CONTENTS

About the Author

Praise for The Snowball Effect
Introduction
Chapter 1: The Treacherous Secular Bears
The Secular Bear Market of 1906 to 1924
The Secular Bear Market of 1929 to 1954
The Secular Bear Market of 1966 to 1982
The Secular Bear Market of 2000 to 2011
What Does It All Mean?
Chapter 2: The Power of Dividends
The Facts of Dividends
Why Do Companies Pay Dividends?
The Dividend Puzzle
A Brief History of Corporate Dividends
Chapter 3: The Snowball Effect: The Promise of Reinvesting Income
Chapter 4: The Small-Cap Paradox
The Size-Effect Phenomenon
The Impact of Institutions
Downside Risk
The Paradox of Small Caps
The Micro-Cap Advantage
Chapter 5: The Power of Bond Interest
What Are Bonds?
 The Language of Bonds
Credit Quality
A Short History of Bond Yields
The Components of Bond Returns
The Corporate Bond Advantage
Total Return Investing with Pepsi Bonds
Chapter 6: The Covered-Call Strategy
Examples of Covered Calls
Chapter 7: The Future and the Top 100
Creating Your Own Snowball Effect
Bibliography
Index
Suggestions for Additional Reading
ETF Corporate Bond Recommendations
Micro-cap Dividend Stock Recommendations
The Top 100 List
 ABOUT THE AUTHOR

Timothy J. McIntosh serves as portfolio manager at SIPCO. He oversees

aspects of major client accounts and serves as the lead portfolio manager
for the firm’s large cap value and corporate bond portfolios.
Mr. McIntosh holds a Bachelor of Science Degree in Economics from
Florida State University. He has also attained a Master of Business
Administration (MBA) degree from the University of Sarasota and a Master
of Public Health Degree (MPH) from the University of South Florida. He is
a Certified Financial Planner (CFP). Mr. McIntosh is the author of The Bear
Market Survival Guide , The Sector Strategist , and the Comprehensive
Financial Planning Strategies for Doctors . He has been featured in the
Wall Street Journal, New York Times, USA Today, Investment Advisor,
Fortune, San Antonio Express News, and The Tampa Bay Times. Mr.
McIntosh served as an adjunct finance professor at Eckerd College from
1998 to 2008. He and his wife, Kim, have two sons and reside in Tampa,
Florida.
 PRAISE FOR THE SNOWBALL EFFECT

“ In his new book, “ The Snowball Effect”, author Timothy J. McIntosh

says that “ time is the best ally of the long-term, buy and hold income
investor.” He goes on to show that patient investors will benefit
enormously from the long-term compounding that dividend paying
stocks provide investors. He makes the case that investors should
ignore the short-term and focus on the compounding benefits that only
long-term investors can enjoy. A simple, yet very effective strategy. I
highly recommend his book to all long-term investors.”
~James P. O’Shaughnessy, author of
“What Works on Wall Street”

“Dividends and their reinvestment are friends of the value investor -

put the two together and you can witness the wonders of compounding.
Mr. McIntosh illustrates how such a strategy can snowball and lead to
large sums of wealth for the patient investor.”
- Mebane Faber is a co-founder and the Chief Investment Officer
of Cambria Investment Management. Mr. Faber has authored
numerous white papers and many books including “ The Ivy
Portfolio” and “ Global Value”.
If you spend any time watching the stock market, you probably get
caught up in its daily gyrations. Stocks are up! Stocks are down! It’s a
bull market! No, it’s a bear market! Of course, that’s the wrong thing to
do. Timothy McIntosh’s book, The Snowball Effect, reminds you that
you have an ally in the stock market: Dividends, which you can collect
in good markets and bad. This book, drawn from McIntosh’s years of
experience as an investment manager and student of the market, will
show you how to make money in stocks in good times and bad.
— John Waggoner, senior columnist, Investment News

“Excellent information for long-term investors. Mr. McIntosh makes a

compelling case for tapping into sources of yield to produce superior
total returns, and he thoroughly demonstrates how dividend-paying
stocks and selling covered calls contribute to such a strategy.”
-John Dobosz is deputy editor of investing content for Forbes
and the editor of the Forbes Dividend Investor.

Timothy McIntosh ’s new book, “ The Snowball Effect,” is a valuable

contribution to the body of work focused on dividend investing. I found
Chapter 3 ( “ The Promise of Reinvested Income”) especially relevant
and powerful.
-Chuck Carlson, CFA, is Chief Executive Officer of Horizon
Investment Services LLC and the author of nine books,
including “ The Little Book of Big Dividends ”
 INTRODUCTION

“I never attempt to make money on the stock market. I buy on the

assumption that they could close the market the next day and not
reopen it for five years .”
— Warren Buffett –

ANY INVESTOR MIGHT believe that stocks have always traded since the
opening of the New York Stock Exchange (NYSE) in 1792. But there have
been notable times when all trading was halted. The most preeminent
period was right before World War I when the NYSE shut its trading system
down on July 31st, 1914. The primary impetus was the closure of the
Vienna stock exchange three days earlier after Austria-Hungary declared
war on Serbia. The leaders of the NYSE were forced to follow as stock
prices plunged across Europe the next day. The exchange would not re-open
until December 15th, a period of 136 days. This period ended up being the
longest interlude in NYSE history of no trading. Although investors who
were counting on capital appreciation from their stocks were disappointed,
those who owned dividend-bearing stocks kept receiving their dividend
checks without interruption during those tumultuous times.
The investors who didn’t have to worry during these times were
focused on collecting income from their investments instead of relying on
capital appreciation to raise their net worth. This isn’t critical only when the
stock market is closed—in fact, it’s critical because more often than not,
and repeatedly for very long stretches of time, stock market appreciation is
anemic. For example, in January 1966, the Dow Jones Industrial Average
(Dow) reached 995. For the next seventeen years the Dow would remain
stagnant. The Dow would not surpass the 995 price level without looking
back until December 1982.

What Is the Dow?

The Dow Jones Industrial Average (Dow) is an index of thirty
blue-chip US stocks. Still going strong after 117 years, it is the
oldest continuously running US market index. It is called an
average because it was originally computed by adding up all
of the prices of its stocks and dividing by the total number of
stocks in the index. (It’s very first average price of industrial
stocks, recorded on May 26, 1896, was 40.94.) The
methodology remains the same today, but the divisor has
been changed to preserve historical continuity.
The Dow is the best-known market indicator in the world,
partly because it’s old enough that many generations of
investors have become accustomed to quoting it, and partly
because the US stock market is the largest in the world. The
Dow began with only twelve components in 1896 and rose to
twenty in 1916. The thirty-stock average made its debut in
1928, and the number has remained constant ever since.

This book is not written for stock speculators, but for those investors
that can embrace the concept of becoming an income investor. An income
investor—one who embraces a buy-and-hold state of mind and who buys
dividend-bearing stocks and bonds—has an innate mental advantage over
the average investor. An income investor realizes that no matter what the
stock market might do, she will continue to reap the rewards of dividends
and interest from her investments. She knows she should only invest in
corporate entities that pay her a portion of its income from profits or interest
from the loan she is providing. In this manner, she can rest assured that her
future goals will ultimately be met through the process of compounding
interest and dividends.

Snowball ([snoh-bawl); verb (used without object): to grow or

become larger, greater, more intense, etc., at an accelerating
rate.

The title of this book is The Snowball Effect , with good cause. In
reality, time is the best ally of the long-term, buy-and-hold income investor.
The initial results are slow to come about and not that impressive, but in
due time, compounding dividends and interest end up snowballing into
mindboggling returns, even during periods of market stagnation.
The first use of the word snowball as a noun came about circa 1400, in
Germany. It was referred to in West Frisian as sniebal , in Middle Dutch as
sneubal , and in German as Schneeball . The image of a snowball increasing
in size as it rolls along had been used since at least 1613, and the first
printed use of the term as a verb meaning to increase rapidly occurred in
1929, in the Denver Post .

“ Every man who is buying and selling on margin is gambling. And the
snowball they have been rolling uphill got too big and heavy and rolled
back over them .”
— Denver Post , October 29, 1929
How ironic, then, that the term snowball was used as a verb on the occasion
of the great market crash of 1929—and that it was used in the context of the
stock market. I’ve titled this book The Snowball Effect as an illustration of
my theory that building up dividends and interest over time is the single
most critical step in building wealth.
I start in Chapter 1, with an introduction to the four largest secular
(secular is an adjective used to describe a long-term time frame, usually at
least 10 years) bear markets that have occurred since 1906. The long years
between 1966 and 1982 are one of the most famous instances of long-term
sideways or secular bear markets. The Dow also made no progress
whatsoever from 1906 to 1924, 1929 to 1954, and, more recently, 2000 to
2011. Surprisingly common and long-lived, sideways markets go against
the common wisdom published in most investment books: that “stocks
always go up” and are a solid investment in the long term.
In Chapters 2 and 3, you’ll find my analysis of the history of dividends
and how higher-income stocks can be powerful ingredients in a recipe for
investment success. Chapter 4 places the focus on small-cap stocks. I
review the historical data and returns of small-cap stocks in comparison to
large-cap companies and examine the dividend characteristics of small-cap
firms. I also delve into micro-cap firms, the smallest within the investment
universe. In Chapter 5, you’ll learn all about bonds. I will concentrate much
of the chapter on how corporate bonds are unique investment vehicles for
an income investor. Chapter 6 examines the covered-call strategy, which
can help you collect additional income from your stock portfolio by selling
covered calls.
Last, in Chapter 7, I provide a guide to the future of investment returns
and also a case study of a portfolio that puts my recommended screening
process for stocks to work. There, I reveal how that portfolio would
perform if we had another secular bear market from 2016 to 2025. I also list
the top 100 dividend-bearing stocks (I call them the Top 100 Snowball
Investments) for income investors—the type of stocks that allow you to
reap high relative income and earn consistent returns, no matter what
market malaise might transpire.
 CHAPTER 1

THE TREACHEROUS SECULAR BEARS

“All the heroes of tomorrow are the heretics of today.”

—Edgar Yipsel “Yip” Harburg, Lyricist, 1896–1981

LYRICIST YIP HARBURG (more about him in a bit) wrote these words in a
poem about a quite different topic, the Hollywood blacklist of the 1940s
and ’50s. But Harburg’s words were prescient about the financial markets as
well. As mentioned in the introduction, secular stock market cycles are
extended periods of time when markets deliver below- or above-average
returns. Secular markets are tenacious: Sometimes lasting as long as one or
two decades. Most importantly, they are the significant marker of investor
performance over any extended period of time.
There are two types of secular markets; bear and bull. A bear secular
market occurs when the market trend is sideways and the Dow doesn’t
climb above its previous high price level. My definition of a secular bear
market might be poles apart than other analysts. I consider a secular bear
market only to be over after the stock market crosses back above its
previous high price and never returns below that price.
A secular bull market is an up trending market that continually sets
new price highs until it reaches its price zenith. Now while it is accurate
that stocks go up, overall, they do so in an incredibly inconsistent manner.
This is because the market whipsaws through secular bear and bull markets
over time. This leads me to address what is, in my opinion, the most
misleading adage about the stock market: “the market always goes up.”
Any student of history—and reality— could tell you that this simply is
not true. As the table indicates below, the stock market can go through
extended periods of time hallmarked by little to no price appreciation in
stocks. These are branded secular bear markets. Table 1.1 maps the four
long-term secular bear markets experienced over a 110-year span, from
1906 to 2015.

Start End Months Years Annualized Price Return

02/1906 06/1924 220 18 -0.24%
09/1929 11/1954 302 25 0.11%
02/1966 11/1982 200 18 0.21%
02/2000 11/2011 141 11 0.32%
Table 1.1: Long-Term Secular Bear Market Periods from 1906 to 2015

So now you know the truth—during the periods 1906–1924, 1929–

1954, 1966–1982, and 2000–2011, almost 70 percent of the 110-year range,
stock prices as measured by the Dow barely budged. That makes the
common promise you’ll hear from investment professionals of a 9 percent
return from stocks over your investment lifetime both misleading and
wrong .
Imagine an investor who began saving for retirement the year he
turned thirty. While investment advisors are right to say investors should
start saving young, like the fellow in this scenario, be glad you didn’t turn
thirty in 1966. That year ranks among the worst to begin long-term
investments in stocks. Over the next eighteen years, our investor would
have seen less than 1 percent growth in the value of his stocks on a price
basis, but would be within ten years of retirement age.
Clearly, these facts go against the conventional wisdom investors have
been told over the last thirty years. And the average investor, unfortunately,
believes the hype. For each of the last five years, Natixis Global Asset
Management has surveyed 7,000 individual investors around the world to
understand their views on investment returns. In the 2015 survey, as in
every previous year, participants were asked what average annual return
they would need to achieve their financial goals. Their response? A return
of 9.7 percent above inflation, almost a full point higher than the 9 percent
reported in the 2014 survey. Even more amazing, 72 percent of the
investors Natixis spoke to said that they believed these expectations of
returns were realistic.
It’s not just individual investors that have pie-in-the-sky expectations.
The California Public Employees’ Retirement System (CalPERS) also
maintains the charade, assuming future annual investment returns of 7.5
percent to 8 percent. CalPERS actuaries, who compile and analyze statistics
and use them to calculate risks, returns, and premiums, have gone on record
urging board members to lower the annual investment assumption to well
below 7.5 percent. You read that right—according to CalPERS’ own experts
, the odds of reaching the intended target are unlikely (in fact, they’ve set
the likelihood at well below 50 percent). Not surprisingly, experts in the
field acknowledge that investment return predictions over any investment
horizon are extremely unreliable, at best.
What most investors are unaware of is the fact that time and time
again, constructive investment returns for stocks have come in short-term
time spurts. A great example—the six years from March 2009 to March
2015, during which the Dow rose by a remarkable 159 percent and logged
more than 2,000 days without posting a major decline. Just like that,
investors saw the value of their stock holdings more than double. But the
2009-2015 period also demonstrated once again the unequal distribution of
investment returns. Many pundits are now arguing we have moved from a
secular bear market (2000-2011) to a secular bull market. This may be the
case. A secular bull, or upward-trending, market occurs when each
successive high point is higher than the previous one. But secular bull
markets are actually more rare and almost always shorter than secular bear
markets (Table 1.2)

Start End Months Years Annualized Price Return

07/1924 08/1929 63 5 29.14%
12/1954 01/1966 135 11 8.63%
11/1982 01/2000 206 17 14.97%
Table 1.2: Long-Term Secular Bull Market Periods from 1906 to 2015

Secular bull market cycles generally begin af ter capital markets have
been soft, providing muted annualized investment returns over a long
period of time. One methodology to predict when a secular bear or bull
market will occur is through an analysis of the P/E ratio of the stock market.
A price-earnings (P/E) ratio values a company by measuring its current
share price relative to its per-share earnings. A conventional P/E ratio
compares a company’s share price to either the past year’s earnings or
forecast earnings, typically for the next twelve months. For example,
suppose that XYZ company is trading at $60 per share and its earnings over
the last twelve months came in at $4 per share. The P/E ratio for XYZ
would be calculated as 60/4 or 15. This has been the average P/E ratio for
all stocks since 1910. But stocks do not always trade at a level of 15 times
earnings.
At the start of a secular bull market, the P/E ratio for all stocks is
generally quite low, typically under 10. In the long run, stock returns tend to
reflect earnings growth. But during the three secular bull markets shown in
Table 1.2 above, stocks advanced much faster than earnings. This is known
as the P/E multiple expansion effect.
In the long-lived bull market that prevailed from 1982 to 2000, stock
prices grew much faster than earnings. The P/E multiple on the Dow nearly
tripled, accounting for 45 percent of the stock market’s total return.
Earnings growth during this period held at 6.5 percent for firms indexed by
the Dow, but the average return for the Dow was 15.1 percent per year. The
Dow’s starting P/E ratio was 8 in 1982; by the end of 1999, it had reached
30. The three big secular bull markets of the twentieth century returned, on
average, just over 15 percent per year for the stocks in the Dow.

Why the Dow?

The Dow Jones Industrial Average, aka the Dow, is the
second oldest stock index in the United States (preceded only
by the Dow Jones Transportation Average). Named after
former Wall Street Journal editor Charles Dow and statistician
Edward Jones (no relation to the Edward Jones who founded
his own eponymous investment firm), the Dow has been a
key measure for large US-based blue-chip stock prices since
its inception on May 26, 1896. I’ve used the Dow as the
touchstone in this book because the data is so far-ranging
(going back to 1906) and because the index itself is a fair
representation of all large-cap US stocks. In addition, the
companies represented in the Dow have maintained a high
level of dividends, or cash payments to shareholders.
I chose not to use the more popular Standard & Poor
(S&P) 500 index, as its history goes back only to 1923 and
began as an index of only a few stocks. It did not grow to its
current size of 500 members until 1957. Additionally, not all
S&P 500 stocks pay dividends, but all Dow stocks do.

You may think that the remarkable progress of stocks during the 1982-
2000 period was due to superior earnings growth. Remarkably, during the
secular bear market of 1966 to 1982, earnings for the companies in the Dow
grew by 7 percent per year—surpassing their earnings growth during the
bull market of 1982-2000. The big difference; starting P/E ratios. Because
the Dow’s P/E ratio was 18.5 in 1966 and not 8, as it was in 1982, returns
for investors remained solidly anemic over those ensuing eighteen years.
That doesn’t mean that stocks can’t continue higher from a particular
P/E level. There is no set ceiling for a stock market to reach. For example,
the P/E ratio continued higher in the late 1990s, ultimately reaching 30 by
the top of the Internet stock bubble. That was much higher than the 18.5
reached in 1966. But after 2000, investors faced severe overvaluation and
the potential for an extreme retrenchment in stocks. The extreme high P/E
values of 2000 were a giant red flag indicating danger to come as investors
crossed into the new century. From 2000 to 2002 and again from 2008 to
2009, the Dow fell by more than 40 percent in value, and it didn’t surpass
its previous price peak again until 2011.
Of course, investors can’t pick and choose the timing of their
investments or know when P/E levels might top out. If the crest level of the
market occurs within an investor’s peak earning years (forty to sixty years
of age) or after retirement (beyond the age of sixty), bear market cycles can
be devastating. If an investor was fortunate enough to start the bulk of her
wealth building in 1982, one of the greatest bull markets in history likely
carried her portfolio to supreme heights until the end of the century. But the
reverse became true in 2000, where the stock market topped out and
remained below the index’s previous high for the next eleven years.
Developing and maintaining strategies to survive secular bear markets is the
most important consideration any prudent investor can have. Let’s examine
the four major bear markets of the last 110 years.

THE SECULAR BEAR MARKET OF 1906 TO 1924

On January 19, 1906, the Dow topped out at a price level 103. Then the
stock index fell off a cliff, losing 48.5 percent of its value over the next
twenty-two months. With that, the first secular bear market cycle of the
twentieth century began.
 Figure 1.1: Dow Price Chart from 1906 to 1924

The collapse of the stock market over this period was caused by
several factors—first among which was the infamous San Francisco
earthquake of 1906. Up to that point, an economic boom had been raging
since the start of the century. But the earthquake caused immediate
economic repercussions, as bank deposits were unavailable for weeks on
the West Coast. A run on US currency began not just in California, but also
throughout the rest of the country.
The run on dollars continued throughout the year and into 1907; then,
a crescendo of events in New York pushed the entire banking system into a
crisis known as the Panic of 1907. In October of that year, copper-miner-
turned-banker F. Augustus Heinze and his stockbroker brothers Otto and
Arthur tried to manipulate the markets to benefit Augustus’s firm, the
United Copper Company. When their plot failed, the price of the stock
collapsed. Investors rushed to pull their money out of the disgraced
company, and an already tenuous banking system became unglued.
Heinze’s primary bank in Montana failed, which then caused the
linked Knickerbocker Trust Bank of New York to collapse. The breakdown
of the Knickerbocker touched off an avalanche of withdrawals across the
banking sector. At the height of the crisis, on November 2, 1907, financier
J.P. Morgan gathered nearly 50 New York bankers in his library. He pledged
large sums of his own money to fix the panic and convinced his fellow
bankers to do the same.
With Morgan’s intervention, a deeper banking crisis was averted. The
Dow ultimately bottomed two weeks later at a price of 53. Immediately
after the Panic, Congress enacted the Aldrich–Vreeland Act, a piece of
legislation that addressed some of the financial system’s most pressing
needs. It only went so far, however, and put off the day of reckoning about
the bigger question: What sort of federal bank could work in a country with
a long history of rejecting central banks?
Instead, members of Congress formed the Fed’s precursor, the National
Monetary Commission. The legislators traveled to the great capitals of
Europe to learn about how their banking systems worked and apply what
they learned to the Commission, but it was ultimately ineffective. The
Federal Reserve System would not be complete for another eight years.

Year High/Low Year High/Low

1/19/1906 103 5/13/1918 82.16
4/26/1906 92.44 11/3/1919 119.62
11/15/1907 53 12/22/1919 103.55
4/24/1908 70.01 1/3/1920 109.88
11/19/1909 100.53 1/14/1920 102
10/10/1910 81.91 2/3/1920 99.96
9/25/1911 72.94 8/24/1921 63.9
9/30/1912 94.15 12/15/1921 81.5
1/14/1913 84.96 1/10/1922 78.59
12/24/1914 53.17 10/14/1922 103.43
4/9/1915 65.02 11/27/1924 92.03
11/21/1916 110.15 3/20/1923 105.38
8/28/1917 86.12 10/27/1923 85.76
12/19/1917 65.95 11/3/1924 103.89
Table 1.3: Secular Bear Dow Highs and Lows from 1906 to 1924

After hitting its November 1907 lows, the Dow nearly doubled over
the next two years. By November 19, 1909, it had climbed over the 100
mark. But the rally was short-lived.
 As time went on, the economy slowed, and by July 1910, the Dow had
dipped by more than 20 percent. The economy officially slipped back into
recession in the third and fourth quarters of 1910, and the economic system
was further plagued by crop failures and droughts during 1911. In the same
year, the central plains scorched through a heat wave that extended from
March to September. Another recession hit the US economy in 1913, and in
July 1914, the stock market closed for four months as World War I began.

The Dow Changes

On October 4, 1916, the Dow changed its makeup. National
Lead, Peoples Gas, General Motors, and US Steel were
dropped, and twelve new companies joined the list. Following
is the full list of its twenty industrial stocks in 1916:
American Beet Sugar, American Can, American Car &
Foundry, American Locomotive, American Smelting,
American Sugar, American Telephone & Telegraph (AT&T),
Anaconda Copper, Baldwin Locomotive, Central Leather,
General Electric, Goodrich Republic, Iron & Steel,
Studebaker, Texas Company, US Rubber, US Steel, Utah
Copper, Westinghouse, Western Union

After it reopened on December 14, 1914, the Dow collapsed. Just a

little more than two months later, on February 24, 1915, it had fallen by
more than 30 percent, back down to 54.
The early 1915 collapse was largely caused by the escalation of the
Great War. Germany began bombing the city of London in early January,
1915. The carnage continued, as on May 7 of that same year—less than a
year after World War I had erupted across Europe—a German U-boat
torpedoed and sank the RMS Lusitania, a British ocean liner en route from
New York to Liverpool, England. More than 1,100 of the 1,900 passengers
and crew members on board perished, including more than 120 Americans.
But after the sinking of the Lusitania, the Dow began a slow ascent that
continued through the summer. The index ultimately reached a high of
99.21 on December 27.
In the next year, 1916, the Dow continued higher, reaching 110.44 that
November. But as Germany continued sinking ships from neutral countries
into early 1917, its relations with the United States soured. After April 6,
1917, the date the United States declared war on Germany, the Dow
fluctuated in a range from 75 to 110 until November 3, 1919, when it
reached a new high of 118.92—a high that would not be surpassed for the
next five years. That same day, Peter J. Maloney paid $100,000 for a seat
on the New York Stock Exchange (NYSE), breaking a record for the
highest price paid that had stood since 1906.
By the conclusion of World War I, those in charge of the US economy
found themselves in a miserable state. The skyrocketing debt load caused
by the war touched off a new recession in early 1920. Annual consumer
price inflation rates had risen above 20 percent and federal spending had
been slashed, from $18.5 billion in 1919 to $6.4 billion. The relatively
young Federal Reserve System also raised interest rates during the period in
an effort to slow inflation. These tactics worked, as deflation became
rampant and prices fell by more than 15 percent over the next 18 months.
In 1921, the unemployment rate peaked at nearly 12 percent, but
afterward, deflation abated and the economy slowly came out of recession.
Just two short years later, the economy was booming and the
unemployment rate had dropped to less than 3 percent. In July 1924, the
Dow bobbed over the 100 mark and finally on November 3, 1924 it had
crossed over the 103 mark set in 1906 for the last time. The decade known
as the Roaring Twenties had arrived, and the markets entered a new phase.
During the next several years until the top in 1929, the Dow would advance
nearly 300 percent, closing at 381 on September 3, 1929.
 THE SECULAR BEAR MARKET OF 1929 TO 1954

Figure 1.2: Dow Price Chart from 1929 to 1953

October 29, 1929 will be forever known as Black Tuesday. As the panic
escalated, investors traded some 16 million shares on the NYSE in a single
day. Billions of dollars in wealth were lost, and thousands of investors were
wiped out.
The Dow had begun its decline on October 18, 1929. Panic set in, and
on October 24, a then-record 12 million shares were traded. Investment
companies and leading bankers responded quickly, trying to soothe the
markets by buying up large blocks of stock.
But nothing could stop the events of Black Tuesday, and stock prices
completely collapsed. In the aftermath, the US economy sank into the Great
Depression. Prices continued to drop, and by 1932 stocks were worth a
fraction of the value they held in the summer of 1929. The boom of the
Roaring Twenties had turned to bust.
Written in 1930 by lyricist Edgar Yipsel “Yip” Harburg and composer
Jay Gorney, “Brother, Can You Spare a Dime?” is perhaps the best known
song of the 1930s. The situation faced by the song’s protagonist hit home
for a lot of Americans, as it dramatized the betrayal many of them felt.
Having built a nation and an economy they truly believed in, many
Americans felt that Wall Street and the political establishment had
conspired to destroy it all. By 1933, nearly half of America’s banks had
failed, and nearly 15 million citizens were unemployed.
 A reprieve came with reforms instituted by the incoming US President,
Franklin D. Roosevelt. Roosevelt’s New Deal mitigated some of the nastiest
elements of the Great Depression, but on July 8, 1932, the Dow plummeted
to its lowest Depression-era point, closing at 41.22. By that day, it had
tumbled nearly 90 percent from its peak in 1929.
Starting in July 1932, the Dow began to slowly climb, but economic
conditions showed little improvement. One year later, on July 18, 1933, the
Dow reached 108.97—amazingly, still below its value in November 1916.
For the next two years, the Dow remained in a tight range from 85 to 110.
Despite continued economic problems, in 1935, the Dow again began
to rise, reaching a high of 184 by November 1936. During this time, the
American Midwest was gripped by a terrible drought that precipitated the
Dust Bowl (also known as the Dirty Thirties). After years of improper
management, the soil of the plains was vulnerable. As the earth became
drier and drier during the drought, the relentless winds of the prairies
whipped the topsoil away and plunged the people of the central United
States into a dust cloud. With their land no longer arable, farmers had
nothing to grow and nothing to sell. The drought and the Dust Bowl
conditions came in three primary waves, 1934, 1936, and 1939–1940.
The Dust Bowl deeply affected the overall US economy; soon, the
Recession of 1937–1938 began. By the spring of 1937, production, profits,
and wages had been restored to 1929 levels, but unemployment remained
high—only slightly below 25 percent. The US economy took a pointed
downturn in the middle of 1937, touching off the recession. It lasted just
over a year, through most of 1938.
At the time, most pundits blamed the recession on the Roosevelt
administration. In 1937, Roosevelt decided to remove monetary stimulus in
order to curb runaway inflation and reduce the deficit. The Dow was hit
hard. Having reached 194 on March 10, 1937, the Dow then plunged by
nearly 50 percent, reaching a low of 98.95 on March 31, 1938.
On September 1, 1939, German soldiers rumbled into Poland, and
World War II had begun. The United States immediately declared its
neutrality, but Wall Street investors were excited by the prospects of
providing war materials overseas: The magazine The Nation ran an article
entitled “Boom Is On.” The Dow quickly rallied, reaching a level of 155.92
on September 12, 1939.
But by March 1942, as the United States became mired in war, the
Dow had dropped below 100. Investor passion had flagged so much that
even an average dividend yield over 9 percent wasn’t enough to entice
them. A seat on the NYSE sold for a mere $17,000 in 1942—versus
$625,000 in 1929, or $100,000 as far back as 1906. Times had certainly
changed on Wall Street.
The Dow would not cross its September 1939 high of 155 again until
January 11, 1945. The index continued higher after the war, as the global
economic recovery began in earnest. By January 1950, the Dow crossed
over 200 and continued its upward trajectory, finally reaching 384 in
November 1954. With that, the longest-running secular bear market in US
history was finally over.

Year High/Low Year High/Low

9/3/1929 383.85 4/28/1942 92.92
7/8/1932 41.22 2/1/1943 125.86
9/7/1932 79.93 7/24/1944 145.77
2/27/1932 50.16 7/22/1946 195.22
5/24/1933 84.29 3/16/1948 165.39
3/10/1937 194.4 8/18/1949 182.02
3/31/1938 98.95 11/26/1951 257.43
9/12/1939 155.92 1/5/1953 293.79
6/10/1940 111.84 1/19/1954 288.27
11/9/1940 138.12 7/13/1954 340.04
5/1/1941 115.3 11/24/1954 384.63
Table 1.4: Secular Bear Dow Highs and Lows from 1929 to 1954
 THE SECULAR BEAR MARKET OF 1966 TO 1982

Figure 1.3: Dow Price Chart from 1966 to 1982

On February 9, 1966, the Dow reached 995.15—within striking distance of

1,000. From then until the end of 1982, both the US economy and markets
were battered by a combination of rising interest rates and commodity
prices. The Dow would flirt with 1,000 again and again throughout the
period, but it would always fall back into a rigid range somewhere between
500 and 1,000. The mood among investors who followed a buy-and-hold
strategy over the course of this long-lasting secular bear market can be
summarized in a single word—irritated. The index spent the eighteen years
following that dazzling peak in February 1966 in a series of political and
economic quandaries.
First, the credit crunch of 1966 soured the markets. In early 1966, the
US economy was entering its sixth year of relentless expansion, high
economic growth, and low inflation. The unemployment rate was very low,
only 4 percent. But during the first eight months of 1966, business and
government sectors placed weighty demands for funds on the money and
capital markets. US corporations had raised an astonishing $13 billion in
new cash from the sale of stock securities—an increase of 25 percent over
1965.
To slow this growth and the resulting precipitous rise in new capital,
Federal Reserve Bank (Fed) policies became much more restrictive over the
summer of 1966 via open market operations and reserve requirement policy.
This period, which became known as the Fed Credit Crunch, is recognized
as the first noteworthy post-World War II financial crisis, namely because it
was the first important intervention by the Fed since the war. The Dow fell
by 22 percent, reaching 744 in October of that year. It climbed back to the
mid-900s by 1967, only to falter once again due to worldwide concerns
over the Vietnam War.
The index spent the next two years fluctuating in a narrow trading
range. Rising inflation, increased deficits caused by defense spending, and
monetary tightening sent the Dow into a dive by the start of 1969. An
ensuing economic recession put an additional damper on investors’
confidence, and the markets endured a vicious losing stretch, falling nearly
by a third in 18 months. The market continued rattling around until student
anti-war protesters were killed at Ohio’s Kent State University in May
1970. The Dow was pummeled, falling by 7 percent over a two-week
period.
In late 1972, the Dow scratched its way back up, reaching 1,036 on
December 11. But the euphoria of crossing back over 1,000 was short-lived.
A new bubble developed around the so-called Nifty Fifty stocks, which
were hailed as the 50 best buy-and-hold large-cap stocks available. This
bubble led to one of the biggest market drops of the century.
Economic and political turmoil ruled the day. In the next year, the
Organization of the Petroleum Exporting Countries (OPEC) quintupled the
price of oil; the reverberations of the move mired the United States in a
deep recession. Between January 1973 and December 1974, the stock
market’s value plunged 45.1 percent. The largest part of its decline—17.6
percent over a three-week period—came in August 1974, in light of US
President Richard Nixon’s resignation. Unemployment rose steadily
throughout 1974, ultimately reaching an apex of 8.7 percent, the highest
rate since 1941, in March 1975. The prime lending rate among large US
banks rose to a monstrous 15.7 percent.
Ultimately, 1975 turned out to be a solid year for stocks. As the
Vietnam War finally drew to a close, the Dow embarked on a two-year
advance of nearly 60 percent. But the market recovery was only temporary.
During the late 1970s, the United States was gripped by recession and
soaring interest rates. The Dow stalled in 1977 and made no progress for
the rest of the Carter administration—primarily because of pervasive
stagflation, an economic condition that combines three negative factors:
high inflation, high unemployment, and stagnant demand.
Economist Paul Volcker was appointed chairman of the Federal
Reserve by President Carter in August 1979. Volcker took office ready to
fight inflation and the other maladies facing the US economy, and Wall
Street responded positively. Ronald Reagan’s victory in the November 1980
election and the simultaneous economic recovery spurred a sizable market
rally. Two weeks after the Republican landslide, the Dow crossed the 1,000
mark for the first time since the end of 1976. It then ascended higher, to
1,024, in the wake of a March 1981 failed assassination attempt on Reagan.

