to current lawsuit, but as we saw in the beginning of this crisis, a lot of Brittans rely on their dividend and the government itself is somewhat protective of it. Exxon yields only 2.5%, so BP would have to double (after uncertainty is resolved) for its yield to match XOM. Or cut its dividend ;-)
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No. of Recommendations: 5
Are you able to account for those that pulled forward a 2013 div to 2012 to avoid a possible tax bite for shareholders?

Yes...those accelerated payments are excluded from the 2012 total dividends and will be included in the 2013 totals. Those companies are marked with a "#" symbol in the column immediately to the left of the 2012 column.
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No. of Recommendations: 0
What about the following:
T
ED
WM
MNR
KIM
SSW
LEG
WU

I have greatly refined my list as well - as 61 is th enext birthdate for me and your focus is a serious one .
Good luck !!! This board is very knowledgable and helpful!


Ps. You might want to consider preferred stocks - i plan to look at this area when i can - you can lock in dividends for say a 5 year period . Check Quantum Online
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