Year High/Low Year High/Low

2/9/1966 995.15 10/4/1974 584.56
10/7/1966 744.32 9/21/1976 1,014.79
9/25/1967 943.08 2/28/1978 742.72
12/3/1968 985.21 9/11/1978 907.74
1/26/1970 768.88 4/21/1980 759.13
5/26/1970 631.16 4/27/1981 1,024.05
4/28/1971 950.82 8/12/1982 776.92
1/11/1973 1,051.7 11/14/1982 996.87
Table 1.5: Secular Bear Dow Highs and Lows from 1966 to 1982

Nonetheless, the US economy entered a recession in July 1981, and by

September, the Dow had plummeted to 824. That fall, the Fed began
slashing interest rates to stem the recession, but the action had little effect
on the market. Continued high unemployment and economic stagnation
conspired to send the Dow below 800 in the spring of 1982. Its descent
persisted for the next five months.
In June 1982, a Business Week article titled “ Running Scared from
Stocks” captured the mood beautifully, and its timing was impeccable. Two
months later, the Dow hit 776—rock bottom of the long secular bear market
that had started back in February 1966.
Another interest rate cut and some positive economic news lit a fire
under the Dow. In the latter half of August, it skyrocketed by 16 percent
and crossed 900. By November 14, it surpassed 996 for the final time. A
secular bull market was born, and the rest of the Reagan years would be
known for exceptional stock market gains.
The amazing statistic from this long period of stagnation is how long it
took for P/E ratio contraction. From 1966 to the end of the brutal 1973–
1974 market downturn, the Dow went from trading at 22 times earnings to
14 times earnings. The next two temporary peaks in the market during the
late 1970s ended at 11.8 and 9.1 times earnings, respectively. It was only
after the last downturn in 1981/82 that the selling in the Dow would finally
be complete. The Dow finally bottomed at a paltry P/E ratio of 8.

THE SECULAR BEAR MARKET OF 2000 TO 2011

Figure 1.4: Dow Price Chart from 2000 to 2011

On January 14, 2000, the Dow reached a new high, 11,722. Just nine years
earlier, on January 9, 1991, it had bottomed at 2,470.30. The Dow’s
fourfold increase was driven by a perfect balance of high economic growth,
low inflation, and technological revolution—excess that hadn’t been seen
since the 1920s.
But the Dow’s increase had a dark side: It had taken the index to
nosebleed valuations as measured by P/E ratio. In January 2000, the P/E of
the Dow was an astounding 32, twice the historical average. From 1997 to
2000, the infamous Dot-Com Bubble was mostly to blame. This historic
speculative market bubble was spawned by the founding of (and endless
market curiosity about) countless new Internet-based companies commonly
referred to as dot-coms.
Companies quickly discovered they could cause their stock prices to
rise, or access huge influxes of venture capital, by simply adding an “e-”
prefix or a “.com” suffix to their names. The technology company-laden
National Association of Securities Dealers Automated Quotations System
(NASDAQ) index climaxed at 5,132 on March 10, 2000—a mere two
months after the Dow had reached its apex. Just as a rising tide lifts all
boats, the steady climb of the NASDAQ and other dot-com companies led
all stocks higher; even old-line firms like Pfizer and Coca-Cola traded at
P/E ratios in the 40s. And the amalgam of rapidly increasing stock prices
and easy venture capital funding led many investors to throw money at a
plethora of inherently unprofitable firms.
Ultimately, fewer than half the dot-com companies that bloomed in the
late 1990s survived the downturn that followed—many that were founded
in 2000 went bankrupt within a year of going public. Bubble-fueled
accounting scandals rocked the capital markets, and monolithic firms like
Enron and WorldCom went bankrupt.
After the terrorist attacks of September 11, 2001, the recession that
gripped the US economy deepened. The Dow fell to a low on September
21, 2001 of 8,235.81. A minor rebound off the lows was short-lived, and by
2002 the Dow had continued its slide. The market bottomed on October 9,
2002, when the Dow closed at 7,285.27.
 Year High/Low Year High/Low
1/14/2000 11,722.98 11/21/2007 12,799.04
9/21/2001 8,235.81 3/10/2008 11,740.15
10/26/2001 9,545.17 5/2/2008 13,058.2
3/19/2002 10,635.25 8/11/2008 11,782.35
10/9/2002 7,286.27 11/20/2008 7,552.29
1/6/2003 8,773.57 1/2/2009 9,034.69
8/16/2003 12,845.78 3/9/2009 6,547.05
10/25/2004 9,749.99 4/26/2010 11,205.03
11/3/2005 10,522.59 7/2/2010 9,686.48
12/27/2006 12,510.57 9/27/2010 10,812.04
10/9/2007 14,164.53 3/17/2011 11,774.54
Table 1.6: Secular Bear Dow Highs and Lows from 2000 to 2011

A rally that started in March 2003 continued for the next four years, as
growth resumed after the Internet bust. Housing prices and consumer debt
soared. During that period, the Dow nearly doubled, reaching a peak of
14,164.53 on October 9, 2007. Yet it stagnated for most of the next six
months, reaching 13,058.20 on May 2, 2008.
In the days and months that followed, the housing market collapsed,
the price of oil (and along with it, the price of food and other commodities
dependent on transport) rose to dizzying heights. The Great Recession had
begun, and the Dow would not surpass its 2007 levels until 2013. The
ensuing stock market collapse was one of the greatest since the 1930s.
The Great Recession had many sources, starting with consumer debt
and the housing bubble. Throughout the early 2000s, consumer debt grew at
a shocking rate, hitting $2 trillion by 2004. As prices spiraled up,
prospective homeowners feared being priced out of the market and took on
risky mortgages. (Banks were only too happy to oblige them.) During the
run-up in housing prices, the mortgage-backed securities (MBS) market and
the credit default swaps (CDSs) became fashionable yet lethal financial
products. As it was subject to virtually no regulation, the CDS market fell
apart. The American dream of homeownership became a nightmare for
thousands as they began to default on their mortgages. By December 2007,
the United States economy was in a recession.
In March 2008, the huge Wall Street investment banking firm Bear
Stearns was slammed with huge losses from the many MBS and CDS
products it had underwritten; it ultimately failed. On September 7, 2008,
with the Dow holding at 11,510.88, the Federal National Mortgage
Association (Fannie Mae) and its sibling, the Federal Home Loan Mortgage
Corporation (Freddie Mac) were taken over by the US government.
One week later, on September 14, 2008, the investment firm Lehman
Brothers announced its collapse—the biggest bankruptcy filing in US
history. The next day, markets plummeted and the Dow closed down 499
points, at 10,917. On September 19, 2008, US Treasury Secretary Henry
Paulson proposed the Troubled Asset Relief Program (TARP), a bailout for
financial institutions that involved making as much as $1 trillion in
government funds available to acquire the institutions’ poisonous debt and,
hopefully, evade a total financial meltdown. The respite TARP provided
was short; the economy continued its dive and the unemployment rate
skyrocketed. By late October 2008, the Dow had fallen to 8,175.
Ultimately, the Dow lost 54 percent of its value over a seventeen-
month period. Its low point came on March 6, 2009—6,443.28. As the
government’s efforts to patch the economy through stimulus began to take
hold, the Dow began to rise consistently, finally breaking through 11,700 in
March 2011. It would not cross its 2007 price high (14,164) until nearly two
years later.

Consider Table 1.7, The Dow’s Best and Worst Days in History. Better than
any discourse, it shows in brief just how perilous the market can be. On its
best day, the Dow shot up more than 15 percent, but on its worst, it
plummeted by almost 23 percent.
 The Best of Times
Dow
Date Closing % Up Context
March 15, The largest ever percentage gain in Dow history was posted in the
1933 62.1 15.34% depths of The Great Depression.
October 6, President Hoover offered plans to revive the Depression-era
1931 99.34 14.87% business climate.
October Stocks recovered a few days after the great 1929 market crash,
30, 1929 258.47 12.34% buoyed by buying activity by one investor, John D. Rockefeller.
September Indications of an economic recovery were helped by railroad
21, 1932 75.16 11.36% freight activity.
October Central bank actions led to optimism that the worst of credit crisis
12, 2008 9387.61 11.08% was over and the Treasury’s TARP plan was outlined.
October Investors expected the Fed to lower rates in response to the credit
28, 2008 9065.12 10.88% crisis.
October
21, 1987 2027.85 10.15% Markets recovered lost ground after the 1987 crash.
August 2, Hopes of a GM dividend and rumors that the Federal Farm Board
1932 58.22 9.52% has eased wheat surpluses pushed the market higher.
February Traders rejoiced over a Congressional bill that would ease
11, 1932 78.6 9.47% financing through the Fed’s discount window.
November The 1929 market experienced a classic “dead cat bounce”
14, 1929 217.28 9.36% following a drop in share prices over the preceding weeks.

The Worst of Times

Dow %
Date Closing Down Context
October Black Monday 1987: Stocks around the world crashed due to
19, 1987 1738.74 -22.61% economic and geographic concerns.
October Black Monday 1929: Speculation that had driven the market up in
28, 1929 260.64 -12.82% preceding years evaporated.
October Black Tuesday 1929: Selling from the previous days continued to
29, 1929 230.07 -11.73% drive the market lower.
November Share prices continued to suffer the effects of the historic crash
6, 1929 232.13 -9.92% days earlier.
August Sellers driven by margin calls—who sold into a lack of liquidity—
12, 1932 63.11 -8.40% helped drive shares lower.
March 14, 76.23 -8.29% The Knickerbocker Crisis yielded panic selling, economic
 1907 recession, and bank runs—and the market was hammered.
October Investors remained anxious following the Black Monday crash that
26, 1987 1793.93 -8.04% occurred one week earlier.
October Recession fears, a gloomy Fed outlook, and weak retail sales drive
15, 2008 8577.91 -7.87% stocks deeply lower.
July 21,
1933 88.71 -7.84% Markets reacted to negative news regarding grain futures.
October 7161.14 -7.26% A selloff in Asia continued into US markets as the triggering of
27, 1997 market circuit breakers led to a shortened trading session.
Table 1.7: The Dow’s Best and Worst Days in History

WHAT DOES IT ALL MEAN?

It’s noteworthy that almost all the cumulative capital appreciation return the
Dow has experienced in the past 110 years came about during three secular
periods: 1924–1929, 1954–1966, and 1982–2000. The balance of the
positive secular bull time period has been since 2011, when the Dow broke
through the high level reached in 2000. In the intervening years, markets
merely treaded water while the economy and earnings grew. This
phenomenon continued until valuations (as measured by P/E ratios)
eventually reached a trough at the lower end of that range, thus allowing a
new secular bull market to arrive.
Secular bull markets thus have only prevailed for 39 years during the
period from 1906 to 2015, but the majority of the period were years of price
stagnation. In a secular bull market cycle, buying and holding stocks is the
optimal strategy. As long as the secular bull market persists, stock
appreciation accounts for the majority of stock gains. But when a secular
bear market cycle begins, on the other hand, a simplistic buy-and-hold
strategy could leave an individual’s portfolio with roughly the same amount
of money decades later. It also means that after inflation is taken into
account, our investor actually loses money.
Obviously, it’s in an investor’s best interest to figure out when secular
bear markets are likely to occur. This is not an easy assignment. But we
know that in most cases, secular bear markets start after the markets have
advanced much faster than earnings and P/E ratios reach nosebleed levels.
To allow for a more elongated view of P/E ratios over time, one key statistic
an investor can investigate is CAPE. Nobel laureate and e conomist Robert
Shiller developed the cyclically adjusted price/earnings ratio (also known as
CAPE) statistical process, and it can be a great indicator of when the
troubles are likely to occur. CAPE is based on a market gauge originally
used for individual stocks by Benjamin Graham and David Dodd, who
intended to measure the price of a company’s stock relative to average
earnings over a ten-year period. Shiller customized it to adjust for inflation,
with an aim to level out the economic and profit cycles and offer clearer
perspective into a company’s value than the traditional P/E ratio, which
measures only a single year’s profits. Examining earnings over a 10-year
period smoothes out the picture and helps investors determine whether the
market is undervalued or overvalued. The CAPE ratio has been
demonstrated to have a high correlation with future investment returns from
stocks.

Figure 1.5: Average 10-Year Real Return Based on Starting CAPE, 1926 to 2012

As this CAPE chart indicates in figure 1.5, when the average CAPE P/E is
low at any given point in time, future ten-year investment returns are high.
Conversely, when the stock market is priced at a high CAPE P/E ratio,
future ten-year returns are virtually nonexistent.
An investor who attempts to build wealth during periods of high
starting CAPE P/E ratios are almost always doomed to low future returns—
at least from a long-term perspective. High stock market valuations, as
measured by CAPE, drive low long-term future returns. Imagine that you
are an investor who has set goals for retirement that will require a 9 percent
annual return—the same that the 2015 Natixis survey participants felt was a
reasonable ask. If secular bear years are more common than secular bulls,
how will you reach those goals over an extended period of time? This is an
extremely critical question, especially in 2016. As CAPE P/E levels have
now returned to higher-than-average levels, due to the strong run-up in
stocks since 2009, investors must develop a plan of action to survive the
next secular bear market.
 CHAPTER 2

THE POWER OF DIVIDENDS

“Do you know the only thing that gives me pleasure? It’s to see my
dividends coming in.”
—John D. Rockefeller, 1896–1981

T HE PREVIOUS CHAPTER made one fact very clear, and it’s something every
investor needs to be aware of. Secular bear stock markets are not rare; they
are commonplace. The odds are extremely high that an investor will witness
a secular bear market over his or her investment lifetime.
Thus, if you are only invested in stocks that offer the promise of
significant capital appreciation gains (think Facebook and Tesla), you’d
better hope that you’re an outstanding stock selector. A safer bet: Focus on
companies that pay dividends. Why? Dividend-paying stocks can insulate
an investor from secular bear market cycles by providing income while
stock prices stagnate.
Remember Table 1.1, which demonstrated that stocks had virtually no
price return over the four extended secular bear markets? Consider Table
2.1, which examines the annualized returns of the Dow over the same
periods with dividends taken into consideration. Although the returns still
don’t approach the overall 9.39 percent average return Dow stocks have
yielded since 1906, they’re noticeably positive. The conclusion: The only
reliable way to make positive returns during secular bear market periods is
to invest in dividend-paying stocks like those in the Dow.

Start End Annualized Return Annualized Return with Dividends Reinvested

2/1906 6/1924 -0.24% 6.19%
9/1929 11/1954 0.11% 5.53%
2/1966 10/1982 0.71% 4.82%
2/2000 11/2011 0.32% 2.78%
Table 2.1: Secular Bear Market Annualized Returns with and without Dividends Reinvested

In fact, dividends have accounted for a substantial part—40 percent—

of total investor returns over the last 110 years—not just during secular bear
markets. In some decades that coincided with secular bear markets (1910–
1920, 1930–1940, 2000–2010), dividends accounted for more than 100
percent of the total return from stocks, as shown in Table 2.2.

Dow Price Dow Price Percentage Change Dividends Percentage of

Decade
Percentage Change with Dividends Total Return
1910s -2.91% 44.8% >100%
1920s 381.6% 422.4% 21.3%
1930s -41.9% 14.1% >100%
1940s 34.8% 135.0% 74.3%
1950s 256.7% 436.7% 41.2%
1960s 53.7% 107.9% 50.2%
1970s 17.2% 76.4% 77.4%
1980s 227.4% 370.5% 38.6%
1990s 315.7% 432.8% 27.0%
2000s -24.1% -9.1% >100%
Table 2.2: Dividend Contribution of Dow Return by Decade
Source: Dow Jones

THE FACTS OF DIVIDENDS

Companies pay portions of their profits to shareholders through the
payment of dividends. A dividend is a payment made to eligible
shareholders on a quarterly, semiannual, or annual basis. Most US
companies that pay dividends do so quarterly, while non-US companies
generally pay semiannual or annual dividends. Most companies try to
maintain or increase dividends to keep shareholders happy and avoid
negative publicity.
Dividends are normally quoted on a per-share basis, meaning that the
dividend each shareholder receives is based on the number of shares that he
or she owns. For example, if you own one hundred shares of stock in
Company X and it decides to pay an annual dividend of $5 per share, your
dividend would be $500 (100 shares × $5 per share). Sometimes, dividends
are quoted in terms of a percentage of the current market price for a
company’s shares; for example, if Company Y announces a 2.5 percent
dividend on its $100 share price, its shareholders will receive $2.50 per
share owned. If you hold one hundred shares of Company Y, you’ll receive
a payment of $250.
 Key Terms Every Dividend Investor Must Know
Cash Dividends: Cash payments made to stockholders paid
on a per-share basis. Cash dividends are quoted either as a
dollar amount or as a percentage of a stock’s current market
value and are typically paid out of the company’s current
earnings or accumulated profits. They are the most common
type of dividend.
Date of Record: The date the company uses to determine
which of its shareholders, or “holders of record,” will receive a
dividend distribution; all shareholders who own the stock two
business days before that date (the ex-dividend date) receive
dividends.
Ex-Dividend Date: Two business days before the date of
record. If you purchase a stock on the ex-dividend date or
afterward, you will not receive the next dividend payment.
Instead, the seller receives the dividend.
Declaration Date: The date a company’s board of directors
announces that a dividend distribution will be forthcoming.
Dividend Coverage Ratio: The ratio between a company’s
earnings and its net dividend to shareholders. The dividend
coverage ratio helps investors measure if a company’s
earnings are sufficient to cover its dividend obligations. For
example, in 2016, Pepsi’s dividend coverage ratio is expected
to be 65 percent, as it will pay a dividend per share of $3.01
against earnings expectations of $4.73 per share. ($3.01 ÷
$4.73) = 65%.

WHY DO COMPANIES PAY DIVIDENDS?

THEORY 1: THE BIRD IN THE HAND
Economists Myron Gordon 1 and John Lintner developed the infamous bird-
in-the-hand theory, which proposes that investors prefer dividends to capital
gains. The theory’s name comes from the maxim “A bird in the hand is
worth two in the bush.” According to the theory, capital gains are
considered to be quite risky, and thus investors expect to be compensated by
higher returns. The bird-in-the-hand, thus, is the dividend, and the bush is
the capital gains.
To Gordon and Lintner, this places undue pressure on a corporation’s
leadership to deliver higher growth in the future. The theory suggests that
dividends are the most relevant consideration of investing in a company; I
find this to be an exceedingly compelling argument, particularly given the
fact that during long periods of stock-market stagnation (i.e., 1966 through
1982), capital appreciation from equities is nonexistent.

THEORY 2: DIVIDEND IRRELEVANCE

In counterpoint, economists Franco Modigliani and Merton Miller proposed
the dividend irrelevance theory, which states a company’s dividend policy
has no impact on its cost of capital or on shareholder wealth. They
pioneered the idea that dividends and capital gains are comparable when an
investor considers returns on investment.
According to dividend irrelevance theory, the only consideration that
affects a company’s valuation is its earnings, which are a direct result of the
company’s investment policy and the future prospects. Much like their work
on the capital-structure irrelevance proposition, Modigliani and Miller also
theorized that if you are not taking into consideration taxes or bankruptcy
costs, dividend policy is also irrelevant.
For example, assume that a company’s dividend is excessive beyond
expectations. An investor who receives the dividend could then use it to buy
more stock. Likewise, if a company’s dividend is smaller than he or she
expected, an investor could sell some of the company’s stock to replicate
the expected cash flow.
Thus, according to Modigliani and Miller, dividends should be
irrelevant to investors, as investors care little about a company’s dividend
policy since they can simulate their own. This theory also suggests that
dividends are irrelevant by the arbitrage argument. By this reasoning,
dividend distribution to shareholders is offset by external financing. Once
dividends are distributed, the price of the stock decreases, thus nullifying
any gains to investors.
Dividend irrelevance also implies that the cost of debt is equal to the
cost of equity, as the cost of capital is not affected by leverage. Perfect
capital markets do not exist, as taxes are always a factor. According to this
theory, there is no difference between internal and external financing. But
this hypothesis is false if flotation costs of new issues are taken into
consideration.
Lastly, dividend irrelevance theory suggests that shareholder wealth is
unaffected by dividends. But consider the transaction costs associated with
the selling of shares to make cash inflows. That alone can lead investors to
prefer dividends; an assumption of no uncertainty is simply unrealistic.
Although dividend irrelevance theory is conceptually sound, I believe that it
ignores the powerful effect dividend payments can have for investors during
secular bear markets.

THEORY 3: TAX PREFERENCE

Taxes are important considerations for investors. Remember, capital gains
are taxed at a lower rate than dividends. Thus, some theorize, investors may
prefer capital gains to dividends. This is known as the tax preference theory.
Of course, capital gains are not paid until an investment is sold. Investors
can control when capital gains are realized, but they can’t control dividend
payments.
Capital gains are also not realized at the time of an investor’s death.
For example, consider an investor who purchased 1,000 shares in a
company 50 years ago at a price of $2.00 per share. That price would be
considered the cost basis of the stock. If the investor chose to sell his stake
in the company in the present day and the shares were trading at $100 per
share, he would have to pay taxes on capital gains of $98 per share, the
difference between the cost basis and the present trading price. But if the
investor dies and the shares transfer to his heirs through his estate, the cost
basis is adjusted—or in tax parlance, “stepped up”—to the price of the
stock at the time of the investor’s death. In such an event, the heirs will not
pay capital gains taxes on the stock’s appreciation.

THE DIVIDEND PUZZLE

The pioneering works of Gordon (1959) and Lintner (1956, 1962) and
Miller and Modigliani (1961) spurred an ongoing debate on dividend
policy, which remains a controversial issue to this day. In a 1976 article,
economist Fischer Black found no convincing explanation for why firms
pay cash dividends; he titled the article “The Dividend Puzzle.” 2 The
dividend puzzle is a concept in finance in which companies that pay
dividends are rewarded by investors with higher valuations, despite the fact
that, according to many economists, investors shouldn’t care whether a firm
pays dividends.
According to this rationale, from the investor’s point of view,
dividends should have no effect on the process of valuing equity because
investors already own (a piece of) the company. Therefore, the investor
should be indifferent to receiving the dividends as cash or reinvesting them
into more shares of the company. At the time Black wrote his paper, there
was a wide gap between the tax rates on ordinary income (meaning
dividends) and capital gains. The puzzle—why would corporations force
investors to pay high ordinary tax rates on dividends when lower capital
gains tax rates could apply to the sale of stocks?
Economist G.M. Frankfurter gave the puzzle a second look many years
later, in a 1999 article that summarized 3 the previous literature. Like Black,
Frankfurter concluded the puzzle still existed, despite changes to the tax
code. He opined, “Investors love dividends.”
Since 1999, many academics have followed on the writings of Black
and Frankfurter. They’ve produced extensive and sometimes conflicting
research, offering many alternative theories as to why firms pay dividends,
or why they shouldn’t, or even why the decision to pay dividends may be
irrelevant. But to date, empirical evidence has yet to clearly support any of
the theories set forth.

The Dividend Payment Process

Suppose Pepsi is planning to pay a dividend to its
shareholders. Here’s how the process will unfold.

On January 28, Pepsi declares it will pay its regular

dividend of $2.40 per share to holders of record on
February 27, with payment to be received by the
shareholders by March 17.
The ex-dividend date for the dividend is February 25
(usually two days before the holder-of-record date).
That means that investors who purchase Pepsi
shares on or after February 25 do not have the right
to receive the dividend.
On March 17, the payment date, Pepsi deposits or
mails dividend checks to the holders of record.

A BRIEF HISTORY OF CORPORATE DIVIDENDS

During the late 1930s and 1940s, dividends were commonplace among
public companies. They were considered the key benefit of stock
ownership: Wary investors who had suffered great losses after the 1929
crash demanded higher dividends to offset the risk of holding stock. In fact,
the average dividend yield on stocks exceeded 4 percent from 1929 until
1958. During that span, stocks always paid more than bonds. In many years,
dividend payments averaged well over 5%.
During the late 1950s, bond yields began to climb and dividend yields
dropped due to a combination of factors. First, rising inflation lifted interest
rates on a ten-year U.S. Treasury note from 2.3 percent at the beginning of
the decade to 4.7 percent by its end. This made bonds more attractive to
investors than stocks.
At the same time, the Dow continued its rise after exiting the secular
bear market in 1954. The average yield of a Dow stock in 1954 was 4.5
percent. 4 As Dow stock prices increased, their dividend yields (as a
percentage of price) dropped below that of bonds. By the end of the decade,
the average yield had dropped to 3.3 percent. The average yield of a Dow
stock did not rise above 4 percent again until 1974.
In 1960, more than 70 percent of public companies trading on US
exchanges paid dividends. Slowly, the number of dividend-paying firms
began to wither. Although the companies in the Dow have always paid
dividends, by 1999, only 20.8 percent of NYSE and NASDAQ listed firms
paid them. The same year marked the end of one of the greatest secular bull
markets in stock-market history.
In a 2001 journal article, economists Eugene Fama and Kenneth
French postulated this decline in dividend popularity occurred largely
because so many new publicly traded firms were very growth oriented. 5
These firms had a lot in common—small size, low earnings, and large
investments relative to earnings—and generally paid few or no dividends.
None of these types of firms trade on the Dow, which is reserved for larger
blue-chip companies.
More recently, dividend initiations and increases have been positive
and today nearly half the firms in the more expansive S&P 500 pay
dividends over 2 percent (Table 2.3).

Sector
S&P 500 Index Number Number of Stocks Median 5-Year Annual
Weight in
Sector of Stocks with Dividends <2% Dividend Growth Rate
Index
Consumer
82 11.5% 34 8%
Discretionary
Consumer Staples 42 10.9% 28 9%
Energy 43 11.1% 11 8%
Financials 81 15.8% 47 1%
Healthcare 53 12.3% 14 8%
Industrials 60 10.3% 30 8%
Materials 30 3.5% 14 4%
Technology 70 18.2% 28 12%
Telecommunications 8 3.0% 5 3%
Utilities 31 3.4% 29 3%
Totals 500 100% 240 6%
Table 2.3: Stock Yields by Sector, Dividends Over 2 Percent
Source: Thomson Reuters, as of 3/31/2016

There has been another notable change in the dividend climate: a

marked increase in the concentration of dividends by payers. In a 2004
journal article, 6 Harry DeAngelo, Linda DeAngelo, and Douglas Skinner
found a strong increase in the concentration of dividend payments over the
preceding thirty years. While the number of firms that paid dividends
steadily declined, the total amount of dividends paid rose in real terms,
adjusted for inflation. According to the article, the top twenty-five dividend
payers in 2004 accounted for more than half of all dividend payments by
public nonfinancial firms.
Astute investors who understand the power of dividends during secular
bear markets strongly prefer higher-yield dividend payers. This is especially
true in a low-yield environment, where many dividend yields come in
above those of US Treasury bonds. That brings us to another bonus offered
by dividend-paying stocks: enhanced safety. During times of market
turmoil, dividend stocks don’t fall as much as others. The relative risk of
stock price free-fall—known as downside risk—is measurable through a
statistic known as the downside capture ratio.
Downside capture ratio is a statistical measure of overall performance
in a down stock market. In a falling stock market, an investment category,
or investment manager, with a downside capture ratio below 100 has
outperformed the index. For example, a downside capture ratio of 80
indicates that the portfolio measure declined only 80 percent as much as the
index during the period. Since 1926, the downside capture ratio of high-
dividend-yielding stocks has been 81 percent or lower over various long-
term periods (Table 2.4). Perhaps it makes more sense to explain the
inverse: Over long-term periods, high-dividend-yielding stocks declined 19
percent less than the broader market.
Time Period Downside Capture Ratio (The Lower, The Better)
Since 1927 81.53
50-year 67.45
30-year 65.86
20-year 65.83
10-year 81.61
Table 2.4: Downside Capture Ratios of High-Dividend Stocks, 1926–2011
Source: Kenneth French, as of 12/31/2011

In addition to safety, another important benefit of owning dividend-

paying stocks during secular bear markets is the consistent increases in
dividend payouts. For example, companies in the Dow in the long secular
bear market of 1966 to 1982 actually increased dividend payouts by nearly
5 percent per year. If you had invested $100,000 in the Dow in January
1966, on a price basis alone the value of your initial shares would have
declined to $90,275 by November 1982. However, by collecting and
reinvesting your dividends, you would have acquired more shares while
prices had stagnated or fell (i.e., 1972, when the Dow dropped by more than
40 percent).
 Stock markets go through more elongated cycles of underperformance
than outperformance. By investing in dividend-paying stocks and
reinvesting the proceeds, investors can better insulate themselves from
treacherous market periods. In the next chapter, I will explore some
examples of the promise of dividend reinvestment.

1 M.J. Gordon, “Dividends, Earnings, and Stock Prices,” Review of Economics and Statistics, 41
(1959): 99–105.
2 Fischer Black, “The Dividend Puzzle,” Journal of Portfolio Management, 2 (1976): 5–8.
3 G.M. Frankfurter, “What Is the Puzzle in ‘The Dividend Puzzle?’” The Journal of Investing, 8
(1999): 76–85.
4 Ibbotson SBBI 2015 Classic Yearbook: Market Results for Stocks, Bonds, Bills, and Inflation ,
Morningstar: Chicago (2015).
5 E. Fama and K. French, “Disappearing Dividends: Changing Firm Characteristics or Lower
Propensity to Pay?” Journal of Financial Economics, 60 (2001a): 3–43.
6 H. DeAngelo, L. DeAngelo, and D. Skinner, “Are Dividends Disappearing? Dividend
Concentration and the Consolidation of Earnings,” Journal of Financial Economics, 72 (2004): 425–
456.
 CHAPTER 3

THE SNOWBALL EFFECT: THE PROMISE OF

REINVESTING INCOME

“I don’t like stock buybacks. I think if a company has the money to buy
their stock back, then they should take that and increase the dividends.
Send it back to the stockholder. Let them invest their money again from
the dividends.”
—T. Boone Pickens–

B U ILDING A PORTFOLIO with dividends and interest as its bedrock is a long

journey. Staying the course through secular bear markets and holding
investments that pay dividends is of paramount importance, and many
investors today are abandoning a key investment strategy that allows
compounding to work.
In 2016, as the Dow once again drew close to its record high of
18,000, slightly more than half of Americans (52 percent) polled by Gallup
reported that they currently had money in the stock market (Figure 3.1).
That matches the lowest ownership rate in the poll’s nineteen-year history.
The percentage of Americans who own stocks has been falling steadily
since the financial crisis began.
Stock ownership by US investors peaked at 65 percent in 2007. It has
been below 60 percent since 2009, even as the broader market has bounced
back from its March 2009 lows. Despite recent stock market highs,
individual investors remain wary of stocks. More than three in four
Americans (76 percent) say they are reluctant to invest in the stock market,
even with interest rates on savings accounts and certificates of deposit
(CDs) lingering at record lows. Americans’ also have a preference for real
estate. Already Americans’ top pick as the “best long-term investment” for
the last two years, Gallup found that real estate has increased its lead over
stocks again. Thirty-five percent of Americans now choose real estate
compared with a mere 22 percent for stocks and stock mutual funds. But
investing in real estate is no panacea. According to the Federal Housing
Finance Agency (FHFA), an investment in the average home (as tracked by
the Home Price Index from the FHFA) would have grown from $100 in
1975 to nearly $500 by 2013. A similar $100 investment in the Dow, with
reinvested dividends, over that time frame would have grown to
approximately $1,500. Thus if American investors knew about the power of
dividends and reinvestment that stocks can provide, they would likely
consider stocks in a different light.

Figure 3.1: Percentage of US Adults Invested in the Stock Market

Source: Gallup, 2016 7

The fact is that Americans’ appetite for risk taking has been short-
circuited. Prior to the Internet and housing bubbles of the early and mid-
2000s, investing used to be all about taking on risk in order to make money.
But today, investors are much more concerned about losing money than
making it. The 2008 financial crisis made us all very aware that the
financial world of today is much more dangerous than it was twenty years
ago. Americans may claim that real estate is the best item to own over the
next several years, but the numbers tell a different story. Cash hoarding is
rampant: A record $10.1 trillion—more than enough cash to easily buy all
thirty Dow companies—is currently parked in money-market mutual funds,
bank savings accounts, and certificates of deposit (CDs). 8
Unfortunately, all that money sitting in low-risk accounts is effectively
earning a return of zero—and when you take inflation into consideration,
the real rate of return is actually negative. Main Street investors started
lightening up on stocks after the 2008 financial crisis. In the four years
ending in 2011, individual investors yanked more than $395 billion out of
stock mutual funds, according to the Investment Company Institute. 9
Investors began to tiptoe back into stock mutual funds again in 2013,
adding $185 billion in that year and 2014. However, in 2015, investors
again began to withdraw money from mutual funds,by just more than $60
billion.
Not surprisingly, the timing of individual investors’ forays into and out
of the stock markets has usually been poor. According to a long-running
study 10 by Dalbar Associates, a financial consulting firm, during the twenty-
year period ending in 2014, investors that were surveyed earned slightly
more than 5 percent annually. During the same period, the Dow averaged a
9.95 percent return when dividend reinvestment is taken into consideration.
This remarkable gap in performance is largely attributable to investors’
efforts to time the market and avoid dividend stocks. For example, during
the 2008 market crash, the average investor surveyed by Dalbar lost 24
percent of his or her portfolio value, compared to an 18.4 percent drop for
the Dow. This evidence strongly suggests that individual investors are very
poor market timers and stock selectors. I have no doubt, however, that the
fear of owning stocks through secular bear periods like the Great Recession
would be reduced if investors stayed put in the markets and focused less on
price and more on dividend income and the power of compounding.
 Let’s take a look at the power of compounding by examining an
investment in Pepsi. Pepsi, one of the largest companies in the world, is a
global firm that maintains a high level of cash generation and ample
dividends. The key to owning stock in companies like Pepsi is not the
stock’s daily price performance, but the cash the company allocates to its
shareholders.
Consider an investor who earmarked $100,000 of her retirement
portfolio to Pepsi right at the end of the last secular bull market, 2000. For
simplicity’s sake, I’ve rendered the information in Table 3.1 by showing the
proceeds from the $100,000 initial investment in Pepsi shares in 2000 and
then at the end of each subsequent year.
The investor began with 2,680 shares of Pepsi from her initial
$100,000 investment. During the first year of investment, she received
$1,500.80 in dividends. She could—and did—choose to use the proceeds of
these dividends to purchase forty more shares of Pepsi at the end of the
year. Each year, her number of shares grew, and the dividends she received
were reinvested.

Shares Annual Price Dividend Payout for Shares Value + Cash

Date
Held Dividend (PEP) Last 12 Months Repurchased Remainder
12/31/2000 2,680 $0.56 $37.29 $1,500.80 40 $62.80
12/31/2001 2,720 $0.58 $37.08 $1,577.60 44 $8.88
12/31/2002 2,764 $0.60 $32.58 $1,658.40 51 $5.70
12/31/2003 2,815 $0.63 $36.51 $1,773.45 48 $26.67
12/31/2004 2,863 $0.85 $41.55 $2,433.55 58 $50.32
12/30/2005 2,921 $1.01 $47.88 $2,950.21 62 $31.97
12/29/2006 2,983 $1.16 $51.65 $3,460.28 67 $31.70
12/31/2007 3,050 $1.43 $63.98 $4,361.50 68 $42.56
12/31/2008 3,118 $1.60 $47.37 $4,988.80 106 $10.14
12/31/2009 3,224 $1.75 $54.30 $5,642.00 104 $4.94
12/31/2010 3,328 $1.89 $60.10 $6,289.92 104 $44.46
12/30/2011 3,432 $2.03 $62.97 $6,966.96 111 $21.75
 Secular Bull Market Resumes
12/31/2012 3,543 $2.13 $66.99 $7,546.59 112 $65.46
12/31/2013 3,655 $2.24 $82.36 $8,187.20 100 $16.66
12/31/2014 3,755 $2.40 $91.76 $9,012.00 98 $36.18
12/31/2015 3,853 $99.92 Price
Table 3.1: Pepsi Dividend Reinvestment Example, 2000–2015

The Pepsi investor started her investment program in 2000 with 2,680
shares of stock. By the end of the secular bear market in 2011 she held
3,432 shares of stock. Her portfolio had more than doubled over that period
of stagnation. I continued the example through the end of 2015. By then,
she had accumulated 3,853 shares. One of the key elements to the growth in
her portfolio was dividend enhancement each year. Throughout the period
of her investment, Pepsi continued to advance its dividend substantially: In
2000, the yearly dividend was $0.56 per share, but by the end of 2015, the
dividend had risen to $2.40 per share and was expected to be $2.80 per
share in 2016.
Since the investor owned 3,853 shares of Pepsi in 2015 thanks to her
stock repurchasing plan, her total net portfolio on December 31, 2015 was
$384,606—almost four times her initial investment. There are several
noteworthy points about this exercise:

Dividend growth is just as important as the yield paid at the initial

stock investment. The power of compounding is enhanced through
rising dividend payments. The more shares you own and the
higher the annual dividend rises in the future, the better the
compounding effect works in your favor.
When the stock market goes through difficult periods, such as it
did in 2008, an investor focused on building wealth through the
compounding effect of dividend reinvestment comes out ahead.
The reason: If prices fall, it simply means that the investor can
buy more shares.
Examine the amount of shares repurchased at the end of 2008
 versus 2007 in Table 3.2. The Pepsi investor was able to purchase
106 shares of Pepsi stock with dividend proceeds at the end of
2008—substantially more than the previous year’s repurchase of
68 shares. When Pepsi’s share price dropped, the investor was
able to purchase more shares when she reinvested her dividends. It
may seem counterintuitive, but a temporary drop in price for a
dividend-yielding stock an investor owns is a benefit, as it allows
her to buy more shares.

Shares Annual Price Dividend Payout for Shares Value + Cash

Date
Held Dividend (PEP) Last 12 Months Repurchased Remainder
$
12/31/2007 3,050 $1.43 $4,361.50 68 $42.56
63.98
$
12/31/2008 3,118 $1.60 $4,988.80 106 $10.14
47.37
Table 3.2: Pepsi Dividend Reinvestment Example, 2007–2008

Investors focused on building wealth through adding shares by

reinvestment must overlook periods of extreme market volatility
and not be frightened away from the stock market in secular bear
markets. An erudite investor who chooses to stay with a dividend
reinvestment program through thick and thin will be rewarded.

Pepsi is an example of a stock that has appreciated in price since the

Internet bubble of 2000. Now, we’ll examine a company whose stock fell in
price during the entire 15 year period, but continued to expand its dividend
and reward its shareholders: Northern Trust, one of the largest trust banks in
the United States. Table 3.3 shows how an investor would have fared at the
end of 2015 based on an initial investment of $100,000 in Northern Trust at
the end of year 2000 with a starting price of $81.91.

Shares Annual Price Dividend Payout for Shares Value + Cash

Date Held Dividend (NTRS) Last 12 Months Repurchased Remainder
12/31/2000 1,220 0.54 $81.91 $658.80 8 $62.80
12/31/2001 1,228 0.62 $60.70 $761.36 12 $62.08
12/31/2002 1,240 0.68 $35.05 $ 843.20 24 $42.27
12/31/2003 1,264 0.68 $46.00 $ 859.52 18 $56.47
12/31/2004 1,282 0.76 $48.73 $ 974.32 19 $71.25
12/30/2005 1,301 0.84 $51.72 $1,092.84 21 $73.53
12/29/2006 1,322 0.94 $61.07 $1,242.68 10 $65.06
12/31/2007 1,332 1.03 $76.38 $1,371.96 17 $23.50
12/31/2008 1,349 1.12 $50.52 $1,510.88 29 $61.78
12/31/2009 1,378 1.12 $52.84 $1,543.36 29 $46.06
12/31/2010 1,407 1.12 $55.35 $1,575.84 28 $23.14
12/30/2011 1,435 1.12 $40.03 $1,607.20 40 $43.07
12/31/2012 1,475 1.18 $50.02 $1,740.50 34 $57.63
12/31/2013 1,509 1.30 $48.95 $1,961.70 40 $77.28
12/31/2014 1,549 1.44 $64.41 $2,230.56 34 $80.67
$72.09
12/31/2015 1,573
Price
Table 3.3: Northern Trust Dividend Reinvestment Example, 2000–2015

The investor in this example collected $17,744 in dividends over the

fifteen-year time period. Because he chose to reinvest those dividends, his
share count grew from 1,220 to 1,573. Without dividend payments or
reinvestment, he would have lost more than 10 percent on the Northern
Trust stock investment, as the price fell from $81.91 to $72.09 over the
period of 2000-2015. His investment would have been worth $87,949.80 if
Northern Trust did not pay dividends, instead of $113,397.57 with the
actual dividend payments and reinvestment.
This proves that even in the most difficult of secular bear markets, a
dividend investor keeps capital losses to a minimum. Remember, at the
initial starting period of ownership, Northern Trust was paying out $658.80
on the original $100,000 investment—an annual yield of less than 1
percent. But by the end of 2015, the investor was receiving $2,230.56 in
cash dividends from the original investment of $100,000—more than three
times greater than his initial yield.

Selecting Dividend-Paying Stocks

Choose firms with a solid history of dividend payments

plus above-average dividend growth. I generally seek a
minimum of 5 percent in dividend growth rate for
prospective investments. As I mentioned in the Pepsi
example, the snowball effect of dividend payments plus
the rate of dividend growth ultimately enriches
investors.
Choose firms with moderate dividend payout ratios.
Firms with moderate or even low payout ratios will have
the financial capacity to continue paying and raising
dividends at an above-market rate.
Choose firms with an above-average dividend yield
based on their price and dividend history. Firms that
trade at low dividend/payout ratios offer investors an
opportunity for added appreciation through share price
and dividend reinvestment.

Year 2006 2007 2008 2009 2010 2011 2012

Dividend Per Share $1.16 $1.43 $1.60 $1.75 $1.89 $2.03 $2.13
Dividend/Payout Ratio 37% 40% 49% 46% 47% 49% 53%
Dividend Yield Avg. 1.9% 2.1% 2.4% 3.2% 2.9% 3.1% 3.1%
Dividend Growth Rate 14.85% 23.28% 11.89% 9.37% 8.00% 7.41% 4.93%
$56– $62– $50– $44– $59–
Stock Price High/Low $59–$68 $62–$74
$66 $79 $80 $65 $72
Dividend Yield Percentage 1.6%– 1.8%– 2.0%– 2.7%– 2.7%– 2.8%– 2.8%–
 High/Low 2.1% 2.3% 3.2% 4.0% 3.3% 3.5% 3.5%
Valuation Over Over Under Under Under Under Under
Table 3.4: Pepsi Dividend/Price Analysis, 2006–2012

As you can see in Table 3.4, Pepsi shares traded at a range of $44 per
share to $80 per share over the six-year period as Pepsi’s dividend
continued to advance. The dividend yield percentage high/low, or current
yield, fluctuated between 1.6 percent and 4 percent. On a dividend-to-share-
price basis, Pepsi is most undervalued when its current yield nears 4 percent
and most overvalued, based on historical precedent, when its current yield
falls below to 2 percent.
Pepsi’s ability to advance dividends slowed to only 5 percent in 2012,
far below its historical rate. A slower dividend growth rate ultimately leads
to reduced reinvestment of Pepsi dividends in the future. As Pepsi is now
paying more than 50 percent of its earnings in dividends (the dividend
payout ratio), future dividend increases will most likely trend slightly below
earnings growth.
Clearly, Pepsi was a tremendous investment from 2000 to 2015. As of
April 2016, Pepsi’s current yield was 2.83 percent, based on the year’s
dividend ($2.81) compared to its current price ($99.03)—right in the middle
of its historical dividend yield range.
If you apply a price-to-dividend ratio analysis to stocks you are
thinking of purchasing or already own, you can purchase, or reinvest, cash
at optimal points in time. If Pepsi’s share price falls and the yield nears 4
percent, the investor could then time her purchases in the most efficient
manner and gain the most shares of Pepsi stock possible. Following this
type of market timing will allow an investor to collect more shares of a
company’s stock at the times when it is most undervalued.

7 Gallup, http://www.gallup.com/poll/190883/half-americans-own-stocks-matching-record-low.aspx?
g_source=stock%20market&g_medium=search&g_campaign=tiles (accessed May 10, 2016).
8 Stradley & Ranon, Crane Data, Money Market Reform Presentation, 2015.
9 Adam Shell, “Financial crisis ushers in ‘The Age of Safety’ for investors,” USA Today, September
4, 2012. Accessed at: http://usatoday30.usatoday.com/money/markets/story/2012-09-04/investing-
stocks-safety-risk/57582840/1 , May 28, 2016
10 John F. Wasik, “Retirement Investors, Riding Out the Panic,” New York Times , October 9, 2015.
Accessed at: http://www.nytimes.com/2015/10/11/business/mutfund/retirement-investors-riding-out-
the-panic.html?_r=0 , May 28, 2016.
 CHAPTER 4

THE SMALL-CAP PARADOX

“Great intellects are skeptical.”

—Friedrich Wilhelm Nietzche, 1844–1900

L A RGE COMPANY STOCKS, like those within the Dow, often go through
periods of elongated stagnation in secular bear markets. Many pundits argue
that adding other asset classes to your portfolio can help you offset the risk
of underperformance during these times. These assets may include small-
cap stocks, gold, bonds, and commodities. This chapter examines small-cap
(cap is short for capitalization) stocks, which trade at much lower market
capitalizations (henceforth, market cap ) than their larger brethren but can
provide income as well. Small-cap stocks do routinely provide dissimilar
performance patterns than large-cap stocks, but you might wonder: Are
small-cap stocks a worthwhile investment for me, since I’m planning to
concentrate my portfolio on dividend-paying stocks? Can small-cap stocks
help me avoid portfolio stagnation during secular bear market periods?
Before examining the virtues of small-cap stocks, I must first define
the term small cap . Market cap is the number of shares outstanding in a
company multiplied by the share’s price. A company with a billion shares
outstanding and a share price of $50 would have a market cap of $50 billion
—a large-cap stock. A company with a million shares outstanding and a
share price of $50 would have a market cap of $50 million—a small-cap
stock.
Note that in this example, the price per share is the same. While it is
true that small-cap stocks sometimes, and even often, have a lower price per
share than large-cap stocks, it is not always true. Price per share has no
bearing on whether a stock is small cap or large cap. The definition of a
small-cap stock is imprecise, but I use $1 billion as a benchmark and
consider any company trading below this market cap a small cap.
The line is drawn differently elsewhere. Most academic researchers
suggest that small caps must be far below a $1 billion market cap to capture
the desired diversification effect. These “smallest of the small caps” are
sometimes referred to as micro-cap stocks .
Why is market cap important? Because history has shown that stocks
of companies with different market caps behave differently in terms of
return and risk. Several older academic studies have concluded that over
long periods of time, the stocks of small companies have outperformed
those of larger ones. This occurs because small company stocks have a so-
called risk premium—because they are riskier, investors should be
compensated with higher returns.
Why are they riskier? Most small-cap companies are in the early years
of their evolution. While they gain maturity, they have limited reserves for
hard times. Also, if a smaller company loses a few key executives, or if the
economy takes a turn for the worse, it only takes a few nervous investors to
cause the stock to plummet.
Most financial planners and market commentators have recommended
for years that small-cap shares be a part of every diversified portfolio,
largely due to their performance attributes and theoretical risk reduction. I
believe, however, that a small-cap paradox exists. Consider the following
facts:

Small caps have undergone substantial periods of

 underperformance and their own unique secular bear market
periods, especially during the last thirty years.
Institutions are now becoming more dominant in the capital
markets.
Small caps have a high level of volatility and downside risk.
Fewer small-cap firms pay dividend yields above 2 percent—the
key element for an investor to withstand a secular bear market.

THE SIZE-EFFECT PHENOMENON

The small-firm effect was first discovered by the general public over thirty
years ago. In a widely known academic journal article in the early 1980s,
Rolf Banz published some of the most important research ever written on
the so-called small-firm effect. In the study, 11 Banz separated all New York
Stock Exchange stocks into quantization (shares outstanding multiplied by
stock price) and examined their returns; he found that the average annual
gain of the smallest firms was almost 20 percent higher than that of the
largest firms. Banz’s documentation of the small-firm effect spawned many
subsequent academic papers. In fact, a special issue of the Journal of
Financial Economics that was devoted to small caps contained several
papers that added to the canon of literature on the size effect.
One early vital discovery about small-cap stocks was made by Donald
B. Keim. He demonstrated in a 1983 study that nearly 50 percent of the
average outperformance during the period from 1963 occurred in the month
of January. Additionally, Keim observed, more than one-quarter of all
excess returns came in the first week of January alone. 12 This is often
ascribed to the notion that some investors sell their securities at the end of
the calendar year in order to establish capital losses for income tax
purposes. These waves of stock sales can put downward pressure on
security prices at the end of year. 13 But then conversely, it causes upward
pressure on shares in January after all the selling is exhausted.
In addition to the Keim data, one detail has always been in question.
For six straight years between 1975 and 1981; small-cap stocks had an
average annual increase of more than 35 percent. This six-year surge was
largely responsible for a preponderance of early journal articles crowing
about how small-cap stocks historically outperform large-cap stocks. Since
this six-year run of supreme outperformance, the annualized returns of
small-cap stocks has not been as stellar. During multiple periods since 1981,
small-cap stocks have dramatically underperformed large-cap stocks (Table
4.1). The Russell 2000 Index, which is the most commonly referenced US
small-cap index, began in 1978, and the Russell 1000 Index is its large-cap
corollary. During the seven-year period from 1984 to 1991, small-cap (as
measured by the Russell2000 Index) stocks returned a pedestrian 4.6
percent on an annual basis versus 13.7 percent for large-cap stocks. From
1995 through the end of 1999, small-cap stocks had an annualized return of
10.2 percent versus 18.3 percent for large caps. In addition, in the past
three-, five-, and ten-year intervals, large-cap stocks continued to
outperform small caps (Table 4.2).

Period Small Cap Large Cap

1984–1991 4.6% 13.7%
1995–1999 10.2% 18.3%
2005–2008 -3.6% -2.8%
2012–2015 7.2% 12.2%
Table 4.1: Small Cap versus Large Cap Underperformance, 1984–2015
Source: Russell Corporation, through 12/31/2015

Period Small Cap Large Cap

3 years 7.2% 12.2%
5 years 6.8% 13.1%
10 years 5.4% 6.7%
Table 4.2: Small Cap versus Large Cap Underperformance, Various Ranges
Source: Russell Corporation, through 12/31/2015

According to data from Russell, a $100,000 investment in small-cap

US stocks at the end of 1978 would have grown to $370,597 by the end of
2015. This compares unfavorably to the $598,344 outcome with a similar
investment in large-cap US stocks.
Clearly, the positive small-size effect postulated by Banz in his famous
1981 study has been slowly eroding over the last few decades, and several
academic studies have chronicled this fact. Julia Sawicki, Nilanjan Sen, and
Cheah Chee Yian of Nenyang University revisited the small-cap effect
twenty-five years after the Banz study was published and found it to be
positive only during that 1975 to 1983 period. 14 The authors hypothesized
that small-cap firms may have indeed have held a narrow lead in
performance prior to 1980, but once the advantage was well promoted
(during the 1980s and 1990s), the size effect began to vanish.
Another researcher, John Campbell of Harvard University, suggested
that the small-cap advantage may be simply a “mistake” 15 that was
corrected once investors learned of the small-cap bias. He argued that the
glacial process of individual investor learning and industry innovations
(e.g., small-cap mutual funds) enabled more investors to participate in small
stocks over time.
A recent paper by Cliff Asness 16 also held a cynical view of small
caps. According to the author, small caps have a weak historical record that
varies significantly over time—one that became particularly weak after its
popularization in the early 1980s. The author concluded that the premium is
solely concentrated among microcap stocks (smallest of the small), that the
premium predominantly “resides in January,” that it is “weak
internationally,” and “is subsumed by proxies for illiquidity.” 17
I believe the explanation is quite simple: As new investors entered
small-cap stocks over the past three decades, the risk inherent in these types
of securities became more widely shared—and thus the excess returns
started to evaporate. In the periods when small caps did outperform large
caps, the illiquid micro-cap stocks included in the group seem to have
driven a noteworthy segment of the performance gap. This suggests that the
small-cap premium may actually be compensation for liquidity risk. A few
studies have presented direct evidence that liquidity risk helped explain the
small-cap premium. 18
An alternative interpretation of the disappearance of the small-cap size
effect was offered by author Jeremy Siegel, who suggested that the high
cost of transactions with small-cap stocks effected performance. 19 Donald
B. Keim also found that the transaction costs are substantial. Keim and his
coauthor Gabriel Hawakini examined the total costs of trading—not only
commissions and bid-asked spreads, but also the effect of trading on the
prices of securities being bought or sold—between 1991 and 1993. 20 They
found that total trading costs for the buying and selling of the smallest
stocks were sometimes above 7 percent. Another study by Kabir Hassan in
2004 found that once transaction costs are considered, small firms offer no
positive abnormal returns over large cap stocks. 21
Another area of dispute is the data held on small-cap stocks by the The
Center for Research in Security Prices (CRSP). The CRSP database fails to
account for stocks delisted by stock exchanges for performance-related
reasons. The CRSP simply ignores these stocks in its calculations, rather
than gathering their new, depressingly low prices and computing their
returns. As a result, many researchers conclude the CRSP overstates
performance. Academic studies examining this phenomenon have
concluded that NASDAQ-delisted stocks could affect the long-term
investment results of small caps by as much as 3 percent.

THE IMPACT OF INSTITUTIONS

Small-cap stocks are also unpopular with institutional investors, such as
pensions and mutual funds—which is clearly problematic, given the fact
that the institutional market is growing rapidly. Today, large institutional
investors hold a large percentage of the country’s equities, and they prefer
to buy large-cap stocks. (Often, this is because institutions have mandates
on market limitations and risk concentrations.) Many pundits argue that the
relative weakness of small-cap stocks since 1982 can also be blamed on the
growth of institutional investors, and indeed, it does appear to have some
effect. Evidence suggests that the growing power of institutions is having an
adverse effect on the ability of smaller, financially sound companies to
obtain investor recognition.
Economists Paul Gompers and Andrew Metrick, 22 who are faculty
research fellows at the National Bureau of Economic Research, arrived at
that conclusion after correlating patterns with stocks and institutions. From
disclosure statements, they found that institutions managing at least $100
million of securities raised their percentage of the equity market from 26
percent in 1980 to 51 percent in 1996. Jonathan Lewellen of Dartmouth
College found that this had risen to 62 percent by 2005. 23 Lewellen also
found that from 1980 to 2005, institutions tilted toward large-cap stocks,
with 77 percent of a typical institutional portfolio devoted to large caps.
Not only have institutions come to own more of the country’s equities
than ever before, they also lean toward the largest of the blue-chip stocks,
mostly because of policy restrictions and the size of the assets within the
funds. Institutional investors are often forbidden from owning more than 5
percent of a company’s shares, a limitation that’s easy to follow when
investing in Microsoft. Of course, this confines the institutions to focus on
large, liquid stocks.
Also, a small company rarely gets considered as an investment by
institutions simply because a large fund purchase of its shares would have
an inordinate affect on the company’s share price. Plus, if an institution
wanted to take a large position in the small-cap company’s stock—say, 3
percent—it would have to take a large public stake in it.

DOWNSIDE RISK
 Figure 4.1: Volatility: 1979–2015
Source: Russell Corporation, Standard & Poor’s, through 12/31/2015

Small caps are inherently more volatile. The average standard deviation of
the Russell 2000 Index since 1979 is 19.5 percent, versus 15.1 percent for
the Dow. The chance of dramatic capital loss from small caps is also higher
than from large caps. When large caps declined in 1973 by 14.7 percent,
small caps dropped 30.9 percent. In the crash of 1987, large caps dropped
30.7 percent but small caps sank 38.2 percent. Thus small-cap stocks almost
always will bear a heavier burden of a market decline.

THE PARADOX OF SMALL CAPS

If small-cap stocks are more volatile and maintain a lower overall total
return than large caps, should income investors consider them? This is the
paradox. One consideration for any asset class is its correlation, or the
statistical measure of how two securities move in relation to each other. The
lower the correlation, the more attractive the additional asset will be in
providing diversification to a portfolio.
The correlation between small- and large-cap companies has averaged
.81 in the twenty-year period ending December 31, 2015, but of late,
correlations have been increasing. According to data from Charles Schwab,
small caps had a correlation to large caps of .66 from 1995 to 2000. From
2001 to 2007, this increased to .83, and from 2008 to 2014, to .94. This
phenomenon is not limited to small caps, as many other equity asset classes
(including international) followed the same pattern.
Small-cap stocks are also infrequently dividend payers. Of the 4,234
companies in the Russell 2000 Index, only 1,363 pay dividends. Of these,
875 pay dividends of 2 percent or higher—my preferred requirement for
investing in a dividend stock. If an investor is considering small-cap stocks
as part of a diversified portfolio, the universe is therefore limited.
If an investor is to consider investing in small-cap stocks, only
dividend-paying firms should be considered. Analysis in 2015 by Royce
Research 24 found that dividend-paying companies within the Russell 2000
measured well relative to their nonpaying counterparts from December 31,
1992 through December 31, 2014. The average annual total return for the
twenty-two–year period was 11.2 percent for small-cap dividend payers
versus 8.2 percent for nonpaying firms. This compares favorably to the 9.5
percent annual return for the small-cap index itself and nearly matches the
large-cap index.
Unsurprisingly, the index’s dividend-paying small-cap companies
showed higher returns in thirteen of the twenty-two calendar-year periods
examined. Outperformance in five out of seven down-market calendar-year
periods was a major contributor to the positive performance of dividend-
paying small-cap companies. Small-cap dividend firms also maintain a low
downside capture ratio, just like their large-cap brethren.
The conventional wisdom has always been that because small caps
possess higher risks, their returns should inevitably be higher. That’s
nonsense. Data prove that small-cap stocks have not outperformed large-cap
stocks since 1979. Data on the long-term returns of small caps going back
to 1926 are also highly suspect, considering the extreme performance
advantage of the 1976–1983 period.

THE MICRO-CAP ADVANTAGE

The micro-cap segment of the US markets is a very small piece of the
greater small-cap universe. The aggregate market capitalization of the entire
micro-cap class is just over $200 billion in investable assets—the same size
as a single Dow firm, Pfizer. Micro-caps are the smallest firms in the small-
cap category; the average market capitalization of companies in the micro-
cap universe is about $300 million. For many years, the investment industry
lacked a clear definition of the difference between small-cap and micro-cap
stocks.
When Russell began publishing the Russell Microcap Index in June
2005 (including data back tested to 2000), it became the first to offer up a
formal definition and an industry categorization standard. The Russell
Microcap Index includes about 1,000 of the smallest securities in the
Russell 2000 Index by market capitalization. Russell then combines those
stocks with another 1,000 securities in the small-cap universe that are
considered to be illiquid.
Today, the average market capitalization in the Russell Microcap Index
is just over $400 million—quite a bit smaller than the average $1.8 billion
of companies in the Russell 2000 Index. Russell Microcap Index stocks are
inherently illiquid, which means that for daily trading, shares are measured
in thousands rather than millions. It is thus more difficult for an investor to
trade these types of stocks.
However, the advantage of micro-cap stocks is their correlation to the
larger-cap Dow—about .65, much lower than the entire small-cap universe.
Furthermore, since 2008, the correlation has steadily been decreasing—the
opposite of what is happening in the broader Russell 2000 Index. This
provides better diversification for investors. Although the universe of
dividend-paying micro caps is also small, a few hundred firms do offer
investors compelling yields.
The micro-cap universe contains about 1,300 firms, and I’ve provided
a list in the appendix of nearly 100 micro-cap stocks that pay solid dividend
yields. You can sort through this list to find promising candidates for direct
investment or invest in a micro-cap fund that includes firms in the list.
There are two caveats in investing in micro-cap stocks individually. The
first is research. Micro-caps have far less information available to investors
and research reports from the major brokerage firms are rare. Secondly,
there is the illiquidity issue. The bid/ask spreads for micro-cap companies
will be much higher than larger firms that trade millions of shares per day.
So although I find the merits of micro-cap stocks with solid dividends
compelling, investing most of your portfolio in larger-cap dividend firms
makes the most sense.

11 R. Banz, “The Relationship between Return and Market Value of Common Stocks,” Journal of
Financial Economics, (1981), 9(1): 3–18.
12 Donald B. Keim, “Size-Related Anomalies and Stock Return Seasonality,” Journal of Financial
Economics, (1983), 12: 13–32.
13 Kathryn E. Easterday, Pradyot K. Sen, and Jens A. Stephan, “The Persistence of the Small
Firm/January Effect: Is It Consistent with Investors’ Learning and Arbitrage Efforts?” The Quarterly
Review of Economics and Finance , 49 (2009), 1172–1193.
14 Julia Sawicki, Nilanjan Sen, and Cheah Chee Yian, “The Disappearance of the Small Stock
Premium: Size as a Narrowly-Held Risk,” 2005, 19-22.
15 John Y. Campbell, “Asset Pricing at the Millennium,” Journal of Finance, 55 (2000): 1515–1567.
16 Cliff Asness, Andrea Frazzini, Ronen Israel, Tobias Maskowitz, and Lasse Pedersen. “Size
Matters If You Control the Junk,” working paper, 2015, 55-59.
17 Ibid, abstract.
18 Weimin Liu,”A Liquidity-Augmented Capital Asset Pricing Model,” Journal of Financial
Economics, 82(3) (2006): 631–671.
19 Jeremy J. Siegel, Stocks for the Long Run (New York: McGraw-Hill, 2002), 78-80.
20 Gabriel Hawakini and Donald B. Keim, “The Cross Section of Common Stock Returns: A Review
of the Evidence and Some New Findings ,” Rodney L. White Center for Financial Research, Wharton
School: 1999.
21 S. al Rjoub and M.K. Hassan, “Transaction Cost and the Small Stock Puzzle: The Impact of
Outliers in the NYSE, 1970–2000,” International Journal of Applied Econometrics and Quantitative
Studies, 1(3) (2004), 103–114.
22 P.A. Gompers and A. Metrick, “Institutional Investors and Equity Prices,” Quarterly Journal of
Economics, 116 (2001), 229–259.
23 Jonathan Lewellen, “Institutional Investors and the Limits of Arbitrage,” Journal of Financial
Economics, 102(1) (2011), 63-64.
24 The Royce Funds, “The Importance of Small-Cap
Investing,” https://www.roycefunds.com/insights/whitepapers/dividends-crucial-component-long-
term-investment-approach (accessed April 27, 2016).
 CHAPTER 5

THE POWER OF BOND INTEREST

“Compound interest is the eighth wonder of the world … the greatest

mathematical discovery of our time.”
—Mark Twain, 1835–1910

WHAT ARE BONDS?

S O FAR, I’VE proven that the notion “stocks always go up” is a falsehood.
I’ve also proven that even during extended periods of underperformance for
stocks, investors who place their hard-earned dollars into high-yielding
dividend stocks—like Pepsi, for example—can still earn moderate returns.
But there are other options for investors during secular bear stock
markets. Many investors consider bonds boring and a poor alternative to
other investment choices. Yet they provide great potential in terms of
diversification and offer dependable semi-annual income during the
elongated periods when stocks stagnate.
A bond is a debt security—it is analogous to an I.O.U. When you
purchase a bond, you are lending money to a government, corporation,
municipality, or other entity known in the bond world as the issuer . In
return for the money you lend, the issuer promises to pay you back a stated
rate of interest during the life of the bond and ultimately repay the bond’s
face value upon its maturation date (the end date of the bond).
Most investors put their money in bonds for diversification and safety.
The price you pay for a bond is based on a multitude of variables, including
prevailing interest rates, liquidity, credit quality, maturity and tax status.

THE LANGUAGE OF BONDS

Newly issued bonds normally sell at or close to par value , which means
100 percent of the face , or principal , value. Previously issued bonds trade
on secondary markets and can vary widely in price. Secondary bonds
fluctuate in price in response to changes in interest rates, credit quality,
wide-ranging economic conditions, and supply and demand. When a bond’s
price increases above its face value, it is considered to be selling at a
premium . A bond selling below face value is considered to be selling at a
discount .

WHAT’S THE DIFFERENCE BETWEEN A BOND AND A STOCK TRADER? A

BOND MATURES.

Bond interest can be fixed, floating, or payable at maturity. Most bonds

carry a fixed interest rate until maturity that is expressed as a percentage of
the principal value. For example, a $1,000 corporate bond with an interest
rate of 4 percent will pay the holder $40 per year, or $20 every six months.
This $40 interest payment is known as a coupon .
A bond’s maturity date is the specific date on which the investor’s
principal (the amount of money loaned) will be repaid. Generally, bond
terms range from one to thirty years. Term ranges are often categorized as
follows:

Short-term: Maturities of up to five years

Medium-term: Maturities of five to ten years
Long-term: Maturities greater than ten years
 Investors choose terms based on when they need their initial
investment repaid and also on their risk tolerance. Short-term bonds, which
generally offer lower interest rates, are considered a fairly safe investment
because principal is repaid sooner. Conversely, long-term bonds provide
better interest rates in order to compensate investors for potential bond price
fluctuations (in the event that the investor decides to sell the bond before
maturation) and for locking up their funds for an extended period of time.
While its maturity date indicates how long a bond will be in effect, or
outstanding , many bonds are designed to allow the issuer to change the
maturity date. This redemption or call provision allows the issuer to redeem
the bonds at a specified price and certain time period prior to the bond’s
maturation. If a bond is called , it is redeemed early.
A bond’s yield is the return earned on the bond based on the price paid
and the interest payments the bondholder receives. Typically, yields are
quoted in basis points (abbreviated as bps and pronounced “bips”). One
basis point is equal to one one-hundredth of a percentage point, or 0.01
percent, so, for example, 4.00 percent = 400 bps.
Current Yield and Yield to Maturity
Investors are usually quoted two types of bond yields: current yield
and yield to maturity . Current yield is the annual return on the dollar
amount paid for the bond; it is derived by dividing the bond’s interest
payment by its purchase price. Thus, a bond purchased at par for $1,000
with an annual interest payment of $40 maintains a current yield of 4
percent. Let’s call that Bond A.
However, if the price of the bond in question falls below its original
purchase price and trades at a discount to par, the same bond will have a
higher current yield. If a $1,000 bond trades for $925, a discount, the
current yield would be calculated by the annualized payment ($40) divided
by its current price ($925), rather than its par value, $1,000. Let’s call that
Bond B.
In Bond B’s case, the current yield would be 4.32 percent. It is
important to note that this calculation of current yield does not take into
account a critical concept: An investor who holds the discount bond to
maturity also collects a capital gain of $75—the difference between the
$925 price paid and the bond’s $1,000 par value at maturity.
That is why the most important calculation to know in owning bonds is
known as yield to maturity. Yield to maturity (YTM) takes this critical
maturity value concept into account. It is the preferred measure for bonds,
as it considers the price paid for the bond, the coupons collected (interest
paid), and maturity at par value. This calculation, which is universal to all
bonds, enables an investor to properly compare bonds with different
maturities and coupon payments.
As with current yield, YTM is expressed as a percentage. It is hard to
calculate a precise YTM, but you can approximate its value by using a bond
yield table or one of the many YTM online calculators. Alternately, you can
consider using this formula:
Approximate YTM = (C + ((F – P) ÷ n)) ÷ (F + P) ÷ 2
In this formula, C = coupon or interest payment; F = face or par value;
P = current price of the bond; and n = years to maturity. Consider the facts
of Bond B in the context of this formula: Bond B was priced at a discount,
$925, and had a coupon of $40. Its face value was $1,000, and its maturity
date was ten years.
Approximate YTM = ($40 + (($1,000 – $925) ÷ 10)) ÷ ($1,000 + $925) ÷ 2
= $47.5 ÷ $962.50 = 4.93 percent
This calculation reveals an approximate YTM of 4.93 percent for Bond
B.
Of course, it’s much easier to calculate actual YTM using Microsoft
Excel or an online calculator. An online calculator determined an actual
YTM of 4.97 percent for Bond B—very close to the 4.93 yield determined
with the approximate formula. You can find online calculators
at Investopedia.com http://www.investopedia.com/calculator/aoytm.aspx )
and Fidelity.com https://powertools.fidelity.com/fixedincome/yield.do ).
YIELD TO CALL
Another key metric of bond return analysis is yield to call, which measures
the total return bondholders receive if they hold bonds until they are called
at the issuer’s discretion. In many cases, issuers pay investors a premium
for the right to call bonds before their maturity date. Yield to call is
calculated the same way as yield to maturity, but assumes that the bond will
be called at some point before maturity.
From the moment a bond is issued until the day it either matures or is
called, its price in the marketplace fluctuates depending on the bond’s terms
and also general market conditions, including prevailing interest rates, the
credit quality of the issuer (more on that in a bit), economic conditions, and
other factors. Because of the variability of bond prices, a bond’s actual
value will most likely be higher or lower than its face value if it is sold
before it matures or is called.
In general, when interest rates fall, bond prices go up. The inverse is
also true: When interest rates rise, bond prices fall. Consider Bond B, which
was originally issued with a 4 percent coupon. If interest rates rise to 5
percent during Bond B’s term, Bond B’s price will fall to approximately
$925 so its YTM will remain consistent with the current market yield of 5
percent.
Government bonds are another story. Their prices rise not only when
interest rates fall, but also when other assets—such as stocks—take a dive.
Perhaps you’ve heard of the “fear trade.” During periods of economic or
political crisis, many investors sell riskier assets, like stocks, and put their
money in safer investments. US Treasury securities are one such alternative.
Prices of government bonds rise in these situations because so much money
pours into low-risk assets.
One other item to pay close attention to is accrued interest, the fraction
of the coupon payment that bond sellers earn for holding the bond for a
period of time between bond payments. Accrued interest is a significant
element to consider if investors are contemplating buying bonds on the
secondary market.
 CREDIT QUALITY
A bond issuer’s credit quality is the likelihood that it will pay its investors
the interest and principal they are due in a timely manner. The spectrum of
credit quality ranges from that of US Treasury bonds, which are considered
risk free because they are backed by the full faith and credit of the federal
government, to speculative bonds. Since a bond’s maturity date may be well
in the future, credit quality is a vital consideration when evaluating bonds.
When a bond is issued, the issuer must provide details as to its
financial soundness and creditworthiness. This information can be found in
the offering document , official statement , or prospectus , which explains
the bond’s terms and features as well as any risk investors should be aware
of before putting their hard earned cash into a bond security.
In the United States, major rating agencies assign ratings to bonds
based on their study of the issuer’s financial condition and management,
economic and debt characteristics, and the precise revenue sources that
secure the bonds. These agencies include Moody’s Investors Service,
Standard & Poor’s (S&P) Corporation and Fitch Ratings. The highest
ratings are Aaa (Moody’s) and AAA (S&P and Fitch Ratings).
Bonds rated in the BBB/Baa category or higher are considered
investment grade ; bonds rated lower than those grades are considered high
yield or junk . A lower rating indicates that a bond is considerably riskier
than a highly rated bond. Lower-rated bonds generally have higher interest
rates, as greater yield is promised as compensation for the greater risk of
default.
Rating agencies make their ratings accessible to the public online
through their respective websites. Their ratings are also reported on many
independent websites, including Yahoo! Finance and most major brokerage
firm sites. In addition, printed versions of their reports and ratings are
available in many local libraries.
Rating agencies continuously scrutinize issuers and sometimes change
ratings of issuers’ bonds based on changing credit factors. Typically, rating
agencies will provide a warning sign they are considering a rating change
by placing the bond on CreditWatch (S&P), Under Review (Moody’s), or
Rating Watch (Fitch Ratings).
Investors should remember that ratings are judgments. In the past,
credit ratings have been a fairly accurate predictor of default risk, but there
have been exceptions. Notably, during the 2007 to 2009 global financial
crisis, AAA and Aaa mortgage-backed securities ultimately suffered high
default rates.
There are millions of diverse bond issues but only a few bond
categories. Most bonds fall into one of these five:
Government bond . This type of bond is a debt security issued by a
government to support its spending; it is most often issued in the country’s
domestic currency. Government debt is money owed by a level of
government and is backed by the full faith of the government. Federal
government bonds in the United States include (but are not limited to)
savings bonds, Treasury bonds, and Treasury inflation-protected securities
(TIPS). Before investing in a country’s government bonds, investors must
assess the inherent risks, including country risk (meaning the soundness—
or lack thereof—of a country’s economy), political risk, inflation risk, and
interest-rate risk.
Agency bond . Agency bonds are issued by institutions originally
created by the US government to perform important functions like fostering
home ownership and providing student loans. The primary agencies, or
government-sponsored enterprises , are Fannie Mae, Freddie Mac, and the
Student Loan Marketing Association (Sallie Mae). While these agencies
technically operate like corporations, they are implicitly backed by the US
government.
Municipal bond . Like the US government, state and local
governments often borrow money by issuing bonds—just on a smaller
scale. Municipal bonds fund an extensive assortment of projects and
government functions, ranging from police and fire departments to bridges
and toll roads. Municipal bonds are popular among individual investors
because they provide tax advantages. Most municipal bonds are free from
federal income taxes. This makes municipal bonds especially attractive to
investors in high tax brackets. If an investor purchases a municipal bond in
the state where he or she resides, it is often free from state and local income
taxes as well. Some municipal bonds are triple tax-free , which means they
are exempt from taxes at the federal, state, and local level.
However, municipal bond investors should be aware that interest
received from these bonds may be subject to the individual federal
alternative minimum income tax. In addition, interest earned may be taken
into account when calculating the taxable portion of an individual’s Social
Security benefits. The best advice: Always consult a tax advisor before
investing in municipal bonds.
Corporate bond . A corporation can issue bonds for many reasons,
including expansions, acquisitions, funding stock buybacks, or simply
taking advantage of low interest rates. Corporate bonds are almost always
taxable at both the federal and state level. As a group, corporate bonds also
carry considerably more credit risk than the other types of bonds outlined
above. However, the rewards of corporate bonds on a longer-term basis are
compelling, a fact that is detailed later in this chapter.
Asset-backed bond . Asset-backed bonds are backed by a pool of
underlying debt obligations. This includes residential home mortgages,
many of which are directly guaranteed by the federal government (the
Government National Mortgage Association, or Ginnie Mae) or through a
government agency (Fannie Mae or Freddie Mac). Other asset-backed
bonds include commercial mortgage-backed securities (CMBSs) and bonds
backed by auto or credit card loans (generally called asset-backed securities
, or ABSs).

A SHORT HISTORY OF BOND YIELDS

According to Treasury bond and Treasury bill return data obtained from the
Federal Reserve database in St. Louis, the average ten-year US Treasury
bond annualized return since 1928 is 5.23 percent. But as with stocks,
Treasury returns are highly variable. Bond returns are dependent on the
starting interest rate and changes in general interest rates over time—that is,
when interest rates increase, the value of bonds decreases, and vice versa.
This comes into focus if you examine the returns decade by decade.
This fact can have a dramatic impact on future expected returns.
Throughout the Great Depression of 1929 to 1933, bond yields declined as
economic growth and inflation turned negative. Under the New Deal in the
1930s, the US Treasury issued new bonds at low interest rates to fund
public works and America’s preparation for and entry into World War II. As
a result, yields were soft for the rest of the decade. The ten-year US
Treasury yield was at 3.29 percent at the start of 1930 but declined to 2.21
percent by the end of the decade. However, the interest, plus gains in price
appreciation, resulted in a total return of 4.48 percent.
During the 1940s, inflation picked up—averaging 6.1 percent—while
ten-year Treasury yields averaged only 2.33 percent. The total return during
the 1940s was a mere 1.82 percent, well below the average rate of inflation.
In the 1950s, economic growth was modestly strong and interest rates
gradually began to climb. By the end of the decade, ten-year US Treasuries
were yielding 4.72 percent.
The four decades from 1940 to 1979 were an extended period of rising
bond yields, and as discussed earlier, changes in yields have a hefty impact
on bond prices. As bond yields first rise in a low-interest rate environment,
capital losses become more pronounced, as lower interest payments can
only partially offset them. As yields reach higher levels, higher annual
coupons, or interest payments, help offset declines in price.
This latter concept became apparent in the 1970s. During that decade,
both bond yields and inflation increased dramatically. Yields on ten-year
Treasury bonds increased from 7.79 percent in 1970 to 10.8 percent by
1980, and the annualized return for the decade was an above-average 6.97
percent. However, much of the return earned from interest was offset by
declines in price caused by increasing inflation. Inflation averaged 7.8
percent during the ten-year period, making the bonds’ real returns , or
returns after inflation, negative.
In 1981, Federal Reserve Chairman Paul Volcker raised short-term
interest rates as high as 20 percent to tame inflation. In the years that
followed, inflation and interest rates declined rapidly, pushing up bond
prices. The ten-year Treasury yield, which reached a high of 15.8 percent in
September 1981, fell as low as 2.05 percent on December 30, 2008.
Investors reaped the rewards during this twenty-seven-year period, getting
interest alongside capital appreciation from declining bond yields.
The average annual return for ten-year Treasury bonds was 10.36
percent through the 1980s, and during the 1990s, the annualized return was
7.53 percent. In the 2000s, returns matched the long-term average of 5.7
percent.
Most of the long-term returns from bonds over the preceding eighty
years came about between 1960 and 2000, when bonds provided a higher-
than-average yield component. When you take into consideration the capital
appreciation factor caused by declining yields in the 1980s, bonds produced
outsized returns for investors for nearly half a century.
Bond yields have continued to decline since 2000, with the ten-year
Treasury bond reaching a historic intraday low yield of 1.40 percent in July
2012. Yields have been continually low since that time, and today, the ten-
year Treasury bond yields just under 2 percent. Thus after five decades, we
have now returned to a similar interest-rate period as the early 1950s.

THE COMPONENTS OF BOND RETURNS

Returns from bonds come from two sources: coupon payments, which are
paid out as income, and changes in price. As we witnessed in the discussion
on bond history, bond returns were highly variable in each decade.
However, over extended periods of time, interest payments ultimately
become a much bigger portion of returns than changes in price. For
example, more than 90 percent of the total return generated since 1976 from
a broadly balanced portfolio of US investment-grade Treasury, agency, and
corporate bonds has come from interest payments, not change in price
(Table 5.1).

Period Ending 03/31/2013 30 Years 10 Years

Total Return 7.98% 5.03%
Price Return 0.97% 0.57%
Coupon Return (with Reinvestment) 7.88% 4.85%
Other Return (e.g. Paydown)* -0.20% -0.32%
Table 5.1: Coupons as a Significant Portion of Bond Returns
Source: Barclays Bank PLC

Brandes Investment Partners reviewed eighty-six years of US and UK

equity and fixed-income investment returns, with the results shown in
Figure 5.1. The importance of income’s contribution to total returns is clear;
both stock and bond returns are heavily dependent on the income
component. For bonds, it is even more significant.

Figure 5.1: Average Income Component of Returns for

Source: Brandes Investment Partners, based on data from Ibbotson
Five-, Ten-, and Twenty-Year Rolling Data
Associates, Global Financial Data, and FactSet, 12/31/2011

SOME FACTS FROM THE BRANDES STUDY;

Fixed-income, or bond, returns were dominated by the income

 component for all time horizons longer than five years.
Over periods of longer than ten years, the income component was
dominant over capital appreciation and represented the bulk of
returns generated in all income-producing asset classes.

For investors in 2016, there is a negative aspect to this analysis: At the

current low levels of interest bonds are generating, it is extremely difficult
for traditional buy-and-hold bond investors to generate attractive
returns.This is especially true for those investors holding government
bonds. In 2016’s low-yield environment, clipping coupons on traditional
government bonds generates a modest return of less than 2 percent. And
this does not account for the fact that interest rates might rise from here,
resulting in bond price losses. Unfortunately, interest rates appear likely to
stay in this range, given the current modest rates of economic growth.
With interest rates currently at historic lows, the potential return from
US Treasury bonds is substantially lower than realized returns from the past
several decades. In such an environment, an investor must look beyond
traditional government bonds. One attractive class of bonds that pays out
higher interest rates are US corporate securities.

THE CORPORATE BOND ADVANTAGE

Unlike government bonds, corporate bonds are subject to credit risk—the
probability of, and potential losses that could arise from, a credit event.
These could include defaulting on scheduled payments, bankruptcy filing,
or restructuring. Corporate bond investors have a wide range of selection in
bond maturity lengths, interest rates, credit quality, and provisions.
Corporate bonds are divided into two markets: investment grade and
below investment grade (commonly called high yield or junk ). Investment-
grade corporate bonds carry a relatively low risk of default. As mentioned
earlier, rating firms like S&P and Moody’s use different designations
of upper- and lower-case As, Bs, and Cs to identify a bond’s credit quality
rating. For example, S&P’s medium-quality credit ratings are A and BBB;
ratings of BBB and higher are considered investment grade. Credit
ratings below these designations (BB, B, CCC, etc.) are considered low
credit quality and higher risk—as mentioned before—high yield or junk
bonds. The following are some critical features of corporate bonds:

They are a hybrid security, which indicates that they have a dual
nature. They are bonds but can experience equity-like volatility.
The value of a corporate bond is closely linked to the issuer’s
credit quality, its earnings and revenue, and the probability of
default.
They are generally less sensitive to fluctuation in interest rates.
They have less liquidity in the capital markets, which gives rise to
market distortions between the value of bonds and their market
price. As uncertainty rises in the markets and the economy,
distortion in corporate bond pricing becomes much more likely.

Historically, the promised yield on US corporate bonds rated by S&P

as AAA (of the highest quality, issued only by blue-chip companies) has
averaged 0.7 percent higher (a figure known as the credit spread ) than US
Treasuries with similar maturities. BBB bonds—the lowest rating given to
investment-grade bonds by S&P—have a historical average credit spread of
1.9 percent above Treasuries.
Have investors received these premiums over Treasuries? To answer
this question, I examined the long-run evidence in detail. Credit Suisse
publishes a book each year that examines the long-term returns of various
asset classes, including corporate bonds. US corporate bond data goes as far
back as 1900 and the return subset is quite large. Credit Suisse found during
the 110-year period from 1900 to 2010, the average annual return of
corporate bonds was 2.52 percent per year—0.68 percent per year better
than a mix of US Treasury bonds.
Quite a bit of academic research in the past decade has supported
favoring corporate bonds over Treasuries. In one study, Alexander
Kozhemiakin demonstrated consistently better returns from corporate bonds
than Treasuries over time. 25 He also found that as investors move to lower-
quality bonds, the return differentials become more pronounced. This is
especially true in the BB category, where excess returns are the highest of
any grade. The lower tier of the investment-grade spectrum—ratings from
A/BBB—accounts for two-thirds of the investment-grade market cap and
trading activity. Kozhemiakin’s findings of higher returns from corporate
bonds versus US Treasuries from 1985 to 2005 are shown in Tables 5.2 and
5.3.

Rating Return Risk

AAA/AA 8.9% 1.9%
A 9.2% 2.2%
BBB 9.3% 3.3%
BB 11.0% 6.5%
B 9.7% 9.0%
CCC 2.8% 15.2%
Table 5.2: Corporate Bond Historical Returns and Risk,
Source: A. Kozhemiakin, “The Risk Premium of Corporate Bonds,”
January 1985 to December 2005
The Journal of Portfolio Management, 33(2) (2007): 101–109. Risk
measured by annualized standard deviation.

Bonds/Index 5 Years 10 Years 20 Years

BB Rated Bonds 9.29% 8.78% 11.03%
Barclays Aggregate Bond Index 6.52% 5.74% 7.80%
Barclays Govt. Bond Index 5.62% 4.87% 6.76%
Table 5.3: Performance of BB Rated Bonds vs. Bond Index,
Source: A. Kozhemiakin, “The Risk Premium of Corporate Bonds,”
January 1985 to December 2005
The Journal of Portfolio Management, 33(2) (2007): 101–109

Of course, investors should expect corporate bonds to trade at higher

yields than US Treasury bonds over extended periods of time. As I
mentioned, the primary difference between the two yields is known as the
credit spread, but credit risk is not the only factor that leads corporate bonds
to deliver better returns than government bonds. Other key factors include
tax treatment, illiquidity, call features, and the unique provisions that are
included in the contracts of corporate bonds—characteristics that
government bonds simply don’t offer.
Most investors believe that corporate bonds’ higher returns are strictly
due to their credit risk, but academic research has concluded otherwise. For
example, Jing-zhi Huang of Penn State University and Ming Huang of
Stanford University found that less than a third of the excess return from
investment-grade bonds is associated with default risk. 26 Gordon Delianedis
and Robert Geske of UCLA’s Anderson School found that among AAA-
rated firms, only a small fraction (5 percent) of the excess returns provided
were attributable to default risk. Furthermore, they determined that among
BBB-rated firms, which are rated just above junk, only 22 percent of the
credit spread can be attributed to default risk. 27 Ultimately, Delianedis and
Geske concluded that credit risk and credit spreads above government
bonds cannot solely be correlated to the possibility of default, leverage, or a
firm’s specific risk. Instead, they are primarily attributable to tax
consequences, liquidity, and market risk factors. 28
But are the results of these academic studies consistent with actual
default rates? According to Credit Suisse, default rates for all rated
corporate bond issuers since 1900 has averaged 1.14 percent per year, while
riskier high-yield bonds averaged 2.84 percent. 29 Of course, during chaotic
economic periods, the default rate has reached much higher extremes.
Default rates for investment-grade bonds peaked at 8.45 percent in 1933,
during the Great Depression; in the same year, speculative bonds had a
default rate of 15.48 percent. According to default data and yearly results
maintained by S&P, the default rate for all investment-grade corporate
bonds (those rated above BB) has averaged below 1 percent since 2001
(Table 5.4).
Year Investment-Grade Defaults (#) Investment-Grade Default Rate (%)
2001 6 0.33
2002 10 0.56
2003 0 0
 2004 1 0.06
2005 1 0.06
2006 0 0
2007 0 0
2008 11 0.73
2009 5 0.34
2010 0 0
2011 1 0.07
2012 0 0
Table 5.4: US Investment-Grade Corporate Bond Default Summary
Sources: S&P’s Global Fixed Income Research and S&P’s Credit Pro.

When you consider the low default rates of the 2000s, the long-run
return premium of 0.68 percent per year for the highest grade, AAA, seems
puzzlingly high. No AAA or AA+ corporate bond has defaulted since 1991,
so that is a very eye-catching return premium. A 3 percent-plus premium
for BB bonds seems downright generous, given the fact that the annual
default rate for these bonds during the financial collapse of 2008 was below
3 percent and, according to S&P, their average default rate has been below 1
percent per year since 1981 (Table 5.5).

Year BBB+ BBB+ BBB- BB+ BB BB-

1981 0 0 0 0 0 0
1982 0 0.69 0 0 2.86 7.14
1983 0 0 1.35 2.27 0 1.64
1984 0 1.41 0 0 1.72 1.56
1985 0 0 0 1.69 1.56 1.39
1986 0 0.78 0 1.85 1.22 1.14
1987 0 0 0 0 0 0.83
1988 0 0 0 0 0 2.34
1989 0.91 0.81 0 0 0 2
1990 0.77 0 1.11 1.43 3.09 4.5
1991 0.84 0.76 0 3.77 1.14 1.05
 1992 0 0 0 0 0 0
1993 0 0 0 0 1.96 0
1994 0 0 0 0 0.89 0
1995 0 0 0.72 0 1.67 1.23
1996 0 0 0 0.98 0 0.62
1997 0.48 0 0 0 0 0.47
1998 0 0.36 0 0 0.71 0.45
1999 0 0.38 0.45 0.85 1.31 0.81
2000 0 0.37 0.91 0 1.26 3.33
2001 0.41 0.71 0.44 0.83 1.3 4.62
2002 1.21 0.69 2.14 1.82 1.17 4.02
2003 0 0 0 0.9 1.6 0.4
2004 0 0 0 0 1.18 0.39
2005 0 0.3 0 0.8 0 0.4
2006 0 0 0 0.87 0 0.41
2007 0 0 0 0 0.54 0.39
2008 0.45 0.76 0.93 2.52 0.63 0.78
2009 0.49 0.37 0.86 0 1.43 0.89
2010 0 0 0 0 0 0
2011 0 0 0.39 0 0 0
2012 0 0 0 0 0 0
BBB+ BBB+ BBB- BB+ BB BB-
Average 0.17 0.26 0.29 0.64 0.85 1.34
Stand. Dev. 0.33 0.37 0.52 0.96 0.87 1.68
Minimum 0 0 0 0 0 0
Maximum 1.21 1.41 2.14 3.77 3.09 7.14
Table 5.5: US Corporate Default Rates, Bonds Rated BB- to BBB+
Sources: S&P’s Global Fixed Income Research
and S&P’s Credit Pro.

Researchers have also concluded that actual default rates are much lower
than ratings might suggest. Stephen Kealhofer, Sherry Kwok, and Wenlong
Weng found true default rates for AAA bonds of 0.13 percent, while the
riskier BB rating category had a default rate of only 1.42 percent. 30 As
reported by S&P, the actual rate since 1981 is below 1 percent for BB+ and
BB bonds, and BB- rated bonds had a default rate slightly above 1 percent
(Table 5.6).

BBB+ BBB+ BBB- BB+ BB BB-

Average Default Rate, 1981–2012 0.17 0.26 0.29 0.64 0.85 1.34
Table 5.6: Average Default Rate, Bonds Rated BB- to BBB+
Source: “Uses and Abuses of Bond Default Rates.” Stephen Kealhofer,
Sherry Kwok, and Wenlong Weng. Document Number: 999-0000-039.

This indicates that the default line between BBB- and BB-rated bonds
is very thin. Given that the actual risk of default is historically quite low, it
seems likely that other factors are at work, such as their illiquidity. An
illiquid asset cannot be sold easily without a noticeable loss in value or
quickly because of a lack of ready-and-willing buyers. Lower-rated
corporate bonds have a larger-than-normal discrepancy between the asking
prices of sellers and the bidding prices of buyers because there is low
demand for them. Thus, the illiquidity of corporate bonds has a larger-than-
expected effect on their returns. Since volume of transactions for corporate
bonds is far below that of government bonds and increased liquidity is an
attractive quality for any investment, investors demand extra remuneration
for holding securities that are less liquid and thus more expensive to sell.
For corporate bonds, this illiquidity premium shows up in higher
interest-rate spreads over otherwise comparable government securities. So
says the theory of several prominent researchers, including Patrick
Houweling, Albert Mentink, and Ton Vorst. In a 2005 article, they analyzed
the effect of liquidity risk on corporate bond credit spreads based on a
sample of 999 investment-grade corporate bonds. 31 In the paper, they
controlled two common factors: 1) excess returns from the stock market and
2) excess returns from long-term corporate bonds over long-term Treasury
bonds, in addition to the rating and maturity of each bond. Houweling et al
found that liquidity risk explains a significant portion of observed credit
risk spreads.
 Corporate bonds also carry a substantial amount of volatility risk.
Although their actual default risk is below expectations, recessions have the
power to drive them to default. While relatively safe during most economic
periods, corporate bonds become a far riskier asset in recessionary periods,
perhaps most notably demonstrated during the Great Recession of 2008 and
2009. As a result, some pundits argue that the corporate bond asset class is
less appropriate for long-term investors who hold a substantial portion of
equity in their portfolios, because other fixed-income asset classes (namely,
government bonds) do a better job of reducing risk. In 2008, an investor
who held Treasury bonds instead of corporate bonds would have had
substantially less portfolio volatility. On the other hand, in the very next
year corporate bonds rebounded strongly.
If you can tolerate the inherent volatility of corporate bonds—
especially during recessions—you should strongly consider them as a long-
term investment option. Investors who concentrate their corporate bond
holdings in the BBB and BB ratings universe reap particularly good
benefits. These bonds have the potential to reward investors with a 3
percent annualized premium over a government bond of a similar duration.
Trading individual corporate bonds is quite different from trading
stocks. Stocks can be bought at uniform prices and are traded through
exchanges, but most bonds trade over the counter, priced by individual
brokers. However, in the last decade, price transparency has improved. In
1999, the Bond Price Competition Improvement Act of 1999 placed new
rules on clarity and candor in bond pricing. In response to the law’s
requirements, the Securities Industry and Financial Markets Association
created the site Investinginbonds.com. There, investors can see current
prices for bonds that have traded more than four times in the preceding day.
Thanks to the law and the subsequent availability of real-time reporting of
many bond trades, investors are better off than they once were.
Many well-regarded brokerages, including Charles Schwab, TD
Ameritrade, and Fidelity Investments, now have websites devoted to bond
pricing and trading. Fidelity discloses its fee structure for all corporate
bonds, making it clear what it will cost you per bond—$1. Other online
brokers charge flat fees, regardless of the number of bonds traded.
Depending on the number of bonds you plan to trade, one broker may be
more advantageous than another.
On the secondary market, there are spreads between the buy and sell
prices. Keep in mind that trading-fee disclosures do not divulge the spreads
between the buy and sell prices embedded in the transaction. You must
comparison shop in order to find the best transaction price after all fees are
taken into account. Some sites charge no transaction fees at all and instead
embed their fees in the spread. Corporate bond price spreads may be high or
low, depending on the issuer. In many instances, the bid (the price at which
you sell) is 75 to 150 basis points (0.75 percent to 1.5 percent) below the
ask (the price at which you buy).
Despite the inherent complications of bond pricing and a lack of
transparency, investing in individual corporate bonds can offer significant
rewards. First, they give investors the luxury of knowing exactly how much
they will receive in interest each year. In addition, the individual investment
is protected against interest-rate risk, but only over the full term of the
bond.
When interest rates are at historic lows, any long-term investment
strategy should take the potential yield effect into consideration. Since the
largest portion of return for an investor will come in the form of income, it’s
paramount to seek out higher-income alternatives, especially since higher-
yielding bonds are less sensitive to interest-rate fluctuations. From 1996 to
2012, higher-yielding bonds have traded at a wide range of prices.
In Figure 5.2, the coupon (or yield) is shown versus the price change.
In some years, like 2008, high-yield bonds’ prices dropped dramatically
versus the income collected; the reverse was true in 2009. However, the
total return graph shows that despite the price moves over time, the overall
return for higher yielding bonds primarily came from their coupons. The
average annualized coupon over the time period shown is 9 percent.
 Figure 5.2: Decomposition of High-Yield Returns,
Sources: TIAA-CREF, Bank of America Merrill Lynch, and Bloomberg, 2012. January 1996 to
December 2011

Higher-yielding bonds are also much less sensitive to high interest

rates—mostly because economic conditions are generally good when
interest rates rise. In a strong economic environment, the default rate
usually drops, and lower default rates make higher-yielding bonds a more
attractive investment. Higher-yielding bonds also offer investors more
annual income, which reduces the bond’s sensitivity to changes in interest
rates.
10-Year Treasury 10-Year Treasury Change Total Return Over
Period Range
Starting Yield in Yield Period
09/30/1998–
4.42% 2.25 3.97%
01/31/2000
10/31/2001–
4.27% 0.77 2.52%
12/31/2001
02/28/2002–
4.87% 0.55 2.38%
03/31/2002
09/30/2002–
3.61% 0.61 5.10%
11/30/2002
05/31/2003–
3.35% 1.1 2.58%
08/31/2003
03/31/2004–
3.84% 0.78 -0.88%
06/30/2004
08/31/2005–
4.02% 0.54 -1.71%
10/31/2005
 12/31/2005– 4.40% 0.74 3.01%
06/30/2006
03/31/2008–
3.43% 0.55 1.80%
06/30/2008
12/31/2008–
2.25% 0.79 1.80%
02/28/2009
03/31/2009–
2.69% 0.84 22.55%
06/30/2009
11/30/2009–
3.20% 0.83 3.00%
12/31/2009
08/31/2010–
2.48% 0.97 10.08%
03/31/2011
Average 3.60% 0.86 4.32%
Table 5.7: High-Yield Bonds’ Sensitivity to Higher Interest Rates
Sources: TIAA-CREF, Bank of America Merrill Lynch, and Bloomberg, 2012. Interest Rates

Reinvestment of bond income can have a powerful effect. As shown in

Figure 5.3, a $10,000 investment in a 20-year corporate bond paying 5
percent interest (the prevailing rate for BBB investment-grade corporate
bonds) would provide $10,000 in income over the life of the bond.
Reinvesting the interest earned at the same 5 percent rate, however,
increases the value of the gain by more than half, from $10,000 to
$16,850.64. Thus, the value of the investment over the twenty-year period
would increase to $26,850.64, rather than the $20,000 total of principal and
interest collected over time without reinvestment.

Figure 5.3: The Power of Compounding Bond Interest

Sources: TIAA-CREF, Bank of America Merrill Lynch, and Bloomberg, 2012.

As mentioned previously, time is an investor’s greatest ally. The

negative effects of volatility are reduced over time, so a longer time horizon
can afford you greater flexibility in constructing a bond portfolio. Above
all, time empowers the snowball effect of reinvesting bond interest to work
for you.

TOTAL RETURN INVESTING WITH PEPSI BONDS

Consider this example: A corporate bond issued by Pepsi in May, 1998
carried a 6.5 percent coupon with a maturity of 15 years. Interest rates were
on the rise from 1988 to 2000, as measured by the ten-year US Treasury
bond rates’ climb from 5.6 percent to 6.45 percent between May 1998 and
January 2000.
Suppose an investor wanted to purchase Pepsi corporate bonds at the
end of 1999— one hundred Pepsi bonds, specifically, each with a par value
of $1,000. On December 31, 2000, she could purchase the bonds at a
discount from par for approximately $919 per bond—thus costing her
$91,900 for one hundred bonds. If the investor decided to keep her
investment total at $100,000, she could buy 108, rather than one hundred,
Pepsi bonds. Those 108 bonds would produce an initial income of $7,020
per year.

Bonds Interest Bonds Value + Cash

Date Bond Price Coupon
Held Payout Repurchased Remainder
12/31/1999 100 — — — — —
12/31/2000 108 $1,026.00 6.50% $7,020.00 8.00 $118,576.00
12/31/2001 116 $1,013.00 6.50% $7,540.00 7.00 $123,888.00
12/31/2002 123 $1,075.00 6.50% $7,930.00 7.00 $138,714.00
12/31/2003 130 $1,069.00 6.50% $8,385.00 8.00 $146,286.00
12/31/2004 138 $1,062.00 6.50% $8,905.00 9.00 $154,399.00
12/30/2005 147 $1,043.00 6.50% $9,490.00 9.00 $161,768.00
12/29/2006 156 $1,070.00 6.50% $10,075.00 9.00 $175,925.00
12/31/2007 166 $1,090.00 6.50% $10,660.00 10.00 $189,420.00
12/31/2008 176 $1,031.00 6.50% $11,310.00 10.00 $190,704.00
12/31/2009 186 $1,027.00 6.50% $11,960.00 13.00 $200,928.00
12/31/2010 198 $1,023.00 6.50% $12,805.00 12.00 $214,336.00
12/30/2011 210 $1,014.00 6.50% $13,585.00 13.00 $225,511.00
12/31/2012 224 $1,010.00 6.50% $14,430.00 15.00 $238,650.00
Maturity + final
05/31/2013 224
interest payment
Table 5.8: Pepsi Bond Example
Source: Bloomberg

Each year, she could choose to reinvest her interest proceeds and buy
additional Pepsi bonds at the prevailing market price (Table 5.8). By 2012,
only thirteen years after her original investment of $100,000, the investor
now has $253,080—a 7.4 percent annualized return. This return was
primarily accrued through interest—more than $145,000. Table 5.9 shows a
synopsis of Pepsi bond prices at the end of each year, along with the
prevailing government bond interest rates and the duration of the Pepsi
bonds.
What Is Duration?
The term duration has a unique meaning in the context of bonds. It
is a measurement of how long (in terms of years) it will take for a
bond’s cost to be repaid by its internal cash flows. Duration is a vital
consideration for investors, as bonds with higher durations carry
more risk and have higher price volatility than those with lower
durations.
Date 10-Year US Treasury Yield Pepsi Bond Duration Pepsi Bond Price
12/31/2000 6.4 9.6 $1,026.00
12/31/2001 5.1 8.2 $1,013.00
12/31/2002 4 7.7 $1,075.00
12/31/2003 4.2 7.2 $1,069.00
12/31/2004 4.3 6.6 $1,062.00
12/30/2005 4.4 5.9 $1,043.00
12/29/2006 4.7 5.3 $1,070.00
 12/31/2007 3.9 4.5 $1,090.00
12/31/2008 2.2 3.7 $1,031.00
12/31/2009 3.8 2.9 $1,027.00
12/31/2010 3.3 2.2 $1,023.00
12/30/2011 1.9 1.3 $1,014.00
12/31/2012 1.9 0.4 $1,010.00
Table 5.9: Pepsi Bond Analysis Table
Source: Bloomberg

A few closing notes to ponder as you consider the Pepsi bond

example:

Reinvesting bond interest is just as important as reinvesting stock

dividends. The same facts you saw in the example of Pepsi stock
analysis are true here: The more bonds you own, the more interest
you will collect each year.
Reinvestment in individual bonds is generally best for investors
who have larger portfolios and plenty of time to closely analyze
the securities before they buy them. Bond mutual funds are more
appropriate for investors with smaller accounts.
I have listed below 50 corporate bonds that are available to
investors primarily in the BBB and BB S&P rated categories.

1-25 26-50
Gap Inc. 5.95% 4/12/2021 Telecom Italia 7.175% 6/18/2019
Arcelormittal Luxembourg 6.25% 8/5/2020 Sara Lee Corp. 6.125% 11/01/2032
Newmont Mining 3.5% 3/15/2022 Pulte Group 6.375% 5/15/2033
KLA-Tencor 4.65% 11/1/2024 Newfield Exploration 5.75% 1/30/2022
Ensco PLC 4.5% 10/01/2024 Neiman Marcus Group Inc. 7.125% 6/1/2028
Coach Inc. 4.25% 4/1/25 Humana Inc. 6.3% 8/1/2018
Suntrust Bank 6% 2/15/2026 HCA Inc. 7.5% 2/15/2022
Expedia Inc. 4.5% 8/15/2024 Wyndham Worldwide 3.9% 3/1/2023
Wendy’s 7.0% 12/15/2025 Morgan Stanley 5.5% 7/28/2021
Royal Caribbean Cruises 7.5% 10/15/2027 Tyson Foods Inc. 3.95% 8/15/2024
Goldman Sachs Group 5.95% 1/15/2027 Liberty Media Corp. 8.5% 7/15/2029
Petrobras Int’l 5.375% 1/27/2021 R. R. Donnelley & Sons 6.125% 1/15/2017
Southwest Airlines 5.125% 3/1/2017 Amerada Hess Corp. 7.3% 8/15/2031
Alcoa Inc. 5.125% 10/01/2024 Kohls Corp. 6% 1/15/2033
Nokia Corp. 5.375% 5/15/2019 Regions Financial Corp. 7.375% 12/10/2037
Toll Bros. 5.875% 2/15/2022 Valero Energy Corp. 6.125% 6/15/2017
Constellation Brands Inc. 4.25% 5/1/2023 Ford Motor Co. 6.5% 8/1/2018
Hertz Corp. 7% 1/15/2028 Health Care Reit Inc. 5.25% 1/15/2022
Masco Corp. 7.1255 3/15/2020 CBS Corp. 3.5% 1/15/2025
Safeway Inc. 7.45% 9/15/2027 Juniper Networks Inc. 4.35% 6/15/2025
Hartford Financial 5.5% 3/30/2020 L-3 Communications Corp. 4.95% 2/15/2021
Devon Energy Corp. 5.85% 12/15/2025 Laboratory Corp. 4% 11/01/2023
Limited Brands Inc. 6.95% 3/1/2033 Nasdaq Inc. 4.25% 6/1/2024
Sunoco Inc. 5.75% 1/15/2017 Quest Diagnostics Inc. 4.25% 4/1/2024
Seacor Holdings Inc. 7.375% 10/01/2019 Zions Bancorp. 4.5% 6/13/2023
Table 5.10: 50 Corporate Bonds
Source: Bondsonline.com

If you have a large enough portfolio to invest in individual bonds,

I strongly suggest you utilize a bond ladder. A bond ladder is a
portfolio of bonds in which each security has a significantly
diverse maturity date. The primary rationale of purchasing a
number of smaller bonds with different maturity dates rather than
one large bond with a single maturity date is to minimize interest-
rate risk and to increase liquidity. Interest payments from the
bonds in a ladder can offer on schedule cash flows. In addition,
the ladder can help you deal with reinvestment risk. For example,
if an investor would put all its fixed income dollars into a single
corporate bond, the bond would eventually mature. There is
uncertainty at that point in time at what interest rates will be. Thus
you could be stuck reinvesting all your money appropriated for
fixed income at a lower interest rate. This is what is known as
 reinvestment risk. Building a bond ladder has the potential to
spread this reinvestment risk across a number of bonds that mature
at different time intervals. Imagine that interest rates fall as one of
your short term bonds in the ladder approaches maturity. If you
choose to reinvest, you will have to invest only a fraction of your
overall bond portfolio at the lower rate. Meanwhile, the other
bonds in the portfolio will continue generating income at the
higher older interest rates. So any impact on your income from a
corporate bond during periods of falling interest rates will be
smaller with a bond ladder than with a single purchase and single
maturity.
What if instead interest rates rise? Maintaining a bond ladder is
also a positive for an investor in this case. An investor can take
advantage of the higher interest rates when one of the bonds in the
portfolio matures. A bond ladder also takes out the risk of a single
bond issuer defaulting and ruining your principal. Overall, a bond
ladder is a strong risk reduction element in maintaining a portfolio
of corporate bonds.

25 A. Kozhemiakin, “The Risk Premium of Corporate Bonds,” The Journal of Portfolio

Management, 33(2) (2007): 101–109.
26 Jing-zhi Huang and Ming Huang, “How Much of the Corporate–Treasury Yield Spread Is Due
to Credit Risk?” Stanford University Working Paper, 2002, No. FIN-02-04.
27 Robert L. Geske and Gordon Delianedis, “The Components of Corporate Credit Spreads: Default,
Recovery, Taxes, Jumps, Liquidity, and Market Factors,” UCLA Anderson Working Paper, 2001, No.
22-01.
28 Ibid.
29 Credit Suisse Global Investment Returns Yearbook, 2016.
30 Stephen Kealhofer, Sherry Kwok, and Wenlong Weng, “Uses and Abuses of Bond Default Rates,”
Document Number: 999-0000-039.
31 Patrick Houweling, Albert Mentink, and Ton Vorst, “Comparing Possible Proxies of Corporate
Bond Liquidity,” Journal of Banking and Finance, 29 (2005): 1,331–1,358.
 CHAPTER 6

THE COVERED-CALL STRATEGY

“Only a fool holds out for top dollar.”

—Joseph P. Kennedy, 1888–1969

A S I’VE DESCRIBED in the preceding chapters, a snowball approach to stock

investing allows you to focus not on the price of the shares you own, but
instead on how many shares you own. The paramount element to true
wealth building is accumulating additional shares of stock through
reinvestment of dividends paid, as that allows your stocks’ value to grow
even when the markets are simply treading water (about half the time). Now
that you know that, it’s time to learn about options, and specifically about
the benefits of the covered-call strategy .

A Short Glossary of Option Terms

Call option: A contract that grants its owner the right, but not
the obligation, to buy one hundred shares of a specific stock
by or before a specific date and at a specific fixed price.
Call owner: The individual who owns the call option.
Call writer: The individual who sells the call option.
Call away: The practice of buying one hundred shares of
stock in a call option.
Underlying security: The stock or other type of security the
option contract is written for; it cannot be exchanged or
replaced.
Exercise: Using a call option to trade in the underlying
security. Exercising an option means that the call owner can
call away (buy) one hundred shares of stock.
Strike price: The specific price per share at which one
hundred shares of stock can be bought or sold when a call
option is exercised.
Expiration cycle: The months in which call options expire.
There are three annual cycles known by the following
acronyms: JAJO (January, April, July, October); FMAN
(February, May, August, November); and MJSD (March, June,
September, December).
Expiration date: The date on which an option expires and
becomes worthless.
Premium: The current value of an option, which is the
amount a call-option buyer has to pay to the call-option seller
to acquire the option, or the amount the call-option seller
receives from the call-option buyer.
Time value: The portion of an option premium that is based
on the time remaining until the call option’s expiration; as the
expiration date approaches, time value declines at an
accelerated pace.
Uncovered call: An option contract sold by an investor who
does not own one hundred shares of the underlying security.
Covered-call strategy: The practice of selling one call per
one hundred shares owned of the underlying stock. If
i d k t i k i li i t d b h
 exercised, market risk is eliminated because shares are
available to be called away. Covered-call writers receive the
premium and earn dividends as long as they own the stock.
Forward roll: Roll forward is to extend the expiration or
maturity of an option or futures contract by closing the initial
shorter-term contract and opening a new longer-term contract
for the same underlying asset

If you add a covered-call strategy to your investment mix, you can add
even more income to what you’re already receiving as a dividend-yielding
stockholder. A covered-call strategy involves selling or writing call options
against a held position in an underlying security , which is known as
covered-call writing . Investors write covered calls primarily for the
following two reasons:

to realize a supplementary return on a stock position by earning

premium income
for protection against a decline in the stock’s price

Covered-call writing is considered the most conservative strategy in

option writing. While it remains unknown to most investors, it is in fact
safer than outright stock ownership because the investor’s downside risk is
offset by premium income received for selling the call provision . Covered-
call writing can either be accomplished by the sale of a call option against a
stock you currently hold or through the simultaneous purchase of a stock
and the sale of a call option.
One call option is sold for every one hundred shares of stock held. As
a call writer , you will receive cash for selling a call, but you will be
compelled to sell the stock at the strike price of the call if the stock is
assigned out of your account. In effect, an investor with a covered-call
strategy is compensated with a premium for agreeing to sell his or her
holdings at the strike price. In exchange for being paid this premium, the
investor relinquishes any increase in the stock’s price above the set strike
price to the call owner . A call option also has an expiration date , which is
the date on which the option expires and becomes worthless. The call owner
has the right to exercise the contract and thus call away, or buy, the call
writer’s shares. Thus, call buyers assume broad risk.
According to the Options Clearing Corporation’s latest (2014) results,
32
less than 20 percent of all option contracts that were opened ended up
being exercised. Thus, a call buyer is practicing a highly speculative
strategy. Most traders use options to time their entry and exit points into a
stock in order to benefit from short-term price movements. But prices
substantially decline as expiration nears, so in most cases, options lose their
value dramatically and are infrequently exercised.
The chief argument against a covered-call strategy is that if the stock’s
price rises above the call option’s strike price, the stock’s potential profits
narrow to the price specified in the indenture . However, if you believe that
a stock’s price has exceeded its normalized historical valuation based on its
dividend yield analysis (more on this below), writing covered calls against
the position can be a sagacious methodology to generate additional income.

EXAMPLES OF COVERED CALLS

The first rule of covered-call writing is this: Pick a company that you
already own whose current stock price, you believe, is above your target
price and whose dividend yield has fallen below its historical averages.
We’ll revisit Pepsi (PEP) and Northern Trust (NTRS) as the companies used
in these examples.
Consider an investor who already owns one hundred Pepsi shares,
which were purchased in September 2011 at a price of $65 per share. At the
same time, the investor also purchased one hundred Northern Trust shares
for $35 per share. PEP closed at $97.20 and yielded a dividend of 3.1
percent, and NTRS closed at $67.18 and yielded a dividend of 2.2 percent
on January 7, 2016. Since both stocks have risen by a substantial amount
since their purchase, the investor wants to protect his positions in the stock
without selling and at the same time potentially acquire additional income.
His first step is to select the best strike price. All the strike prices
shown in Table 6.1 are slightly above the stocks’ current trading price, but
the premium levels are quite different. As you can see in Tables 6.1 and 6.2,
the more time remains before the call option’s expiration, the higher the
value will be for the call closest to the stock’s current price. The closer the
strike price is to the current price of the stock, the higher the premium will
be.
To help make the decision process easier on which calls to sell,
annualize the returns of these options for the sake of comparison. An
investor can calculate a yield by dividing the option premium by the current
stock price. Then, divide the yield by the number of months in the holding
period and multiply by 12 (the number of months in a year). The total is the
calculated yield that would be earned if the position were kept open for a
full year (Table 6.2).

Premium ($)
Stock Strike Price ($) April Expiration July Expiration
100 1.94 3.15
PEP 105 0.61 1.55
110 0.18 0.60
70 1.87 3.26
NTRS 75 0.70 1.55
80 0.20 0.80
Table 6.1: Option Values for PEP and NTRS
Source: Yahoo Finance

Premium ($)
Strike Price
Stock ($) April (3 Months) July (3 Months)
PEP (1.94 ÷ 99.20 ) ÷ 3 × 12 = 5.43 (3.15 ÷ 99.20 ) ÷ 6 × 12 = 4.41
100
percent percent
 105 (0.61 ÷ 99.20 ) ÷ 3 × 12 = 1.73 (1.55 ÷ 99.20 ) ÷ 6 × 12 = 2.18
percent percent
(0.18 ÷ 99.20 ) ÷ 3 × 12 = 0.51 (0.60 ÷ 99.20 ) ÷ 6 × 12 = 0.86
110
percent percent
(1.87 ÷ 67.18 ) ÷ 3 × 12 = 7.73 (3.26 ÷ 67.18) ÷ 6 × 12 = 6.73
70
percent percent
(0.70 ÷ 67.18) ÷ 3 × 12 = 2.89 (1.55 ÷ 67.18) ÷ 6 × 12 = 3.10
NTRS 75
percent percent
(0.20 ÷ 67.18) ÷ 3 × 12 = 0.82 (0.80 ÷ 67.18) ÷ 6 × 12 = 1.65
80
percent percent
Table 6.2: Calculating Annualized Yield for PEP and NTRS Options
Source: Yahoo Finance

The Four Possible Outcomes from Writing Pepsi

Covered Calls @ $105 Strike Price

1. The call option expires and you keep the proceeds. Pepsi stock
never reaches the strike price. In this event, the premium you
received is 100 percent profit. In the example shown in Table 6.1,
if you sold a covered call against the $105 strike price in Pepsi for
April, you would collect a $0.61 premium for each share you
owned, or $61 for one hundred shares. You would also have
collected the quarterly dividend of $0.7025 per share ($70.25)
along the way.
2. You close the position to secure a profit or to limit a loss. You are
free to close a call option that you wrote any time before it
expires. If the call’s premium drops substantially, it might make
sense to take your profits. You can then take the proceeds and
always write calls that are above the current price and expire at a
later point in time.
3. The covered call is exercised. This can happen at any time, but it
most commonly occurs on the last trading day of the month of
expiration. In the case of exercise on the last day, your one
hundred shares are called away and your net profits include the
premium you received on selling the call provision ($61) along
 with the quarterly dividend of $70.25. Since the strike price was
$105, you would also collect the gains from the point you wrote
the call ($105-$99.20). The downside is anything above the $105
price point in share price gain you would have sacrificed.
4. You roll forward your covered call. Covered-call writers can avoid
an exercise by closing the call and replacing it with one that
expires later. The forward roll works because a later-expiring
contract is always worth more, since it has a longer period of time
before it expires. Make sure to avoid the transaction becoming
“unqualified”. Ensure you write a call or roll forward a call
against your stock with a strike price greater than or equal to the
previous day’s closing price and with 30 or more days till
expiration. Thus, there will be no effect on the holding period of
your stock.

Annualized returns are a solid gauge to value and compare two firms
for covered-call writing. There are always a multitude of factors that
ultimately determine annualized yield. These include daily movement in a
stock’s price, changes in markets, dividend payments, and timing between
entry date and expiration of an option. When a snowball investor is picking
a covered-call strategy, a strong consideration should be placed upon
dividend yield in addition to premium income on an annualized basis.
Remember, the covered call writer earns any dividends paid on the call-
covered stock until it is called. Pepsi currently yields 2.8 percent, higher
than Northern Trust’s 2.2 percent. Pepsi’s ex-dividend date is March 3,
2016, and Northern Trust’s is one day earlier, March 2, 2016. If the stocks
had different ex-dividend dates, the premium pricing would also be affected
as well as the potential for the option to be exercised.
Covered writing does invite some risk. For example if Pepsi’s stock
price fell to $90, the loss on the stock position ($99.20 – $90.00 = $9.20)
would surpass the sum of the dividends and call sale proceeds ($0.61 +
$0.7025 = $1.31). It would have been much better for a trader to actually
sell Pepsi at that point in time. Alternatively, the price of the stock could
well exceed $105. In this case the investor might lament the writing of the
call. However, a snowball investor is not concerned as much with the price
of the actual stock, but the income they receive. If Pepsi stock does drop to
$90, a snowball investor can simply buy more shares as the stock will be
more attractive from a payout perspective.
Not every shareholder holding one hundred shares of a stock should
sell covered calls. In some cases, you’re better off selling your shares,
taking the profits, and buying another dividend-bearing stock that offers a
higher yield and more potential. One way to prevent call writing regret is to
write a call only when your stock is highly overvalued on a dividend yield
basis. For example, you would write a call on Pepsi shares only when the
dividend yield dropped to the lowest end of the historical range
(2.25%-2.5%) based upon the strike price. In my example above, if Pepsi
traded to the strike price of $105 per share, its dividend yield would be
($2.81/$105.00) or 2.6%. A better option might be to wait for Pepsi shares
to trade above that level and then sell a covered call. If Pepsi stock
continued to advance in 2016 to $115 a share, you could then sell a covered
call at $120 a share. At $120 a share, Pepsi’s dividend yield would 2.34%
($2.81/$120.00). You could then easily feel comfortable that if Pepsi
advances and your shares are called, you ended up liquidating your position
in Pepsi at the $120 strike price and at the lowest historical yield point.
Another item to consider is the potential tax consequences? Income
from a covered call is always treated as a short-term capital gain or rolled
into the capital gain on exercised stock. There’s also the risk of a more
serious tax consequence: possibly losing the benefit of long-term gain
treatment. If you sell a call that is lower than one increment from its latest
closing price in most cases (meaning the strike is well below the stock’s
current market value), you could be required to treat the gain as a short-
term profit.

Final Guidelines for Writing Covered Calls

Never buy a stock just to write a covered call. Apply a
sensible standard: Pick companies whose stock you
want to own because of their higher than average
dividend growth.
Be willing to accept exercise when it happens. When
you sell a covered call, you are granting someone the
right to call away your stock. You need to be prepared
to sell your one hundred shares for the strike price at
any point in time after you write the covered call. Have
a replacement stock picked out so your funds will not
sit idle and will still be able to earn competitive
dividends.
Pick a strike price higher than the price you paid for the
stock and at a point where the historical yield for the
stock is at its lowest point. I never recommend writing
covered calls with strikes below the current price—they
are much more likely to get exercised.
Most critically, include dividend income when making
your comparison. When you are comparing potential
income from covered calls, always remember that
dividends do play a role in the overall return. If the
fundamentals are approximately equal on two or more
stocks you are considering writing covered calls
against, opt for the company with a lower dividend yield
or the company with a dividend payment farther in the
future. Make sure you’re not sacrificing income, as the
income component is the most critical factor of long-
term wealth building.
32 Options Clearing Corporation, “TradeKing Options
Playbook,” https://investor.tradeking.com/PrivateView/edu/opb/opbCashingOutYourOptions.tmpl .
 CHAPTER 7

THE FUTURE AND THE TOP 100

“The further backward you look, the further ahead you can see.”
—Winston Churchill, 1874–1965

N OW YOU KNOW the truth—i nvestments that generate income were the key
to earning consistent returns throughout the last one hundred and ten years.
Here’s the bad news: Today, the income component from both stocks and
bonds are near cycle lows. As recently as 1990, Dow stocks provided a
healthy average dividend yield of over 4 percent; in fact, the average
dividend yield had hovered around the 4 percent mark since 1906. More
importantly, that 4 percent has contributed nearly half of all stock
appreciation for more than a decade. This is not just the case for the 30
firms within the Dow. Vanguard Total Stock Market ETF, which tracks
approximately 100% of the investable U.S. stock market and includes
large-, mid-, small-, and micro-cap stocks regularly traded on the New York
Stock Exchange and Nasdaq, yields an anemic 1.9%
Tables 7.1 and 7.2 below show the average dividend yield for the Dow
since 1906 by year and by decade, respectively. In the fifty years following
the 1906 San Francisco earthquake, dividends were considered the most
important consideration for owning stocks, but the average dividend yield
of the stock market has slowly eroded over time.
 The current cash dividend on the 1,000 largest US companies
represents a mere 32 percent of reported earnings (payout ratio) —well
below the high points of the last fifty years. According to longrundata.com,
the historical highs in dividend payout ratios occurred in 1960 (63.8
percent) and 1991 (67.2 percent). 33 The dividend payout ratio is the
percentage of earnings (aka net income or the “bottom line”) a firm pays its
shareholders in the form of dividends. Pepsi expects net income of $4.70
per share in earnings this year, and the firm will pay out $2.81 in dividends
to its shareholders. This indicates the company has a payout ratio of 59
percent—nearly double today’s payout ratio for the average US company.
Today’s extremely low dividend yields are a direct outcome not only of the
lower payout ratio, but also the fantastic rise in stock prices during the bull
market of the 1990s.
For investors to get back to the 1991 average yield of 4 percent, US
firms would have to double their payout ratios, or stock prices would have
to tumble much lower. This occurred in March 2009, when the Dow
dropped to its lowest point in recent history, 6,547. The average yield on
Dow stocks at that point in time was 3.8 percent.

Figure 7.1: Average Dow Dividend Yield by Decade from 1906 to 2015
 Figure 7.2: Average Dow Dividend Yield from 1906 to 2015

As the stock market has risen rapidly since 2009, higher-paying

dividend stocks have once again become scarce. I believe that the dividend
contribution to total return over the next decade will be closer to 2 percent,
as I don’t expect payout ratios to rise dramatically. This is a direct result of
companies giving preference to stock buybacks and reinvesting their profits
in capital expenditures.
Companies in today’s era may be concerned about raising payout
ratios back to historical levels due to the lack of growth since the go-go
days of the 1990s. Despite companies’ commitment to reinvesting their
profits, earnings growth has not returned to the glory days of the 1990s (14
percent). Recent earnings growth has averaged 5 to 6 percent. Another
factor is the price of stocks. Recall the Shiller CAPE P/E ratio mentioned in
Chapter 1. As of June 2016, it is 26—among the top 10 percent readings in
history and nearly 60 percent higher than the historical mean of 16.5. With a
CAPE this high, future investment returns from stock-price appreciation are
likely to be anemic.
Even if the stock market remains rosy, earning 2 percent from
dividends versus 4 percent will most likely drive future investment returns
below the 9 percent long-term average. I am of the opinion that dividends
will most likely account for an outsized percentage of investment returns
over the next decade.

Is the 2000 Secular Bear Really Over?

The Dow climbed above 18,000 in April 2016—far above the
high marks for the Dow in 2000 (11,722) or even 2007
(14,164). So it may seem that the 2000 secular bear market
has completed its journey.
However, history has demonstrated that if the Dow rises
above the prior peak, but then drops back below it, a secular
bear is not over. Recall that Chapter 1, I demonstrated that
the Dow reached 103 in 1906 and then hit 119 in November
1919. But the Dow ultimately fell much further, bottoming out
at 78 in January 1922. Thus, anyone who declared the
secular bear market over in 1919 was ultimately proved
wrong. Not until 1924 did the Dow rise above the 106 price
level and never look back. Thus, 1924 was the official end of
that elongated period of stock market stagnation.

Despite the fact that the average company now pays an average
dividend yield far below the market average from 1906 to 1991, some
companies still pay handsome dividends that allow snowball investors to
earn decent total returns. I have scoured the US and international markets
for just these kinds of companies.
I began with a long list (more than 2,500 companies) and gradually
narrowed it down to my favorite 100 large-cap dividend companies. You’ll
find them all in Table 7.1, my Top 100 Snowball Investments. You can read
full profiles of each company in the Appendix. Each company is ranked in
its industry (category) based on five critical factors: dividend yield,
dividend growth, P/E ratio, financial rating, and beta. I consider these five
criteria to be the best way to evaluate dividend-paying firms. Firms with the
highest ranking in each category earn the top position and the lowest score.

1-25 26-50 51-75 76-100

International Business Chubb Corp. Siemens AG ADR CVS CareMark
Machines
Wal-Mart Stores Accenture PLC Prudential Financial Valero Energy
McDonald’s Corp. General Mills TJX Companies Sempra Energy
Nestle SA ADR Southern Co Union Pacific Cardinal Health
Lockheed Martin Toronto-Dominion Pepsico Inc. Viacom ‘B’
Bank
Chevron Corp. AB Inbev ADR Archer Daniels Sysco Corp
Verizon Marathon Petroleum Eaton Corp. Suncor Energy
Corp.
Cisco Systems Inc. Oracle Corp. Nextera Energy Ameriprise Financial
Occidental Petroleum Royal Dutch Shell Texas Instruments Boeing Company
ADR
Travelers Cos. Discover Financial Magna International Pfizer, Inc.
AT&T Inc. Emerson Electric Aetna Inc. Price (T. Rowe) Group
Teva Pharmaceuticals ConocoPhillips Capital One Corning
ADR Financial
Qualcomm American Electric Anthem Inc. Dominion Res
Power
Deere & Co. UnitedHealth Group Caterpillar Inc. Automatic Data Proc.
Exxon Mobil Corp. GlaxoSmithKline Infosys Technology Honeywell
ADR ADR
Intel Corp. Rio Tinto PLC ADR Medtronic Inc. MetLife Inc.
Amgen Bank of Montreal Ford Motor Ventas Inc.
Procter & Gamble Public Storage Becton, Dickinson Wells Fargo
Duke Energy Kimberly-Clark Stryker Corp. 3M
Raytheon PPL Corp. American Express UPS
Bank of Nova Scotia Target Corp. Colgate-Palmolive Diageo PLC ADR
Johnson & Johnson Unilever Plc ADR United Technology J.P. Morgan Bank
Coca-Cola Merck & Co. Norfolk Southern Maxim Integrated
 Products
Total ADR Novartis AG ADR Blackrock Inc. KeyCorp
Microsoft Corp. Kellogg Co. Comcast Apple Inc.
Table 7.1: Top 100 Snowball Investments (Dividend-Yielding Stocks)

For example, as you can see in Table 7.2, IBM ranks number one in its
category (technology) based on its high average dividend yield, its above-
average dividend growth, its low P/E ratio, its high S&P financial rating,
and its low beta, and it has the lowest score in its category. In fact, IBM
actually ranks among the top five companies for each measure, and its total
score is the lowest of any stock that maintains a market cap of over $10
billion.

IBM (Technology) Value Score Ranking

Dividend Yield 3.00 78
Dividend Growth (5 year) 15 70
Trailing P/E 10.4 14
S&P Financial Rating A++ 40
Beta 0.90 100
Total Ranking in Technology #1 302
Table 7.2: IBM Ranking Table (Top 100 Snowball Investments)

When putting together this list, I placed a great deal of focus on

diversification. Astute investors must be sure to spread their funds among
different sectors of the economy and different parts of the world. Many of
the firms on the list are international companies, but you can find them on
US exchanges as American depository receipts (ADRs).
Let’s consider another example of the compounding value of the Top
100 Snowball Investment dividend-paying firms. Consider an investor with
$100,001.20 to invest at the end of 2015. Like the investor who chose Pepsi
in Chapter 3, this investor is focused on income and reinvestment to build
his wealth. In this example, we’ll assume that we continue on a secular bear
market path that started in year 2000. In this example, the stock market does
not advance over the coming decade (a potential outcome, given the current
CAPE P/E ratio).
Table 7.3 shows the projected yearly dividends and growth the sample
investor portfolio would deliver based on a starting value of $100,001.20
invested in the Top 100 Snowball Investment stocks. Each of the Top 100
pays a dividend each year. For simplicity’s sake, I have chosen to reinvest
those dividend proceeds into a single high-dividend ETF fund instead of
each stock. Each firm’s annual dividend and future dividends is based on
the historical five-year growth rate in dividends for each company

ETFs (Exchange Traded Funds)

Introduced in 1993, ETFs are now one of the fastest-growing
segments of the investment industry. ETFs are considered
hybrid investment products; combining the diversification of
mutual funds with the trading elements of common stocks. An
investor in an ETF is looking for an interest in a pooled asset
that maintains low overall expenses. Another advantage is
that ETFs trade continuously throughout the day. An ETF can
hold assets such as stocks, bonds, gold, currencies, etc. Most
ETFs track an index, such as a stock or bond index. ETFs are
attractive as investments because they let a small investor
diversify quickly into dividend stocks at a low cost with
excellent tax efficiency. Transparency is another key benefit
because most ETF providers display their entire portfolios on
a daily basis through their websites, If you are limited on the
size of your portfolio, ETFs like the iShares Select Dividend
ETF (Symbol: DVY) is a compelling choice. Other high
dividend ETFs you may consider include the Schwab U.S.
Dividend Equity ETF (SCHD), Vanguard Dividend
Appreciation ETF (VIG), or the WisdomTree High Dividend
Fund (DHS).
 Here is the starting portfolio;

Total Shares
Bought Symbol Company Name Price Value
$
10 AAPL APPLE INC 105.26 $ 1,053
$
10 ACN ACCENTURE PLC 104.50 $ 1,045
28 ADM ARCHER DANIELS MIDLAND CO $ 36.35 $ 1,018
12 ADP AUTOMATIC DATA PROCESSING $ 84.72 $ 1,017
17 AEP AMERICAN ELECTRIC POWER INC $ 57.75 $ 982
$
9 AET AETNA INC NEW 107.86 $ 971
$
6 AMGN AMGEN INC 161.21 $ 967
$
9 AMP AMERIPRISE FINANCIAL INC 105.52 $ 950
$
7 ANTM ANTHEM INC COM 139.44 $ 976
14 AXP AMERICAN EXPRESS CO $ 69.25 $ 970
$
7 BA BOEING CO 143.26 $ 1,003
$
6 BDX BECTON DICKINSON CO 154.09 $ 925
$
3 BLK BLACKROCK, INC. 340.52 $ 1,022
18 BMO BANK OF MONTREAL $ 56.42 $ 1,016
25 BNS BANK OF NOVA SCOTIA $ 40.44 $ 1,011
$
8 BUD ANHEUSER BUSCH INBEV SA 125.00 $ 1,000
11 CAH CARDINAL HEALTH INC $ 89.27 $ 982
15 CAT CATERPILLAR INC $ 67.12 $ 1,007
$
9 CB CHUBB CORP 116.85 $ 1,052
15 CL COLGATE-PALMOLIVE CO $ 66.62 $ 999
18 CMCSA COMCAST CORP NEW CLA $ 56.18 $ 1,011
14 COF CAPITAL ONE FINANCIALCORP $ 71.72 $ 1,004
21 COP CONOCOPHILLIPS $ 46.69 $ 980
37 CSCO CISCO SYS INC COM $ 27.15 $ 1,005
10 CVS CVS CORPORATION $ 97.33 $ 973
11 CVX CHEVRON CORP NEW $ 88.83 $ 977
15 D DOMINION RESOURCES INC $ 67.64 $ 1,015
13 DE DEERE & COMPANY $ 76.27 $ 992
$
9 DEO DIAGEO ADR 109.07 $ 982
19 DFS DISCOVER FINL SVCS $ 53.29 $ 1,013
14 DUK DUKE ENERGY CORP $ 71.39 $ 999
21 EMR EMERSON ELECTRIC CO $ 47.35 $ 994
19 ETN EATON CORP PLC COM $ 52.04 $ 989
71 F FORD MTR CO DEL COM $ 14.09 $ 1,000
17 GIS GENERAL MILLS INCORPORATED $ 57.21 $ 973
55 GLW CORNING INC $ 18.15 $ 998
25 GSK GLAXOSMITHKLINE ADR $ 40.35 $ 1,009
$
10 HON HONEYWELL INTL INC 102.98 $ 1,030
INTERNATIONAL BUSINESS $
7 IBM MACHINES 136.23 $ 954
60 INFY INFOSYS TECHNOLOGIES LTD $ 16.75 $ 1,005
29 INTC INTEL CORP $ 34.45 $ 999
$
10 JNJ JOHNSON & JOHNSON 102.72 $ 1,027
15 JPM JPMORGAN CHASE & CO $ 66.03 $ 990
14 K KELLOGG COMPANY $ 71.79 $ 1,005
76 KEY KEYCORP NEW $ 13.10 $ 996
$
8 KMB KIMBERLY-CLARK CORP 127.30 $ 1,018
23 KO COCA COLA CO $ 42.96 $ 988
$
5 LMT LOCKHEED MARTIN CORP 215.52 $ 1,078
9 MCD MCDONALD’S CORPORATION $ $ 1,055
117.25
13 MDT MEDTRONIC PLC $ 76.92 $ 1,000
21 MET METLIFE INC COM $ 47.79 $ 1,004
25 MGA MAGNA INTL INC CL A $ 40.56 $ 1,014
$
7 MMM 3M COMPANY 149.56 $ 1,047
19 MPC MARATHON PETROLEUM CORP $ 51.30 $ 975
19 MRK MERCK & CO INC NEW COM $ 52.82 $ 1,004
18 MSFT MICROSOFT CORP $ 55.48 $ 999
26 MXIM MAXIM INTEGRATED PRODSINC $ 38.00 $ 988
$
10 NEE NEXTERA ENERFY INC. 103.11 $ 1,031
11 NSC NORFOLK SOUTHERN CRP $ 83.84 $ 922
13 NSRGY NESTLE S A SPONS ADR $ 74.42 $ 967
12 NVS NOVARTIS A G $ 82.81 $ 994
27 ORCL ORACLE CORP $ 36.53 $ 986
15 OXY OCCIDENTAL PETROLEUM CORP $ 67.61 $ 1,014
10 PEP PEPSICO INC $ 99.92 $ 999
31 PFE PFIZER INC $ 32.28 $ 1,001
13 PG PROCTER & GAMBLE CO $ 79.41 $ 1,032
29 PPL PPL CORP $ 34.13 $ 990
12 PRU PRUDENTIAL FINL INC $ 80.55 $ 967
$
4 PSA PUBLIC STORAGE 247.70 $ 991
20 QCOM QUALCOMM INC $ 49.53 $ 991
22 RDSB ROYAL DUTCH SHELL PLC $ 46.04 $ 1,013
36 RIO RIO TINTO ADS $ 28.00 $ 1,008
$
8 RTN RAYTHEON CO COM NEW 123.86 $ 991
11 SIEGY SIEMENS A G SPONSORED ADR $ 92.16 $ 1,014
21 SO SOUTHERN CO $ 46.79 $ 983
11 SRE SEMPRA ENERGY $ 94.01 $ 1,034
39 SU SUNCOR ENERGY $ 25.80 $ 1,006
 11 SYK STRYKER CORP $ 92.94 $ 1,022
25 SYY SYSCO CORP $ 40.69 $ 1,017
29 T AT&T INC COM $ 34.41 $ 998
26 TD THE TORONTO-DOMINION BANK $ 38.80 $ 1,009
15 TEVA TEVA PHARMACEUTICAL $ 65.64 $ 985
14 TGT TARGET CORP $ 72.61 $ 1,017
14 TJX TJX COMPANIES INC $ 70.69 $ 990
22 TOT TOTAL S A $ 44.95 $ 989
14 TROW ROWE T PRICE GROUP INC $ 71.49 $ 1,001
$
9 TRV TRAVELERS COMPANIES INC 112.86 $ 1,016
18 TXN TEXAS INSTRUMENTS INC $ 54.81 $ 987
23 UL UNILEVER PLC SPONSORED ADR $ 42.80 $ 984
$
9 UNH UNITEDHEALTH GROUP 117.64 $ 1,059
13 UNP UNION PACIFIC CORP $ 77.66 $ 1,010
10 UPS UNITED PARCEL SVC INC $ 96.23 $ 962
10 UTX UNITED TECHNOLOGIES CORP $ 95.36 $ 954
24 VIAB VIACOM INC NEW CL B $ 41.16 $ 988
14 VLO VALERO ENERGY CORP $ 70.02 $ 980
18 VTR VENTAS INC $ 56.43 $ 1,016
22 VZ VERIZON COMMUNICATIONS $ 46.22 $ 1,017
19 WFC WELLS FARGO COMPANY COM $ 53.94 $ 1,025
16 WMT WALMART STORES INC $ 61.30 $ 981
13 XOM EXXON MOBIL CORP $ 77.95 $ 1,013
Total Portfolio
Value $100,001.20
Table 7.3: Sample Initial Dividend Investor Portfolio as of December 31, 2015

Table 7.4 shows the yearly dividends and growth delivered by this
sample investor portfolio, based on each firm’s historical five-year growth
rate in dividends for the first five years.
Symbol Dividends + Interest
2016 2017 2018 2019 2020
AAPL $23.09 $25.63 $28.45 $31.58 $35.05
ACN $23.76 $25.66 $27.71 $29.93 $32.33
ADM $35.95 $38.47 $41.16 $44.04 $47.13
ADP $27.48 $29.67 $32.05 $34.61 $37.38
AEP $40.36 $42.79 $45.35 $48.08 $50.96
AET $9.99 $11.09 $12.31 $13.66 $15.17
AMGN $30.48 $38.71 $49.16 $62.43 $79.29
AMP $27.98 $32.46 $37.65 $43.67 $50.66
ANTM $21.29 $24.91 $29.15 $34.10 $39.90
AXP $18.19 $20.37 $22.82 $25.55 $28.62
BA $36.62 $43.95 $52.74 $63.29 $75.94
BDX $17.42 $19.17 $21.08 $23.19 $25.51
BLK $31.05 $35.09 $39.65 $44.81 $50.63
BMO $62.90 $65.42 $68.03 $70.75 $73.58
BNS $76.30 $83.17 $90.65 $98.81 $107.70
BUD $34.27 $41.46 $50.17 $60.71 $73.45
CAH $19.24 $21.74 $24.57 $27.76 $31.37
CAT $50.82 $55.90 $61.49 $67.64 $74.41
CB $21.14 $21.77 $22.42 $23.10 $23.79
CL $24.17 $25.62 $27.16 $28.78 $30.51
CMCSA $21.98 $24.40 $27.08 $30.06 $33.36
COF $29.79 $39.62 $52.70 $70.09 $93.22
COP $22.05 $23.15 $24.31 $25.53 $26.80
CSCO $42.71 $47.41 $52.63 $58.42 $64.84
CVS $20.57 $24.89 $30.12 $36.44 $44.09
CVX $50.38 $53.90 $57.68 $61.71 $66.03
D $45.36 $48.99 $52.91 $57.14 $61.71
DE $36.82 $43.44 $51.26 $60.49 $71.38
DEO $26.21 $29.35 $32.88 $36.82 $41.24
DFS $24.90 $29.13 $34.08 $39.88 $46.66
DUK $48.05 $49.97 $51.97 $54.05 $56.21
EMR $43.49 $47.41 $51.67 $56.32 $61.39
ETN $48.52 $54.34 $60.86 $68.16 $76.34
F $51.55 $62.37 $75.47 $91.32 $110.49
GIS $32.01 $34.26 $36.65 $39.22 $41.96
GLW $33.56 $37.92 $42.85 $48.43 $54.72
GSK $81.74 $99.72 $121.66 $148.43 $181.08
HON $27.37 $31.48 $36.20 $41.63 $47.87
IBM $42.95 $50.68 $59.81 $70.57 $83.27
INFY $71.21 $91.86 $118.50 $152.86 $197.19
INTC $32.57 $35.18 $37.99 $41.03 $44.31
JNJ $32.10 $34.35 $36.75 $39.32 $42.08
JPM $29.04 $31.94 $35.14 $38.65 $42.52
K $28.56 $29.13 $29.71 $30.31 $30.91
KEY $26.22 $30.15 $34.68 $39.88 $45.86
KMB $30.91 $32.46 $34.08 $35.78 $37.57
KO $34.78 $37.56 $40.56 $43.81 $47.31
LMT $36.30 $39.93 $43.92 $48.32 $53.15
MCD $33.64 $35.32 $37.09 $38.94 $40.89
MDT $24.70 $30.88 $38.59 $48.24 $60.30
MET $33.71 $36.06 $38.59 $41.29 $44.18
MGA $29.00 $33.64 $39.02 $45.27 $52.51
MMM $33.57 $36.25 $39.15 $42.28 $45.67
MPC $31.13 $39.85 $51.00 $65.28 $83.56
MRK $35.66 $36.37 $37.10 $37.84 $38.60
MSFT $30.07 $34.88 $40.46 $46.93 $54.44
MXIM $33.38 $35.72 $38.22 $40.90 $43.76
NEE $39.32 $44.44 $50.21 $56.74 $64.12
NSC $27.00 $28.08 $29.20 $30.37 $31.58
NSRGY $32.61 $36.20 $40.18 $44.60 $49.51
NVS $34.44 $35.82 $37.26 $38.75 $40.30
ORCL $20.25 $25.31 $31.64 $39.55 $49.44
OXY $46.80 $48.67 $50.62 $52.64 $54.75
PEP $30.07 $32.17 $34.42 $36.83 $39.41
PFE $39.80 $42.59 $45.57 $48.76 $52.17
PG $35.48 $36.55 $37.64 $38.77 $39.94
PPL $44.96 $45.86 $46.78 $47.71 $48.67
PRU $40.66 $49.19 $59.52 $72.02 $87.15
PSA $32.91 $39.82 $48.19 $58.31 $70.55
QCOM $43.78 $49.90 $56.89 $64.86 $73.94
RDSB $78.71 $81.86 $85.13 $88.53 $92.08
RIO $85.14 $93.65 $103.02 $113.32 $124.65
RTN $23.80 $26.42 $29.32 $32.55 $36.13
SIEGY $41.66 $42.08 $42.50 $42.92 $43.35
SO $46.94 $48.35 $49.80 $51.29 $52.83
SRE $35.21 $37.33 $39.57 $41.94 $44.46
SU $55.19 $67.34 $82.15 $100.22 $122.27
SYK $18.39 $20.23 $22.25 $24.48 $26.93
SYY $31.93 $32.89 $33.87 $34.89 $35.94
T $56.79 $57.93 $59.09 $60.27 $61.48
TD $59.49 $61.87 $64.34 $66.92 $69.59
TEVA $21.62 $22.92 $24.30 $25.75 $27.30
TGT $33.87 $36.58 $39.50 $42.66 $46.08
TJX $14.11 $16.93 $20.32 $24.39 $29.26
TOT $59.69 $60.88 $62.10 $63.34 $64.61
TROW $35.68 $42.11 $49.69 $58.63 $69.18
TRV $24.38 $27.06 $30.03 $33.34 $37.00
TXN $30.64 $34.32 $38.44 $43.05 $48.22
UL $31.88 $33.47 $35.15 $36.90 $38.75
UNH $23.94 $31.84 $42.35 $56.32 $74.91
UNP $31.46 $34.61 $38.07 $41.87 $46.06
UPS $33.38 $35.72 $38.22 $40.90 $43.76
UTX $27.65 $29.86 $32.25 $34.83 $37.61
VIAB $46.46 $56.22 $68.03 $82.31 $99.60
 VLO $40.32 $48.38 $58.06 $69.67 $83.61
VTR $71.48 $97.21 $132.21 $179.81 $244.54
VZ $51.21 $52.75 $54.33 $55.96 $57.64
WFC $30.50 $32.63 $34.91 $37.36 $39.97
WMT $32.64 $33.29 $33.96 $34.64 $35.33
XOM
$40.24
$42.65
$45.21 $47.92 $50.80

DVY* $0.00 $127.80 $274.76 $444.10 $639.72

Shares
DVY Share Purchases on 12/31 0 73 84 97 112

Total Income $3,651.55 $4,198.79 $4,838.17 $5,589.15 $6,476.06

Table 7.4: Sample Portfolio Dividend Projections, 2016–2020
* All proceeds from dividends are used to buy additional shares of the iShares Select Dividend
ETF (Symbol: DVY) at the end of each year. DVY shares collected will also pay out an annual
dividend, as seen in this and the following table. The projections for DVY dividends per year are
based upon the historical increases for the previous five years.

Table 7.5 continues this analysis, showing the yearly dividends and
growth delivered by this sample investor portfolio from 2021 to 2025.

Dividends + Interest
Symbol 2021 2022 2023 2024 2025
AAPL $38.90 $43.18 $47.93 $53.21 $59.06
ACN $34.91 $37.70 $40.72 $43.98 $47.50
ADM $50.42 $53.95 $57.73 $61.77 $66.10
ADP $40.37 $43.60 $47.09 $50.85 $54.92
AEP $54.02 $57.26 $60.69 $64.34 $68.20
AET $16.83 $18.69 $20.74 $23.02 $25.55
AMGN $100.70 $127.89 $162.42 $206.27 $261.97
AMP $58.77 $68.17 $79.08 $91.73 $106.40
ANTM $46.69 $54.62 $63.91 $74.77 $87.48
AXP $32.05 $35.90 $40.21 $45.03 $50.44
 BA $91.13 $109.36 $131.23 $157.48 $188.97
BDX $28.06 $30.87 $33.95 $37.35 $41.08
BLK $57.21 $64.65 $73.05 $82.55 $93.28
BMO $76.53 $79.59 $82.77 $86.08 $89.53
BNS $117.40 $127.96 $139.48 $152.03 $165.72
BUD $88.88 $107.55 $130.13 $157.46 $190.52
CAH $35.45 $40.06 $45.27 $51.15 $57.80
CAT $81.85 $90.03 $99.03 $108.94 $119.83
CB $24.50 $25.24 $25.99 $26.77 $27.58
CL $32.34 $34.28 $36.34 $38.52 $40.83
CMCSA $37.03 $41.11 $45.63 $50.65 $56.22
COF $123.98 $164.90 $219.31 $291.68 $387.94
COP $28.14 $29.55 $31.03 $32.58 $34.21
CSCO $71.97 $79.89 $88.68 $98.43 $109.26
CVS $53.35 $64.56 $78.11 $94.52 $114.37
CVX $70.65 $75.60 $80.89 $86.55 $92.61
D $66.65 $71.98 $77.74 $83.96 $90.67
DE $84.23 $99.39 $117.28 $138.39 $163.30
DEO $46.19 $51.73 $57.94 $64.89 $72.68
DFS $54.59 $63.87 $74.72 $87.43 $102.29
DUK $58.46 $60.80 $63.23 $65.76 $68.39
EMR $66.92 $72.94 $79.50 $86.66 $94.46
ETN $85.51 $95.77 $107.26 $120.13 $134.55
F $133.70 $161.77 $195.75 $236.85 $286.59
GIS $44.90 $48.04 $51.41 $55.01 $58.86
GLW $61.83 $69.87 $78.96 $89.22 $100.82
GSK $220.92 $269.52 $328.82 $401.16 $489.41
HON $55.05 $63.31 $72.80 $83.73 $96.28
IBM $98.26 $115.95 $136.82 $161.45 $190.51
INFY $254.38 $328.15 $423.31 $546.07 $704.43
INTC $47.86 $51.69 $55.82 $60.29 $65.11
JNJ $45.02 $48.17 $51.55 $55.15 $59.01
 JPM $46.77 $51.45 $56.59 $62.25 $68.47
K $31.53 $32.16 $32.81 $33.46 $34.13
KEY $52.74 $60.65 $69.75 $80.21 $92.24
KMB $39.45 $41.43 $43.50 $45.67 $47.95
KO $51.10 $55.19 $59.60 $64.37 $69.52
LMT $58.46 $64.31 $70.74 $77.81 $85.59
MCD $42.94 $45.08 $47.34 $49.70 $52.19
MDT $75.38 $94.22 $117.78 $147.22 $184.03
MET $47.27 $50.58 $54.12 $57.91 $61.97
MGA $60.91 $70.66 $81.96 $95.07 $110.29
MMM $49.32 $53.27 $57.53 $62.13 $67.10
MPC $106.96 $136.91 $175.24 $224.31 $287.12
MRK $39.37 $40.16 $40.96 $41.78 $42.62
MSFT $63.15 $73.26 $84.98 $98.57 $114.34
MXIM $46.82 $50.10 $53.61 $57.36 $61.38
NEE $72.45 $81.87 $92.51 $104.54 $118.13
NSC $32.85 $34.16 $35.53 $36.95 $38.43
NSRGY $54.95 $61.00 $67.71 $75.16 $83.42
NVS $41.91 $43.58 $45.33 $47.14 $49.03
ORCL $61.80 $77.25 $96.56 $120.70 $150.87
OXY $56.94 $59.22 $61.59 $64.05 $66.61
PEP $42.17 $45.12 $48.28 $51.66 $55.28
PFE $55.83 $59.74 $63.92 $68.39 $73.18
PG $41.14 $42.37 $43.64 $44.95 $46.30
PPL $49.64 $50.63 $51.65 $52.68 $53.73
PRU $105.45 $127.60 $154.39 $186.81 $226.04
PSA $85.37 $103.29 $124.98 $151.23 $182.99
QCOM $84.29 $96.09 $109.54 $124.87 $142.36
RDSB $95.76 $99.59 $103.57 $107.72 $112.02
RIO $137.12 $150.83 $165.91 $182.51 $200.76
RTN $40.10 $44.51 $49.41 $54.84 $60.88
SIEGY $43.79 $44.23 $44.67 $45.11 $45.57
 SO $54.41 $56.05 $57.73 $59.46 $61.24
SRE $47.12 $49.95 $52.95 $56.12 $59.49
SU $149.17 $181.99 $222.02 $270.87 $330.46
SYK $29.62 $32.58 $35.84 $39.42 $43.37
SYY $37.02 $38.13 $39.27 $40.45 $41.66
T $62.70 $63.96 $65.24 $66.54 $67.87
TD $72.38 $75.27 $78.28 $81.41 $84.67
TEVA $28.94 $30.67 $32.51 $34.47 $36.53
TGT $49.76 $53.75 $58.05 $62.69 $67.70
TJX $35.12 $42.14 $50.57 $60.68 $72.81
TOT $65.90 $67.22 $68.57 $69.94 $71.34
TROW $81.63 $96.33 $113.67 $134.13 $158.27
TRV $41.07 $45.59 $50.61 $56.17 $62.35
TXN $54.00 $60.48 $67.74 $75.87 $84.98
UL $40.69 $42.72 $44.86 $47.10 $49.45
UNH $99.63 $132.51 $176.23 $234.39 $311.74
UNP $50.67 $55.73 $61.31 $67.44 $74.18
UPS $46.82 $50.10 $53.61 $57.36 $61.38
UTX $40.62 $43.87 $47.38 $51.17 $55.27
VIAB $120.52 $145.82 $176.45 $213.50 $258.34
VLO $100.33 $120.39 $144.47 $173.37 $208.04
VTR $332.57 $452.30 $615.13 $836.58 $1,037.74
VZ $59.37 $61.15 $62.98 $64.87 $66.82
WFC $42.77 $45.76 $48.97 $52.40 $56.06
WMT $36.04 $36.76 $37.49 $38.24 $39.01
XOM $53.85 $57.08 $60.50 $64.13 $67.98

DVY $866.38 $1,129.91 $1,437.48 $1,797.98 $2,222.45

Total DVY Shares Owned 496 647 823 1030 1273

Shares
DVY Share Purchases on 12/31 of
each year 121 138 158 183 214
 Total Income $7,529.44 $8,787.80 $10,299.91 $12,127.77 $14,350.48
Table 7.5: Sample Portfolio Dividend Projections, 2021–2025

Although the prices of all the stocks and the DVY ETF held in the
portfolio stagnated from 2016 through 2025, the portfolio’s value continued
to grow the original investment, $100,001.20, to $163,498.85 by the end of
2025—a 4.99 percent annual total return.
By reinvesting the dividends each year back into the DVY exchange-
traded fund (ETF), the investor’s number of shares in the ETF grew from
zero to 1,273. As a result, the total yearly income of this portfolio
skyrocketed over the decade from an initial $3,651 per year to $14,350 per
year.
The initial yield on the investor’s portfolio was 3.65 percent, based on
his investment of $100,001.20 and the annual dividends that would be
collected as income. But just ten years later, the investment produced over
three times that amount—yielding 14.3 percent ($14,350.48/$100,001.20)
based on the original investment’s value. An investor following this path of
dividend collection and reinvestment can be assured that they will be
rewarded even during future periods of stock market stagnation.

CREATING YOUR OWN SNOWBALL EFFECT

Today, we live in a world of 24-hour business television, high-speed
trading, and volatile capital markets. Instead of asking your dentist for a hot
stock tip, you need only turn on the TV to hear what the talking heads
recommend or jump on the Internet to find thousands of web pages devoted
to showing you how to make a quick buck. Don’t listen to pundits and
faceless Internet “experts.” Consider instead the proof I’ve provided in this
book.
There is no easy way to build wealth without taking on substantial risk
—especially if you are highly dependent on stocks to increase in price as
your only method of profit. If you want true wealth building, and most of us
do, follow the methodology I’ve put forth here. Remember: Companies that
pay dividends will always provide you with a return. Always. You don’t
need to examine your stocks’ price movement each day or panic when you
hear on the news that the Dow fell by 500 points. Instead, concentrate your
attention on the power of compounding dividends over time and their
ability to provide income on and add value to the shares you collect and
already own, not the price of your shares at any given moment in time.
Remember the story of the sale of Manhattan? A Native American tribe
sold the island to the West India Company for a mere pittance—60 guilders
(the equivalent of $24 in US dollars)—back in 1626. If you had taken that
measly sum and invested it in a dividend-paying stock at a 5 percent yield
and a growth rate in dividends per year of 5 percent, your sum in 2015
would be worth more than $10,000 trillion. Now that’s a snowball!
The historic examples I’ve provided in The Snowball Effect are meant
to convey the power of putting your money in investments that produce
income. You can never guess which way the Dow will go over the next
thirty years, but you can count on those quarterly payments to build up your
nest egg. Tables 7.4 and 7.5 clearly demonstrate the power of the
reinvestment of stock dividends during a period of stock-market stagnation.
Now, it’s time for you to put this strategy to use. It doesn’t matter
whether you start with $100 or $100,000—the key is to get started as soon
as possible with the process of building wealth through reinvestment of
dividends and interest.
Dividend-bearing stocks. You can choose to start with my Top 100
Snowball Investment stocks listed in Table 7.1 and explored in depth in the
appendix, or review websites like Yahoo! Finance to collect information on
other dividend-paying companies that interest you.
Even if you start with a small amount of funds, consider directly
investing in dividend-paying companies yourself or using a large discount
brokerage, such as Charles Schwab or Scottrade. In my opinion, the most
important thing is to start your investing with as many of the Top 100
Snowball Investment firms as possible. As each firm pays its dividend,
reinvest those cash payments into the same firm if its selling at a discount,
or select another company within the Top 100 that offers a high relative
dividend yield (as shown in Chapter 3’s Pepsi example). You may also
consider micro-cap dividend stocks as well for diversification. I have
provided a list of micro-cap dividend stocks that may warrant attention in
the Appendix.
Bonds. Bonds provide diversification from your stock holdings and
consistent semi-annual coupon payments. If you are interested in investing
in bonds but have a relatively small portfolio, choose an ETF instead of
investing in individual corporate bonds. Newly issued individual corporate
bonds are priced at $1,000 per bond (or close to it), so an ETF will allow
you to spread risk among many issuers. As your portfolio grows, or if you
are starting with a larger pool of funds, you can buy individual corporate
bonds. You can learn much about individual bonds at
www.bondsonline.com or through large discount brokerages, which
generally have an inventory of bonds available for purchase. Remember:
Concentrate your holdings on bonds rated BBB and BB to get the best
yields with minimal risk. You may choose from the list of 50 solid
companies provided in Chapter 5 or the ETFs that are presented in the
Appendix.
Lastly, utilize covered calls when prudent, to generate additional
income along the way. This will increase your “snowball’ by allowing you
to buy additional shares of stock or bonds. For another example, in the
appendix each Top 100 company is listed along with a ten year history of
average dividend yield. Here is the IBM table;

Date Yearly Dividend Dividend Growth % Average Dividend Yield %

2015 5.00 15 3.2
2014 4.25 23 2.7
2013 3.70 12 2.0
2012 3.30 14 1.7
2011 2.90 16 1.6
2010 2.50 16 1.7
 2009 2.15 13 1.6
2008 1.90 27 2.3
2007 1.50 36 1.4
2006 1.10 41 1.1
2005 0.78 11 1.0
Table 7.6: Dividend Table from Top 100 Source: IBM

With your covered call income, you will normally not buy more shares
of the same firm you wrote covered calls against. The reason is that the
price of the stock was high and the dividend yield below average. That is
why any prudent investor would write a covered call in the first place. I
would recommend you examine the Top 100 for firms that trade at a lower
valuation and higher dividend yield. For example, you could attempt to buy
additional shares of IBM based upon the fact that its yield remains above 3
percent in 2016, which is much above its long-term average. Thus, it
presents a compelling reinvestment opportunity.
Good luck to you! Now that you know the building blocks to
consistent income and reinvestment, your investment future can be much
more of a certainty.

33 Ibbotson SBBI 2015 Classic Yearbook: Market Results for Stocks, Bonds, Bills, and Inflation ,
Morningstar: Chicago (2015).
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 INDEX

Page numbers in italics refer to figures and tables.

Agency bond, 70
Fannie mae, 22, 70-71
Freddie Mac, 22, 70-71
Student Loan Marketing Association (Sallie Mae), 70
American Depository Receipts (ADRs), 109
Asset-backed bond (ABSs), 71
Government National Mortgage Association (Ginnie Mae), 71
Commerical mortgage-backed securities (CMBs), 71

Bear markets, 7-26

average Dow dividend yield from 1906 to 2015, 105
average Dow dividend yield by decade from 1906 to 2015, 105
Dow’s best and worst days in history, 23-24
Dow price chart from 1906-1924, 7
Dow price chart from 1929-1953, 12
Dow price chart from 1966-1982, 15
Dow price chart from 2000-2011, 19
long term secular bear markets periods from 1906-2015, 2
long term secular bull markets periods from 1906-2015, 4
secular bear market (1906-1924), 4, 7-11
secular bear market (1929-1954), 4, 12-15
secular bear markets (1966-1982), 4, 6, 15-19
secular bear markets (2000-2011), 4, 19-22
 secular bear Dow highs and lows from 1906 to 1924, 9
secular bear Dow highs and lows from 1929 to 1954, 15
secular bear Dow highs and lows from 1966 to 1982, 18
secular bear Dow highs and lows from 2000 to 2011, 21
Below investment grade, 76, 82, see also high yield
Bond, 63-92
Bond interest, 63-68
compounding bond interest, 88-92
Bond maturity date, 65
short-term, 65
medium-term, 65
long-term, 65
Bond returns, 74-76
average income component of returns for five-, ten-, and twenty-year
rolling data, 75
coupons as a significant portion of bond returns, 74
Bond yield, 65-67
history, 72-74

Call away, 94, 96, 101

Call option, 93, 95, 96
Call owner, 94, 95
Call provision, 65, 95, see also redemption
Call writer, 94, 95
Capital gains, 30-33, 101
Cash dividends , 29
Center for Research in Security Prices (CRSP), 56-57
Corporate bond, 71, 74-88
average default rate, bonds rated BB- to BBB+, 82
corporate bond historical returns and risk January 1985 to December
2005, 78
decomposition of high-yield returns, January 1996 to December 2011,
86
high-yield bonds’ sensitivity to higher interest rates, 86-87
performance of BB rated bonds vs. bond index, January 1985 to
 December 2005, 78
the power of compounding bond interest, 87
U.S. investment-grade corporate bond default summary, 80
U.S. corporate default rates, bonds rated BB- to BBB+, 81-82
Commerical mortgage-backed security (CMBs), 71
Coupon, 65-68
Covered call strategy, 93-102
calculating annualized yield for PEP and NTRS options, 98
final guidelines, 101-102
option values for PEP and NTRS, 98
Pepsi call example, 97-101
possible outcomes, 98-99
Credit quality, 68-71
Credit spread, 77-79
Current yield, 65-67
Cyclically adjusted price/earnings ratio (CAPE), 25-26, 106, 109
average 10-yr real return based on starting CAPE, 1926-2012, 26

Declaration date, 30
Date of record, 29-30
Dow Jones Industrial Average (the Dow), 5
Dividends, 27-38
dividend contribution of Dow return by decade, 28
dividend irrevelance, 31-32
dividend puzzle, 33-34
Downside capture ratios of high-dividend stocks, 1926–2011, 38
history, 35-36
northern trust dividend reinvestment example, 2000–2015, 46
payment process, 34
percentage of U.S. adults invested in the stock market, 41
per-share basis, 29
pepsi dividend reinvestment example, 2000–2015, 44
pepsi dividend reinvestment example, 2007–2008, 45
pepsi dividend/price analysis, 2006–2012, 48
secular bear market annualized returns with and without dividends
reinvested, 35
 stock yields by sector, dividends over 2 percent, 36
The Bird in the Hand, 30-31
tax preference, 32-33
Dividend coverage ratio, 30
Dividend-bearing stocks, 122
Default rates, 79-83
Downside risk, 58-59
volatility: 1979–2015, 58
Duration, 89

Ex-dividend date, 30
Exercise, 94
Expiration price, 94

Face value, 64, see also principal

Forward roll, 95

High yield (junk bonds), 69, 76

Illiquidity premium, 83-84

Indenture, 96
Investment grade, 69

Government bond, 68

Market cap, 50-51, see also large cap & small cap
Micro-cap stocks, 51, 60-62, see also small cap
micro-cap advantage, 60-62
Municipal bond, 70-71

Large cap stock, 45

Par value, 64
Premium, 64, 80
Price/earnings ratio, 4
Principal, 64, see also face value
Rating agencies, 69, see also credit quality
Redemption, 65, see also call provision
Russell Microcap Index, 61-62

Secular bull market, 2-5, 24

Small cap stocks, 50-51
Small-Cap Paradox, 50-57
small cap versus large cap underperformance, 1984–2015, 54
small cap versus large cap underperformance, Various Ranges, 54
Small firm effect, 52-57
Snowball effect, 39-49
IBM ranking table (top 100 snowball investments), 109
Pepsi dividend reinvestment example, 43-46
sample initial dividend investor portfolio as of December 31, 2015, 110-
113
sample portfolio dividend projections, 2016–2020, 113-116
sample portfolio dividend projections, 2021–2025, 117-120
selecting dividend paying stocks, 47-48
top 100 snowball investments (dividend-yielding stocks), 107-108
Standard & Poor (S&P) 500 market, 6
Strike price, 94

Time Value, 94
Total return investing, 88-89
Pepsi bond example, 88-90
Pepsi bond analysis table, 90

Uncovered call, 95
Underlying security, 94

Yield to Call, 67
Yield to Maturity, 65-67
 SUGGESTIONS FOR ADDITIONAL READING

Get Rich with Dividends: A Proven System for Earning Double-Digit

Returns
Feb 24, 2015
by Marc Lichtenfeld

The Little Book of Big Dividends: A Safe Formula for Guaranteed

Returns
Feb 8, 2010
by Charles B. Carlson and Terry Savage

The Strategic Dividend Investor

Apr 18, 2011
by Daniel Peris

Beating the S&P with Dividends: How to Build a Superior Portfolio of

Dividend Yielding Stocks
Mar 14, 2005
by Peter O’Shea and Jonathan Worrall

A Random Walk Down Wall Street: The Time-Tested Strategy for

Successful Investing (11th Edition)
Jan 4, 2016
by Burton G. Malkiel

What Works on Wall Street, Fourth Edition: The Classic Guide to the
Best-Performing Investment Strategies
Nov 14, 2011
by James O’Shaughnessy

The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid
Bear Markets
Apr 5, 2011
by Mebane T. Faber and Eric W. Richardson

Security Analysis: The Classic 1934 Edition

Oct 22, 1996
by Benjamin Graham and David Dodd

Stocks for the Long Run 5th Edition: The Definitive Guide to Financial
Market Returns & Long-Term Investment Strategies
Jan 7, 2014
by Jeremy J. Siegel

One Up On Wall Street: How To Use What You Already Know To

Make Money In The Market
Apr 9, 2001
by Peter Lynch and John Rothchild

The Little Book of Common Sense Investing: The Only Way to

Guarantee Your Fair Share of Stock Market Returns
Mar 5, 2007
by John C. Bogle
Bonds Now!: Making Money in the New Fixed Income Landscape
Dec 9, 2009
by Marilyn Cohen and Christopher R. Malburg

The Only Guide to a Winning Bond Strategy You’ll Ever Need:

The Way Smart Money Preserves Wealth Today Hardcover
March 7, 2006
by Larry E. Swedroe

Asset Allocation: Balancing Financial Risk, Fifth Edition Hardcover

May 21, 2013
by Roger Gibson (Author)
ETF CORPORATE BOND RECOMMENDATIONS

Symbol Name Type

QLTB iShares Baa - Ba Rated Corporate Bond ETF

CORP PIMCO Investment Grade Corporate Bond Index ETF ETF
VCSH Vanguard Short-Term Corporate Bond ETF ETF
VCLT Vanguard Long-Term Corporate Bond ETF ETF
CRDT WisdomTree Strategic Corporate Bond ETF ETF
GHYG iShares Global High Yield Corporate Bond ETF
FCOR Fidelity Corporate Bond ETF ETF
QLTB iShares Baa - Ba Rated Corporate Bond ETF
GLCB WisdomTree Strategic Corporate Bond ETF ETF
HYG iShares iBoxx $ High Yield Corporate Bond ETF ETF
 MICRO-CAP DIVIDEND STOCK RECOMMENDATIONS

Company Market Cap Dividend Yield Symbol

Allegheny Valley Bancorp Inc. 42.37M 4.45 AVLY

Ardmore Shipping Corporation 258.54M 8.83 ASC
Ballston Spa Bancorp, Inc. 25.04M 3.68 BSPA
BEO Bancorp 20.71M 2.98 BEOB
Blue Capital Reinsurance Holdings Ltd. 150.98M 7.01 BCRH
Capella Education Co. 598.91M 3.01 CPLA
Cass Information Systems, Inc. 567.18M 1.76 CASS
CBT Financial Corp. 27.16M 4.4 CBTC
Chicago Rivet & Machine Co. 27.24M 2.63 CVR
Citi Trends, Inc. 239.56M 1.47 CTRN
Citizens Bancorp of Virginia Inc. 47.63M 3.88 CZBT
Clifton Bancorp Inc. 340.56M 1.6 CSBK
CNB Corp. 20.79M 2.92 CNBZ
Commercial Bancshares, Inc. 39.11M 3.19 CMOH
Computer Task Group Inc. 81.77M 4.74 CTG
Consumers Bancorp Inc. 47.05M 2.79 CBKM
Corning Natural Gas Holding Corporation 42.02M 3.63 CNIG
CryoLife Inc. 386.47M 1.02 CRY
Culp, Inc. 347.67M 1.12 CFI
Detrex Corp. 45.25M 3.7 DTRX
 Eagle Bancorp Montana, Inc. 46.87M 2.42 EBMT
Ecology & Environment, Inc. 43.035M 4.91 EEI
Elmira Savings Bank 51.58M 4.58 ESBK
Empire Resources Inc. 31M 2.82 ERS
FBR & Co. 119.83M 4.99 FBRC
First Century Bankshares Inc. 39.01M 3.9 FCBS
First Colebrook Bancorp, Inc. 13.32M 2.74 FCNH
First Federal of N. Michigan Bancorp 26.09M 2.29 FFNM
First Robinson Financial Corp. 16.19M 2.95 FRFC
First West Virginia Bancorp Inc. 31.55M 4.53 FWVB
FreightCar America Inc. 175.64M 2.46 RAIL
FutureFuel Corp. 453.39M 2.3 FF
GAIN Capital Holdings, Inc. 310.09M 3.15 GCAP
George Risk Industries Inc. 37.43M 4.56 RSKIA
Glen Burnie Bancorp 29.99M 3.7 GLBZ
Global Self Storage, Inc. 40.64M 5.07 SELF
GNB Financial Services, Inc. 31.56M 1.6 GNBF
Graham Corporation 180.01M 1.97 GHM
Haynes International, Inc. 367.33M 2.81 HAYN
Heidrick & Struggles International Inc. 327.79M 2.99 HSII
Highlands Bankshares Inc. 37.55M 3.64 HBSI
Home City Financial Corp. 15.34M 2.24 HCFL
Home Financial Bancorp 8.63M 2.21 HWEN
International Shipholding Corp. 2.14M 69.2 ISHC
Jacksonville Bancorp Inc. 46.59M 1.48 JXSB
JMP Group LLC 116.65M 6.47 JMP
Kadant Inc. 549.79M 1.53 KAI
Katahdin Bankshares Corp. 38.26M 3.53 KTHN
Kewaunee Scientific Corp. 50.31M 3.11 KEQU
Kforce Inc. 463.71M 2.74 KFRC
Landauer Inc. 386.82M 2.76 LDR
Landmark Bancorp, Inc. 19.84M 2.64 LDKB
 Ledyard Financial Group, Inc. 48.99M 4.02 LFGP
Limoneira Company 251.66M 1.1 LMNR
LSI Industries Inc. 277.91M 1.82 LYTS
Mansei Corporation 24.03M 3.14 MSPVF
Mars National Bancorp, Inc. 30.48M 3.16 MNBP
Muncy Bank Financial, Inc. 49.59M 3.54 MYBF
New ULM Telecom Inc. 36.76M 4.82 NULM
Optical Cable Corp. 15.54M 3.64 OCC
Panhandle Oil and Gas Inc. 263.49M 0.98 PHX
Park Sterling Corporation 377.26M 1.73 PSTB
Pzena Investment Management, Inc 121.26M 1.44 PZN
QAD Inc. 360.161M 1.52 QADA
Raven Industries Inc. 715.58M 2.66 RAVN
Reserve Petroleum Co. 29.42M 2.69 RSRV
Resources Connection, Inc. 551.04M 2.71 RECN
Riverview Financial Corporation 35.87M 4.63 RIVE
SBT Bancorp, Inc. 26.53M 2.89 SBTB
Servotronics Inc. 20.6182M 3.45 SVT
Shoe Carnival Inc. 492.2M 1.04 SCVL
Sierra Monitor Corp. 14.265M 2.86 SRMC
Silvercrest Asset Management Group Inc. 99.06M 3.96 SAMG
Southwest Georgia Financial Corp. 37.39M 2.68 SGB
Span-America Medical Systems Inc. 49.33M 3.6 SPAN
Stage Stores Inc. 136.97M 11.52 SSI
Stein Mart Inc. 349.6M 4.1 SMRT
Superior Industries International, Inc. 693.36M 2.66 SUP
The Farmers Bank of Appomattox 20.92M 4.15 FBPA
Unique Fabricating, Inc. 135.02M 4.43 UFAB
United Tennessee Bankshares Inc. 14.89M 2.89 UNTN
Valley Commerce Bancorp 47.59M 2.5 VCBP
VSB Bancorp, Inc. 19.36M 2.26 VSBN
Wayne Savings Bancshares Inc. 34.34M 2.88 WAYN
 Wells Financial Corp. 27.8M 2.86 WEFP
Westfield Financial Inc. 131.51M 1.59 WFD
Westwood Holdings Group Inc. 486.26M 4.12 WHG
WSI Industries Inc. 8.79M 5.41 WSCI
THE TOP 100 LIST
 INTERNATIONAL BUSINESS MACHINES

IBM provides information technology (IT) products and services

worldwide. It creates business value for clients and solves business
problems through integrated solutions that leverage information technology
& knowledge of business processes.
Website: http://www.ibm.com
RANKINGS; OVERALL; #1, WITHIN TECHNOLOGY; #1

Category Value Ranking

Dividend Yield 3.00 78

Dividend Growth 15 70

Trailing Price/Earnings 10.4 14

S&P Financial Rating A++ 40

Beta 0.90 100

Ranking Score 302

Yearly Dividend Growth Average Dividend

Date
Dividend % Yield %

2015 5.00 17 3.2

2014 4.25 23 2.7

2013 3.70 12 2.0

2012 3.30 14 1.7

2011 2.90 16 1.6

2010 2.50 16 1.7

2009 2.15 13 1.6

2008 1.90 27 2.3

2007 1.50 36 1.4

2006 1.10 41 1.1

2005 0.78 11 1.0

 WALMART STORES

Wal-Mart stores Inc. operates retail stores in various formats under various
banners. Its operations comprise of three reportable business segments,
Walmart U.S., Walmart International and Sam’s Club in three categories
retail, wholesale, and others.
Website: http://www.walmart.com
RANKINGS; OVERALL; #2, WITHIN CONSUMER STAPLES; #1

Category Value Ranking

Dividend Yield 2.51 117

Dividend Growth 14.5 73

Trailing Price/Earnings 15.4 80

S&P Financial Rating A++ 40

Beta 0.60 25

Ranking Score 335

Yearly Dividend Growth Average Dividend

Date
Dividend % Yield %

2015 1.96 2 2.8

2014 1.92 2 2.2

2013 1.88 18 2.4

2012 1.59 9 2.3

2011 1.46 20 2.4

2010 1.21 11 2.2

2009 1.09 15 2.0

2008 0.95 8 1.7

2007 0.88 31 1.9

2006 0.67 12 1.5

2005 0.60 15 1.3

 MCDONALD’S

McDonald’s Corp. franchises and operates McDonald’s restaurants in the

food service industry. Its geographic segments include the United States,
Europe, and Asia-Pacific, Middle East and Africa.
Website: http://www.mcdonalds.com
RANKINGS; OVERALL; #3, WITHIN CONSUMER
DISCRETIONARY; #1

Category Value Ranking

Dividend Yield 3.54 49

Dividend Growth 15.5 65

Trailing Price/Earnings 19.5 133

S&P Financial Rating A++ 40

Beta 0.70 50

Ranking Score 337

Yearly Dividend Growth Average Dividend

Date
Dividend % Yield %

2015 3.44 5 3.4

2014 3.28 5 3.5

2013 3.12 9 3.2

2012 2.87 13 3.3

2011 2.53 12 2.5

2010 2.26 10 2.9

2009 2.05 26 3.3

2008 1.63 9 2.6

2007 1.50 50 2.6

2006 1.00 50 2.3

2005 0.67 22 2.0

 NESTLE SA ADR

Nestle SA manufactures and markets food products. The Company’s

product line includes milk, chocolate, confectionery, creamer, coffee, food
seasoning, bottled water and pet foods among others.
Website: http://www.nestle.com
RANKINGS; OVERALL; #4, WITHIN CONSUMER STAPLES; #2

Category Value Ranking

Dividend Yield 2.99 80

Dividend Growth 13.5 85

Trailing Price/Earnings 17.2 103

S&P Financial Rating A++ 40

Beta 0.70 50

Ranking Score 358

Yearly Dividend Growth Average Dividend

Date
Dividend % Yield %

2015 2.25 5 3.0

2014 2.14 5 3.3

2013 2.03 6 2.9

2012 1.91 6 3.2

2011 1.80 43 3.6

2010 1.26 -11 2.0

2009 1.41 80 2.6

2008 0.78 18 1.9

2007 0.66 12 1.2

2006 0.59 -26 1.3

2005 0.80 44 2.2

 LOCKHEED MARTIN

Lockheed Martin Corp is a security and aerospace company. The Company

is engaged in the research, design, development, manufacture, integration
and sustainment of advanced technology systems, products and services.
Website: http://www.lockheedmartin.com
RANKINGS; OVERALL; #5, WITHIN BASIC MATERIALS; #1

Category Value Ranking

Dividend Yield 3.20 67

Dividend Growth 20.5 46

Trailing Price/Earnings 17.8 109

S&P Financial Rating A++ 40

Beta 0.90 100

Ranking Score 362

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 6.15 12 3.0

2014 5.49 15 2.9

2013 4.78 15 3.2

2012 4.15 28 4.5

2011 3.25 23 4.0

2010 2.64 13 3.8

2009 2.34 28 3.1

2008 1.83 25 2.2

2007 1.47 18 1.4

2006 1.25 19 1.4

2005 1.05 15 1.7

 CHEVRON CORP

Chevron Corp provides administrative, financial, management and

technology support to U.S. & international subsidiaries that engage in fully
integrated petroleum operations, chemicals operations, mining operations,
and power and energy services.
Website: http://www.chevron.com
RANKINGS; OVERALL; #6, WITHIN ENERGY; #1

Category Value Ranking

Dividend Yield 3.96 31

Dividend Growth 9 131

Trailing Price/Earnings 10.6 16

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 368

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 4.28 2 4.4

2014 4.21 8 3.8

2013 3.90 11 3.1

2012 3.51 14 3.3

2011 3.09 9 2.9

2010 2.84 7 3.1

2009 2.66 5 3.5

2008 2.53 12 3.4

2007 2.26 12 2.4

2006 2.01 15 2.7

2005 1.75 14 3.1

 VERIZON COMMUNICATIONS

Verizon Communications Inc is a provider of communications, information

and entertainment products and services to consumers, businesses and
governmental agencies. Its two segments are Wireless and Wireline.
Website: http://www.verizon.com
RANKINGS; OVERALL; #7, WITHIN TELECOMMUNICATIONS;
#1

Category Value Ranking

Dividend Yield 4.39 22

Dividend Growth 3.5 195

Trailing Price/Earnings 14.2 63

S&P Financial Rating A++ 40

Beta 0.7 50

Ranking Score 370

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.23 3 4.7

2014 2.16 3 4.6

2013 2.09 3 4.2

2012 2.03 3 4.7

2011 1.98 3 4.9

2010 1.93 3 5.4

2009 1.87 5 5.6

2008 1.78 7 5.2

2007 1.67 -17 3.8

2006 2.03 25 4.4

2005 1.62 17 5.3

 CISCO SYSTEMS

Cisco Systems Inc. is engaged in designing, manufacturing and selling of

Internet Protocol (IP) based networking products and services related to the
communications and information technology (IT) industry.
Website: http://www.cisco.com
RANKINGS; OVERALL; #8, WITHIN TECHNOLOGY; #2

Category Value Ranking

Dividend Yield 2.91 88

Dividend Growth 22 37

Trailing Price/Earnings 14.2 56

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 371

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 0.80 11 2.9

2014 0.72 16 2.7

2013 0.62 121 2.9

2012 0.28 133 2.2

2011 0.12 - 1.0

2010 - - -

2009 - - -

2008 - - -

2007 - - -

2006 - - -

2005 - - -
 OCCIDENTAL PETROLEUM

Occidental Petroleum Corp. is a multinational organization whose

subsidiaries and affiliates operate in the oil and gas, chemical and
midstream, marketing & other segments.
Website: http://www.oxy.com
RANKINGS; OVERALL; #9, WITHIN ENERGY; #2

Category Value Ranking

Dividend Yield 3.66 43

Dividend Growth 17.5 55

Trailing Price/Earnings 13.7 59

S&P Financial Rating A++ 40

Beta 1.2 175

Ranking Score 372

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.94 2 4.0

2014 2.88 13 3.6

2013 2.56 19 2.7

2012 2.16 17 2.8

2011 1.84 25 2.0

2010 1.47 12 1.5

2009 1.31 8 1.6

2008 1.21 29 2.0

2007 0.94 18 1.2

2006 0.80 23 1.6

2005 0.65 23 1.6

 TRAVELERS COMPANIES

Travelers Companies Inc through its subsidiaries provides commercial &

personal property and casualty insurance products and services to
businesses, government units, associations and individuals.
Website: http://www.travelers.com
RANKINGS; OVERALL; #10, WITHIN FINANCIAL; #1

Category Value Ranking

Dividend Yield 2.39 121

Dividend Growth 10 125

Trailing Price/Earnings 10.2 11

S&P Financial Rating A++ 40

Beta 0.8 75

Ranking Score 372

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.38 11 2.3

2014 2.15 13 2.0

2013 1.96 19 2.2

2012 1.79 17 2.5

2011 1.59 25 2.7

2010 1.41 12 2.5

2009 1.23 8 2.5

2008 1.19 29 2.6

2007 1.13 18 2.1

2006 1.01 23 1.9

2005 0.91 -4 2.0

 AT&T INC

AT&T Inc. through its subsidiaries and affiliates, provides wireless and
wireline telecommunications services in the United States and
internationally. The Company has three reportable segments: Wireless,
Wireline, and Other.
Website: http://www.att.com
RANKINGS; OVERALL; #11, WITHIN TELECOMMUNICATIONS;
#2

Category Value Ranking

Dividend Yield 5.58 7

Dividend Growth 3 203

Trailing Price/Earnings 13.1 47

S&P Financial Rating A++ 40

Beta 0.8 75

Ranking Score 372

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 1.88 2 5.6

2014 1.85 2 5.5

2013 1.81 2 5.1

2012 1.77 2 5.2

2011 1.73 2 5.7

2010 1.69 2 5.7

2009 1.65 3 5.9

2008 1.61 -14 5.6

2007 1.87 9 3.4

2006 1.71 32 3.7

2005 1.30 4 5.3

 TEVA PHARMACEUTICAL INDUSTRIES

Teva Pharmaceutical Industries Ltd develops, manufactures, markets, and

distributes generic, specialty, and other pharmaceutical products worldwide.
The company operated in two segments, Generic Medicine and Specialty
Medicines.
Website: http://www.tevapharm.com
RANKINGS; OVERALL; #12, WITHIN HEALTHCARE; #1

Category Value Ranking

Dividend Yield 2.19 143

Dividend Growth 22 38

Trailing Price/Earnings 12.3 38

S&P Financial Rating A+ 80

Beta 0.8 75

Ranking Score 374

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.37 - 2.2

2014 1.37 7 0.6

2013 1.28 24 3.2

2012 1.03 16 2.8

2011 0.89 33 2.2

2010 0.67 40 1.3

2009 0.48 17 0.9

2008 0.41 24 1.0

2007 0.33 32 0.7

2006 0.25 14 0.8

2005 0.22 10 0.5

 QUALCOMM INC

Qualcomm Inc develops digital communication technology called CDMA

(Code Division Multiple Access), & owns intellectual property applicable
to products that implement any version of CDMA including patents, patent
applications & trade secrets.
Website: http://www.qualcomm.com
RANKINGS; OVERALL; #13, WITHIN TECHNOLOGY; #3

Category Value Ranking

Dividend Yield 2.81 91

Dividend Growth 15.5 68

Trailing Price/Earnings 13.4 55

S&P Financial Rating A++ 40

Beta 1.0 125

Ranking Score 379

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.80 17 2.7

2014 1.54 28 2.2

2013 1.20 4 1.8

2012 1.15 42 1.6

2011 0.81 13 1.5

2010 0.72 9 1.5

2009 0.66 10 1.5

2008 0.60 15 1.7

2007 0.52 24 1.4

2006 0.42 31 1.2

2005 0.32 39 0.8

 DEERE & COMPANY

Deer & Company operated in three business segments: agriculture/turf,

construction/forestry, & financial services. The Company helps customers
to be more productive as they help to improve the quality of like for people
around the world.
Website: http://www.deere.com
RANKINGS; OVERALL; #14, WITHIN INDUSTRIALS; #1

Category Value Ranking

Dividend Yield 2.66 105

Dividend Growth 14 79

Trailing Price/Earnings 10.3 12

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 386

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.4 8 2.7

2014 2.22 12 2.6

2013 1.99 11 2.2

2012 1.79 18 2.1

2011 1.52 31 2.0

2010 1.16 4 1.5

2009 1.12 6 2.1

2008 1.06 16 2.8

2007 0.91 17 1.0

2006 0.78 28 1.7

2005 0.61 9 0.9

 EXXON MOBIL

Exxon Mobil Corporation is engaged in energy, involving exploration for,

and production of, crude oil and natural transportation and sale of crude oil,
natural gas and petroleum products.
Website: http://www.exxonmobil.com
RANKINGS; OVERALL; #15, WITHIN ENERGY; #3

Category Value Ranking

Dividend Yield 3.30 56

Dividend Growth 9 134

Trailing Price/Earnings 11.8 33

S&P Financial Rating A++ 40

Beta 1.0 125

Ranking Score 388

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.88 7 3.5

2014 2.70 10 2.9

2013 2.46 13 2.4

2012 2.18 18 2.5

2011 1.85 6 2.2

2010 1.74 5 2.4

2009 1.66 7 2.4

2008 1.55 13 1.9

2007 1.37 7 1.5

2006 1.28 12 1.7

2005 1.14 8 2.0

 INTEL CORP

Intel Corporation is a semiconductor chip maker. It develops integrated

digital technology products like integrated circuits, for industries such as
computing and communications.
Website: http://www.intel.com
RANKINGS; OVERALL; #16, WITHIN TECHNOLOGY; #4

Category Value Ranking

Dividend Yield 2.94 83

Dividend Growth 12.5 95

Trailing Price/Earnings 13.2 52

S&P Financial Rating A++ 40

Beta 1.0 125

Ranking Score 395

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 0.96 7 3.0

2014 0.90 0 2.5

2013 0.90 3 3.5

2012 0.87 12 4.2

2011 0.78 24 3.2

2010 0.63 13 3.0

2009 0.56 2 2.8

2008 0.55 22 3.7

2007 0.45 13 1.7

2006 0.40 25 2.0

2005 0.32 100 1.3

 AMGEN INC

Amgen Inc is a biotechnology company that discovers, develops,

manufactures and delivers human therapeutics. It focuses for the treatment
of illness in the areas of oncology, hematology, inflammation, bone health,
nephrology, cardiovascular, and general medicine.
Website: http://www.amgen.com
RANKINGS; OVERALL; #17, WITHIN HEALTHCARE; #2

Category Value Ranking

Dividend Yield 1.98 157

Dividend Growth 30 18

Trailing Price/Earnings 18.2 114

S&P Financial Rating A++ 40

Beta 0.8 75

Ranking Score 404

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 3.16 30 2.0

2014 2.44 30 1.5

2013 1.88 31 1.7

2012 1.44 157 1.7

2011 0.56 - 0.90

2010 - - -

2009 - - -

2008 - - -

2007 - - -

2006 - - -

2005 - - -
 PROCTER & GAMBLE CO

Procter & Gamble Co provides branded consumer packaged goods. It

markets its products in about 180 countries through mass merchandisers,
grocery stores, membership club stores, drug stores, department stores
among others.
Website: http://www.pg.com
RANKINGS; OVERALL; #18, WITHIN CONSUMER STAPLES; #3

Category Value Ranking

Dividend Yield 3.31 55

Dividend Growth 9.5 129

Trailing Price/Earnings 20.2 141

S&P Financial Rating A++ 40

Beta 0.7 50

Ranking Score 415

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.59 6 3.1

2014 2.45 16 2.8

2013 2.29 7 2.9

2012 2.14 9 3.3

2011 1.97 9 3.1

2010 1.80 10 2.9

2009 1.64 13 2.8

2008 1.45 13 2.5

2007 1.28 11 1.9

2006 1.15 12 1.9

2005 1.03 5 1.9

 DUKE ENERGY

Duke Energy Corporation operated as an energy company. The Company

operates in three business segments; Regulated Utilities, International
Energy and Commercial Power.
Website: http://www.duke-energy.com
RANKINGS; OVERALL; #19, WITHIN UTILITIES; #1

Category Value Ranking

Dividend Yield 4.17 25

Dividend Growth 11.5 104

Trailing Price/Earnings 20.3 142

S&P Financial Rating A 120

Beta 0.6 25

Ranking Score 417

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 3.24 3 4.3

2014 3.15 2 3.8

2013 3.09 2 4.5

2012 3.03 2 4.8

2011 2.97 2 4.5

2010 2.91 3 5.5

2009 2.82 4 5.5

2008 2.70 5 6.0

2007 2.58 -32 4.3

2006 3.78 8 3.8

2005 3.51 13 4.3

 RAYTHEON CO

Raytheon Co together with its subsidiaries is engaged in developing

integrated defense systems. The Company offers air and missile defense;
radar solutions; naval combat and ship electronic systems; command,
control and communications systems.
Website: http://www.raytheon.com
RANKINGS; OVERALL; #20, WITHIN INDUSTRIALS; #2

Category Value Ranking

Dividend Yield 2.55 113

Dividend Growth 14 81

Trailing Price/Earnings 15.5 83

S&P Financial Rating A++ 40

Beta 0.9 100

Ranking Score 417

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.68 11 2.5

2014 2.42 10 2.2

2013 2.20 10 2.4

2012 2.00 16 3.5

2011 1.72 15 3.6

2010 1.50 21 3.1

2009 1.24 11 2.4

2008 1.12 10 2.2

2007 1.02 6 1.7

2006 0.96 9 1.8

2005 0.88 10 2.2

 BANK OF NOVA SCOTIA

Bank of Nova Scotia is a diversified financial services institution that

provides financial products and services to retail, commercial and corporate
customers around the world.
Website: http://www.scotiabank.com
RANKINGS; OVERALL; #21, WITHIN FINANCIAL; #2

Category Value Ranking

Dividend Yield 4.09 29

Dividend Growth 5 177

Trailing Price/Earnings 11.3 22

S&P Financial Rating A 120

Beta 0.8 75

Ranking Score 423

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.72 6 4.3

2014 2.56 7 3.9

2013 2.39 9 3.6

2012 2.19 7 3.9

2011 2.05 5 4.1

2010 1.96 0 3.4

2009 1.96 2 4.0

2008 1.92 10 5.8

2007 1.74 16 3.6

2006 1.50 14 3.0

2005 1.32 25 3.0

 JOHNSON & JOHNSON

Johnson & Johnson is engaged in the research & development,

manufacture, and sale of a broad range of products in the healthcare field. It
has three business segments: Consumer, Pharmaceutical, and Medical
Devices & Diagnostics.
Website: http://www.jnj.com
RANKINGS; OVERALL; #22, WITHIN HEALTHCARE; #3

Category Value Ranking

Dividend Yield 3.02 77

Dividend Growth 8.5 137

Trailing Price/Earnings 16.8 96

S&P Financial Rating A++ 40

Beta 0.80 75

Ranking Score 425

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.95 7 3.0

2014 2.76 6 2.7

2013 2.59 8 3
2012 2.40 7 3.6

2011 2.25 6 3.5

2010 2.11 10 3.4

2009 1.93 7 3.3

2008 1.80 11 2.8

2007 1.62 11 2.5

2006 1.46 14 2.3

2005 1.28 16 2.0

 COCACOLA

Coca-Cola Co manufactures, distributes and markets non-alcoholic

beverage concentrates and syrups. The company primarily offers sparkling
beverages and still beverages.
Website: http://www.cocacola.com
RANKINGS; OVERALL; #23, WITHIN CONSUMER STAPLES; #4

Category Value Ranking

Dividend Yield 3.24 61

Dividend Growth 8.5 138

Trailing Price/Earnings 19.9 139

S&P Financial Rating A++ 40

Beta 0.7 50

Ranking Score 428

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.32 8 3.2

2014 1.22 9 2.9

2013 1.12 10 2.7

2012 1.02 8 2.8

2011 0.94 7 2.7

2010 0.88 7 2.7

2009 0.82 8 2.9

2008 0.76 12 3.4

2007 0.68 10 2.2

2006 0.62 11 2.6

2005 0.56 12 2.8

 TOTAL SA ADR

Total SA is an integrated oil and gas company. It explores and develops oil
and gas properties, liquefied natural gas, petrochemicals and specialty
chemicals. It is also engaged in trading and shipping of crude oil and
petroleum products.
Website: http://www.total.com
RANKINGS; OVERALL; #24, WITHIN ENERGY; #4

Category Value Ranking

Dividend Yield 5.68 6

Dividend Growth 2.5 211

Trailing Price/Earnings 9.5 5

S&P Financial Rating A++ 40

Beta 1.2 175

Ranking Score 437

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.73 -14 5.5

2014 3.17 -0.3 6.2

2013 3.18 7 5.2

2012 2.96 -5 5.7

2011 3.11 23 6.1

2010 2.53 -23 4.7

2009 3.28 6 5.1

2008 3.10 10 5.6

2007 2.81 31 3.4

2006 2.15 14 3.0

2005 1.88 -17 3.0

 MICROSOFT

Microsoft Corp is engaged in designing, manufacturing, selling devices,

and online advertising to a global customer audience. Its products include
operating systems for computing devices, servers, phones, and other
intelligent devices.
Website: http://www.microsoft.com
RANKINGS; OVERALL; #25, WITHIN TECHNOLOGY; #5

Category Value Ranking

Dividend Yield 2.61 109

Dividend Growth 2.5 67

Trailing Price/Earnings 15.5 97

S&P Financial Rating A++ 40

Beta 1.0 125

Ranking Score 438

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.24 16 2.7

2014 1.07 20 2.5

2013 0.89 17 2.6

2012 0.76 25 3.1

2011 0.61 17 2.6

2010 0.52 4 2.0

2009 0.50 16 1.7

2008 0.43 10 2.4

2007 0.39 15 1.2

2006 0.34 6 1.2

2005 0.32 0 1.2

 CHUBB CORP

Chubb Corp is a holding company. The Company, through its subsidiaries is

engaged in property and casualty insurance to business and individuals.
Website: http://www.chubb.com
RANKINGS; OVERALL; #26, WITHIN FINANCIAL; #3

Category Value Ranking

Dividend Yield 2.29 131

Dividend Growth 7.5 149

Trailing Price/Earnings 13.2 50

S&P Financial Rating A++ 40

Beta 0.8 75

Ranking Score 445

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.64 32 2.4

2014 2.00 14 1.9

2013 1.76 7 1.8

2012 1.64 6 2.2

2011 1.54 4 2.3

2010 1.48 6 2.5

2009 1.40 6 2.9

2008 1.32 14 2.6

2007 1.16 16 2.1

2006 1.00 16 1.9

2005 0.86 10 1.8

 ACCENTURE PLC

Accenture PLC is a professional service company. The Company is

engaged in providing management consulting, technology and outsourcing
services to clients.
Website: http://www.accenture.com
RANKINGS; OVERALL; #27, WITHIN TECHNOLOGY; #6

Category Value Ranking

Dividend Yield 2.18 144

Dividend Growth 30.5 15

Trailing Price/Earnings 18.9 125

S&P Financial Rating A++ 40

Beta 1.0 125

Ranking Score 449

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.04 10 2.3

2014 1.86 15 2.2

2013 1.62 20 2.1

2012 1.35 50 2.2

2011 0.90 -20 2.1

2010 1.13 126 1.7

2009 0.50 19 1.8

2008 0.42 20 1.5

2007 0.35 17 1.2

2006 0.30 - 1.0

2005 - - 1.0
 GENERAL MILLS

General Mills Inc is a manufacturer and marketer of branded customer

foods sold through retail stores. It supplies branded and unbranded food
products to the foodservice and commercial baking industries.
Website: http://www.generalmills.com
RANKINGS; OVERALL; #28, WITHIN CONSUMER STAPLES; #5

Category Value Ranking

Dividend Yield 3.16 68

Dividend Growth 11.5 105

Trailing Price/Earnings 20.5 146

S&P Financial Rating A+ 80

Beta 0.7 50

Ranking Score 449

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.67 8 3.1

2014 1.55 17 3.0

2013 1.32 7 2.9

2012 1.22 9 3.1

2011 1.12 17 2.9

2010 0.96 12 3.0

2009 0.86 9 2.5

2008 0.79 10 2.7

2007 0.72 7 2.7

2006 0.67 8 2.4

2005 0.62 5 2.6

 SOUTHERN CO.

The Southern Company together with its subsidiaries, operates as a public

electric utility company. It is involved in the generation, transmission, and
distribution of electricity through coal, nuclear, oil and gas, and hydro
resources in the states of Alabama, Georgia, Florida, and Mississippi.
Website: http://www.southernco.com
RANKINGS; OVERALL; #29, WITHIN UTILITIES; #2

Category Value Ranking

Dividend Yield 4.90 10

Dividend Growth 4 188

Trailing Price/Earnings 17.3 106

S&P Financial Rating A 120

Beta 0.6 25

Ranking Score 449

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.15 3 4.8

2014 2.08 17 4.2

2013 2.01 7 4.9

2012 1.94 9 4.5

2011 1.87 17 4.1

2010 1.80 12 4.7

2009 1.73 9 5.2

2008 1.66 10 4.5

2007 1.60 7 4.1

2006 1.54 4 4.2

2005 1.48 4 4.3

 TORONTODOMINION BANK

Toronto-Dominion Bank is a Canadian bank. Together with its subsidiaries,

it provides financial and banking services in North America and
internationally. The company operates through Canadian Retail, U.S. Retail,
and Wholesale Banking segments.
Website: http://www.td.com
RANKINGS; OVERALL; #30, WITHIN FINANCIAL; #4

Category Value Ranking

Dividend Yield 3.67 41

Dividend Growth 7.5 157

Trailing Price/Earnings 12.8 43

S&P Financial Rating B++ 160

Beta 0.7 50

Ranking Score 451

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.00 9 3.7

2014 1.84 14 3.5

2013 1.62 12 3.4

2012 1.45 11 3.4

2011 1.31 7 3.6

2010 1.22 0 3.2

2009 1.22 3 3.4

2008 1.18 10 6.3

2007 1.07 20 2.8

2006 0.89 14 2.6

2005 0.78 11 2.6

 ANHEUSERBUSCH INBEV SA

Anheuser-Busch Inbev SA, a brewing company, engages in the production,

distribution, and sale of beer, alcoholic beverages, and soft drinks
worldwide. It offers a portfolio of approximately 200 beer brands, which
includes Budweiser, Corona and Stella Artois.
Website: http://www.ab-inbev.com
RANKINGS; OVERALL; #31, WITHIN CONSUMER STAPLES; #6

Category Value Ranking

Dividend Yield 2.91 87

Dividend Growth 22.7 35

Trailing Price/Earnings 22.2 166

S&P Financial Rating A++ 40

Beta 1.0 125

Ranking Score 453

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 3.95 22 3.3

2014 3.25 7 2.9

2013 3.03 93 2.8

2012 1.57 33 1.8

2011 1.18 141 1.9

2010 0.49 - 0.9

2009 - - -

2008 - - -

2007 - - -

2006 - - -

2005 - - -
 MARATHON PETROLEUM

Marathon Petroleum Corp is a supplier of gasoline and distillates to

resellers and consumers. Its refining, marketing and transportation
operations are concentrated in the Midwest, Gulf Coast and Southeast
regions of the U.S.
Website: http://www.marathonpetroleum.com
RANKINGS; OVERALL; #32, WITHIN ENERGY; #5

Category Value Ranking

Dividend Yield 1.96 159

Dividend Growth 60 6

Trailing Price/Earnings 11.9 35

S&P Financial Rating A+ 80

Beta 1.2 175

Ranking Score 455

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.14 24 2.3

2014 0.92 19 2.1

2013 0.77 28 2.0

2012 0.60 160 1.6

2011 0.23 - 1.3

2010 - - -

2009 - - -

2008 - - -

2007 - - -

2006 - - -

2005 - - -
 ORACLE CORPORATION

Oracle Corporation develops, manufactures, markets, hosts and supports

database and middleware software, application software, cloud
infrastructure, hardware system including computer server, storage and
networking products and related services.
Website: http://www.oracle.com
RANKINGS; OVERALL; #33, WITHIN TECHNOLOGY; #7

Category Value Ranking

Dividend Yield 1.37 195

Dividend Growth 83 2

Trailing Price/Earnings 14.8 72

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 455

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 0.51 6 1.2

2014 0.48 300 1.1

2013 0.12 -50 0.60

2012 0.24 14 0.70

2011 0.21 5 0.90

2010 0.20 300 0.60

2009 0.05 - 0.60

2008 - - -

2007 - - -

2006 - - -

2005 - - -
 ROYAL DUTCH SHELL PLC

Royal Dutch Shell PLC is an integrated oil & gas company. The Company
explores for and extracts crude oil, natural gas and natural gas liquids. It
also liquefies and transports gas.
Website: http://www.shell.com
RANKINGS; OVERALL; #34, WITHIN BASIC MATERIALS; #2

Category Value Ranking

Dividend Yield 5.84 3

Dividend Growth 3 201

Trailing Price/Earnings 14.4 68

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 462

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 3.76 1 6.5

2014 3.72 4 5.4

2013 3.56 4 4.7

2012 3.42 2 4.8

2011 3.36 0 4.4

2010 3.36 1 5.0

2009 3.32 6 5.7

2008 3.12 11 6.1

2007 2.81 49 3.4

2006 1.89 - 2.7

2005 - - -
 DISCOVER FINANCIAL SERVICES

Discover Financial Services is a direct banking and payment services

company. The Company offers credit card loans, private student loans,
personal loans, home equity loans and deposits products.
Website: http://www.discoverfinancial.com
RANKINGS; OVERALL; #35, WITHIN FINANCIAL; #5

Category Value Ranking

Dividend Yield 1.91 165

Dividend Growth 30.5 16

Trailing Price/Earnings 10.8 18

S&P Financial Rating A 120

Beta 1.1 150

Ranking Score 469

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 1.08 17 1.9

2014 0.92 53 1.4

2013 0.60 50 1.3

2012 0.40 100 1.1

2011 0.20 150 1.2

2010 0.08 -22 0.4

2009 0.12 -50 0.5

2008 0.24 300 2.5

2007 0.06 - 0.8

2006 - - -

2005 - - -
 EMERSON ELECTRIC CO

Emerson Electric Co is engaged in designing and supplying products and

technology, and delivering engineering services and solutions in industrial,
commercial and consumer markets.
Website: http://www.emerson.com
RANKINGS; OVERALL; #36, WITHIN INDUSTRIALS; #3

Category Value Ranking

Dividend Yield 3.22 64

Dividend Growth 8 145

Trailing Price/Earnings 14.8 71

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 470

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.88 9 3.3

2014 1.72 5 2.9

2013 1.64 3 2.4

2012 1.60 16 3.0

2011 1.38 3 3.1

2010 1.34 2 2.4

2009 1.32 10 3.1

2008 1.20 14 3.4

2007 1.05 18 1.9

2006 0.89 7 2.1

2005 0.83 2 2.3

 CONOCOPHILLIPS

ConocoPhillips is engaged in exploration, development and production of

crude oil and natural gas.
Website: http://www.conocophillips.com
RANKINGS; OVERALL; #37, WITHIN ENERGY; #6

Category Value Ranking

Dividend Yield 4.35 23

Dividend Growth 8.5 135

Trailing Price/Earnings 13.6 58

S&P Financial Rating A+ 80

Beta 1.2 175

Ranking Score 471

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.94 4 5.1

2014 2.84 5 4.1

2013 2.70 3 3.8

2012 2.64 16 4.6

2011 2.64 3 3.6

2010 2.15 2 3.2

2009 1.91 10 3.7

2008 1.88 14 3.6

2007 1.64 18 1.9

2006 1.44 7 2.0

2005 1.18 16 2.0

 AMERICAN ELECTRIC POWER CO.

American Electric Power Co. Inc. is a public utility holding company,

through its subsidiaries, provides electric service, consisting of generation,
transmission and distribution, on an integrated basis to its retail customers.
Website: http://www.aep.com
RANKINGS; OVERALL; #38, WITHIN UTILITIES; #3

Category Value Ranking

Dividend Yield 3.79 35

Dividend Growth 4 185

Trailing Price/Earnings 16.1 89

S&P Financial Rating A 120

Beta 0.7 50

Ranking Score 479

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.15 6 3.8

2014 2.03 4 3.3

2013 1.95 4 4.2

2012 1.88 2 4.4

2011 1.85 8 4.5

2010 1.71 4 4.8

2009 1.64 0 4.7

2008 1.64 4 4.9

2007 1.58 5 3.4

2006 1.50 6 3.5

2005 1.42 1 3.8

 UNITEDHEALTH GROUP INC.

UnitedHealth Group Inc. designs products, provides services and applies

technologies that improve access to health and well-being services, simplify
the health care experience and make health care more affordable.
Website: http://www.unitedhealthgroup.com
RANKINGS; OVERALL; #39, WITHIN HEALTHCARE; #4

Category Value Ranking

Dividend Yield 1.32 202

Dividend Growth 94 1

Trailing Price/Earnings 19.8 138

S&P Financial Rating A++ 40

Beta 0.9 100

Ranking Score 481

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.88 33 1.6

2014 1.41 34 1.4

2013 1.05 31 1.4

2012 0.80 31 1.5

2011 0.61 49 1.2

2010 0.41 1266 1.1

2009 0.03 0 0.1

2008 0.03 0 0.1

2007 0.03 0 0.1

2006 0.03 50 0.1

2005 0.02 0 0
 GLAXOSMITHKLINE PLC ADR.

GlaxoSmithKline PLC creates, discovers, develops, manufactures and

markets pharmaceutical products including vaccines, over-the-counter
(OTC) medicines and health-related consumer products.
Website: http://www.gsk.com
RANKINGS; OVERALL; #40, WITHIN HEALTHCARE; #5

Category Value Ranking

Dividend Yield 5.69 5

Dividend Growth 3 199

Trailing Price/Earnings 19 126

S&P Financial Rating A+ 80

Beta 0.8 75

Ranking Score 485

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.48 -6 5.7

2014 2.65 10 6.2

2013 2.41 -3 4.5

2012 2.48 12 5.3

2011 2.21 11 4.8

2010 2.00 8 5.1

2009 1.86 -13 4.4

2008 2.14 4 5.7

2007 2.06 18 4.1

2006 1.74 14 3.3

2005 1.53 -4 3.0

 RIO TINTO PLC ADR

Rio Tinto PLC is an international mining group engaged in finding, mining

and processing the Earth’s mineral resources. Its main products are Bauxite,
Alumina, Copper, Gold, Molybdenum, Silver, Nickel, Diamonds and
Rutile.
Website: http://www.riotinto.com
RANKINGS; OVERALL; #41, WITHIN BASIC MATERIALS; #3

Category Value Ranking

Dividend Yield 4.55 17

Dividend Growth 10 123

Trailing Price/Earnings 8.4 2

S&P Financial Rating A 120

Beta 1.4 225

Ranking Score 487

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.21 9 5.5

2014 2.03 15 4.4

2013 1.76 7 3.1

2012 1.64 40 2.8

2011 1.17 33 2.4

2010 0.88 30 1.2

2009 0.68 -55 1.3

2008 1.52 31 6.8

2007 1.16 41 1.1

2006 0.82 -2 1.5

2005 0.84 281 1.8

 BANK OF MONTREAL

Bank of Montreal is a financial services provider based in North America. It

provides retail banking, wealth management and investment banking
products & services.
Website: http://www.bmo.com
RANKINGS; OVERALL; #42, WITHIN FINANCIAL; #6

Category Value Ranking

Dividend Yield 4.10 28

Dividend Growth 1 217

Trailing Price/Earnings 11.9 34

S&P Financial Rating B++ 160

Beta 0.7 50

Ranking Score 489

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 3.24 5 4.2

2014 3.08 5 3.9

2013 2.94 4 4.2

2012 2.82 0 4.6

2011 2.80 0 5.1

2010 2.80 0 4.7

2009 2.80 0 4.7

2008 2.80 4 10.2

2007 2.70 19 4.5

2006 2.26 22 3.4

2005 1.85 13 2.7

 PUBLIC STORAGE

Public Storage is engaged in the acquisition, development, ownership and

operation of self-storage facilities which offers storage spaces for lease,
generally on a month-to-month basis, for personal and business use.
Website: http://www.publicstorage.com
RANKINGS; OVERALL; #43, WITHIN REAL ESTATE
INVESTMENT; #1

Category Value Ranking

Dividend Yield 3.63 47

Dividend Growth 18 53

Trailing Price/Earnings 37.9 236

S&P Financial Rating A+ 80

Beta 0.8 75

Ranking Score 491

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 6.50 16 3.1

2014 5.60 9 3.0

2013 5.15 17 3.4

2012 4.40 21 3.0

2011 3.65 20 2.7

2010 3.05 39 3.0

2009 2.20 0 2.7

2008 2.20 10 2.8

2007 2.00 0 2.7

2006 2.00 5 2.1

2005 1.90 6 2.8

 KIMBERLYCLARK CORP.

Kimberly-Clark Corp. is engaged in the manufacturing and marketing of

products made from natural or synthetic fibers using technologies in fibers,
nonwovens and absorbency.
Website: http://www.kimberly-clark.com
RANKINGS; OVERALL; #44, WITHIN CONSUMER STAPLES; #7

Category Value Ranking

Dividend Yield 3.22 65

Dividend Growth 7.5 154

Trailing Price/Earnings 27.1 211

S&P Financial Rating A++ 40

Beta 0.6 25

Ranking Score 495

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 3.52 5 3.1

2014 3.36 4 2.9

2013 3.24 9 3.1

2012 2.96 6 3.5

2011 2.80 6 3.8

2010 2.64 10 4.2

2009 2.40 3 3.8

2008 2.32 9 4.4

2007 2.12 8 3.1

2006 1.96 9 2.9

2005 1.80 17 3.0

 PPL CORP.

PPL Corp. is an energy and utility holding company through its

subsidiaries, is engaged in the generation and marketing of electricity in the
northeastern and western U.S. and in the delivery of electricity in
Pennsylvania and the U.K.
Website: http://www.pplweb.com
RANKINGS; OVERALL; #45, WITHIN UTILITIES; #4

Category Value Ranking

Dividend Yield 4.42 20

Dividend Growth 3.5 194

Trailing Price/Earnings 14.8 73

S&P Financial Rating B++ 160

Beta 0.7 50

Ranking Score 497

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.50 1 4.5

2014 1.49 1 4.1

2013 1.47 2 4.9

2012 1.44 3 5.0

2011 1.40 0 4.8

2010 1.40 1 5.3

2009 1.38 3 4.3

2008 1.34 10 4.4

2007 1.22 11 2.3

2006 1.10 30 3.1

2005 0.85 4 3.3

 TARGET CORP.

Target Corporation operates as a general merchandise retailer in the United

States and Canada. It offers household essentials, including pharmacy,
beauty, personal care, baby care, cleaning, and paper products; music,
movies, books, computer software, sporting goods, and toys; electronics,
such as video game hardware and software; and apparel for women, men,
boys, girls, toddlers, infants, and newborns, as well as intimate apparel,
jewelry, accessories, and shoes.
Website: http://www.targetcorp.com
RANKINGS; OVERALL; #46, WITHIN CONSUMER STAPLES; #8

Category Value Ranking

Dividend Yield 2.63 108

Dividend Growth 21 43

Trailing Price/Earnings 23.2 179

S&P Financial Rating A 120

Beta 0.70 50

Ranking Score 500

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.16 14 2.8
2014 1.90 20 2.5

2013 1.58 20 2.5

2012 1.32 20 2.2

2011 1.10 31 2.2

2010 0.84 27 1.4

2009 0.66 10 1.4

2008 0.60 15 1.7

2007 0.52 18 1.0

2006 0.44 22 0.8

2005 0.36 20 0.7

 UNILEVER PLC.

Unilever PLC operates in the fast-moving consumer goods market in the

Americas, Europe, Asia, Australasia, Africa, the Middle East, Turkey, the
Russian Federation, Ukraine, and Belarus. The company operates through
Personal Care, Foods, Refreshment, and Home Care segments.
Website: http://www.unilever.co.uk
RANKINGS; OVERALL; #47, WITHIN CONSUMER STAPLES; #9

Category Value Ranking

Dividend Yield 3.25 60

Dividend Growth 6.5 166

Trailing Price/Earnings 19.8 137

S&P Financial Rating A++ 40

Beta 0.90 100

Ranking Score 503

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.32 13 3.1

2014 1.51 8 3.7

2013 1.40 14 3.4

2012 1.23 -1 3.2

2011 1.24 11 3.7

2010 1.12 12 3.6

2009 1.00 - 3.2

2008 1.00 1 4.3

2007 0.99 -17 2.6

2006 1.19 49 2.1

2005 0.80 7 2.0

 MERCK & CO. INC.

Merck & Co., Inc. provides health care solutions worldwide. The company
offer therapeutic and preventive agents to treat cardiovascular, type 2
diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis
C virus, HIV-1 infection, fungal infections, intra-abdominal infections,
hypertension, arthritis and pain, inflammatory, osteoporosis, male pattern
hair loss, and fertility diseases.
Website: http://www.merck.com
RANKINGS; OVERALL; #48, WITHIN HEALTHCARE; #6

Category Value Ranking

Dividend Yield 2.98 81

Dividend Growth 1.5 215

Trailing Price/Earnings 16.7 94

S&P Financial Rating A++ 40

Beta 0.80 75

Ranking Score 505

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.80 2 3.2

2014 1.77 2 3.1

2013 1.73 2 3.5

2012 1.69 8 4.1

2011 1.56 3 4.1

2010 1.52 - 4.2

2009 1.52 - 4.2

2008 1.52 - 5.0

2007 1.52 - 2.6

2006 1.52 - 3.5

2005 1.52 1 4.8

 NOVARTIS AG

Novartis AG researches, develops, manufactures, and markets a range of

healthcare products worldwide. Its Pharmaceuticals division offers patented
prescription medicines in various therapeutic areas, such as oncology,
cardio-metabolic, immunology and dermatology, retina, respiratory,
neuroscience, and established medicines.
Website: http://www.novartis.com
RANKINGS; OVERALL; #49, WITHIN HEALTHCARE; #7

Category Value Ranking

Dividend Yield 2.61 110

Dividend Growth 12.5 98

Trailing Price/Earnings 23.7 183

S&P Financial Rating A++ 40

Beta 0.80 75

Ranking Score 506

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.66 2 2.7

2014 2.72 8 2.9

2013 2.53 2 3.2

2012 2.48 5 3.9

2011 2.36 21 4.1

2010 1.95 14 3.3

2009 1.71 11 3.2

2008 1.54 40 3.1

2007 1.10 24 2.0

2006 0.89 3 1.6

2005 0.86 6 1.7

 KELLOGG COMPANY

Kellogg Company, together with its subsidiaries, manufactures and markets

ready-to-eat cereal and convenience foods. The company operates through
U.S. Morning Foods, U.S. Snacks, U.S. Specialty, North America Other,
Europe, Latin America, and Asia Pacific segments. Its principal products
include ready-to-eat cereals and convenience foods, such as cookies,
crackers, savory snacks, frozen foods, toaster pastries, cereal bars, fruit-
flavored snacks, frozen waffles, and veggie foods, as well as health and
wellness business bars, and beverages.
Website: http://www.kelloggcompany.com
RANKINGS; OVERALL; #50, WITHIN CONSUMER STAPLES; #10

Category Value Ranking

Dividend Yield 3.10 71

Dividend Growth 6.5 165

Trailing Price/Earnings 16.9 100

S&P Financial Rating A 120

Beta 0.70 50

Ranking Score 506

Date Yearly Dividend Growth Average Dividend Yield

Dividend % %
2015 1.98 4 3.0

2014 1.90 6 2.9

2013 1.80 3 3.0

2012 1.74 4 3.1

2011 1.67 7 3.3

2010 1.56 9 3.1

2009 1.43 10 2.7

2008 1.30 8 3.0

2007 1.20 5 2.3

2006 1.14 8 2.3

2005 1.06 5 2.5

 SIEMENS AKTIENGESELLSCHAFT

Siemens Aktiengesellschaft operates as a technology company worldwide.

The company’s Power and Gas segment offers gas and steam turbines,
generators, compressors, power plant solutions, and instrumentation and
control systems for generating electricity, and producing and transporting
oil and gas.
Website: http://www.siemens.com
RANKINGS; OVERALL; #51, WITHIN INDUSTRIALS; #4

Category Value Ranking

Dividend Yield 3.49 50

Dividend Growth 14.5 72

Trailing Price/Earnings 14.3 65

S&P Financial Rating A 120

Beta 1.3 200

Ranking Score 507

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 3.96 32 3.7

2014 3.00 2 3.6

2013 2.95 -0.3 2.9

2012 2.96 8 3.6

2011 2.74 132 3.9

2010 1.18 -1 1.3

2009 1.19 25 1.7

2008 1.58 10 3.1

2007 1.44 12 1.2

2006 1.29 32 1.6

2005 0.98 - 1.5

 PRUDENTIAL FINANCIAL INC.

Prudential Financial, Inc. provides insurance, investment management, and

other financial products and services to individual and institutional
customers in the United States and internationally. The company principally
offers life insurance, annuities, retirement-related services, mutual funds,
and investment management products.
Website: http://www.prudential.com
RANKINGS; OVERALL; #52, WITHIN FINANCIAL; #7

Category Value Ranking

Dividend Yield 2.78 96

Dividend Growth 17.5 56

Trailing Price/Earnings 8.2 1

S&P Financial Rating B++ 160

Beta 1.3 200

Ranking Score 513

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.44 12 2.9

2014 2.17 25 2.4

2013 1.73 8 1.9

2012 1.60 10 3.0

2011 1.45 26 2.9

2010 1.15 64 2.0

2009 0.70 21 1.4

2008 0.58 -50 1.9

2007 1.15 21 1.2

2006 0.95 22 1.1

2005 0.78 24 1.1

 THE TJX COMPANY, INC.

The TJX Companies, Inc. operates as an off-price apparel and home

fashions retailer in the United States and internationally. It operates through
four segments: Marmaxx, HomeGoods, TJX Canada, and TJX Europe. The
company sells family apparel, including footwear and accessories; home
fashions, such as home basics, accent furniture, lamps, rugs, wall décor,
decorative accessories, and giftware; and other merchandise.
Website: http://www.tjx.com
RANKINGS; OVERALL; #53, WITHIN CONSUMER
DISCRETIONARY; #2

Category Value Ranking

Dividend Yield 1.28 207

Dividend Growth 21.5 40

Trailing Price/Earnings 21 152

S&P Financial Rating A++ 40

Beta 0.80 75

Ranking Score 514

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 0.84 25 1.2

2014 0.67 22 1.0

2013 0.55 57 0.9

2012 0.35 -24 1.0

2011 0.46 59 1.1

2010 0.29 21 1.3

2009 0.24 41 1.3

2008 0.17 -5 2.0

2007 0.18 29 1.2

2006 0.14 - 1.0

2005 0.14 75 1.0

 UNION PACIFIC CORPORATION

Union Pacific Corporation, through its subsidiary, Union Pacific Railroad

Company, operates railroads in the United States. The company offers
freight transportation services for agricultural products, including grains,
commodities produced from grains, and food and beverage products;
automotive products, such as finished vehicles and automotive parts; and
chemicals consisting of industrial chemicals, plastics, crude oil, liquid
petroleum gases, fertilizers, soda ash, sodium products, and phosphorus
rock and sulfur products.
Website: http://www.up.com
RANKINGS; OVERALL; #54, WITHIN INDUSTRIALS; #5

Category Value Ranking

Dividend Yield 2.08 148

Dividend Growth 28 22

Trailing Price/Earnings 21.3 157

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 517

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.20 15 2.2

2014 1.91 29 1.6

2013 1.48 18 1.8

2012 1.25 29 2.0

2011 0.97 47 1.8

2010 0.66 22 1.4

2009 0.54 10 1.7

2008 0.49 32 2.1

2007 0.37 23 1.2

2006 0.30 - 1.3

2005 0.30 - 1.5

 PEPSICO INC.

PepsiCo, Inc. operates as a food and beverage company worldwide. Its

Frito-Lay North America segment offers Lay’s potato chips, Doritos tortilla
chips, Cheetos cheese-flavored snacks, Tostitos tortilla chips, branded dips,
Ruffles potato chips, Fritos corn chips, and Santitas tortilla chips.
Website: http://www.pepsico.com
RANKINGS; OVERALL; #55, WITHIN CONSUMER STAPLES; #11

Category Value Ranking

Dividend Yield 2.75 99

Dividend Growth 7.5 155

Trailing Price/Earnings 22.6 174

S&P Financial Rating A++ 40

Beta 0.70 50

Ranking Score 518

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.79 10 2.9

2014 2.53 13 2.7

2013 2.24 5 2.7

2012 2.13 5 3.1

2011 2.03 7 3.1

2010 1.89 6 2.9

2009 1.78 8 2.9

2008 1.65 15 3.0

2007 1.43 23 1.9

2006 1.16 15 1.9

2005 1.01 19 1.7

 ARCHERDANIELS MIDLAND COMPANY

Archer-Daniels-Midland Company procures, transports, stores, processes,

and merchandises agricultural commodities and products. The company’s
Oilseeds Processing segment originates, merchandises, crushes, and
processes soybeans and soft seeds into vegetable oils and protein meals.
Website: http://www.adm.com
RANKINGS; OVERALL; #56, WITHIN CONSUMER STAPLES; #12

Category Value Ranking

Dividend Yield 2.22 140

Dividend Growth 12.5 90

Trailing Price/Earnings 14 60

S&P Financial Rating A+ 80

Beta 1.1 150

Ranking Score 520

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.12 17 2.4

2014 0.96 26 1.9

2013 0.76 9 1.8

2012 0.70 13 2.6

2011 0.62 7 2.3

2010 0.58 7 2.0

2009 0.54 10 1.8

2008 0.49 14 1.8

2007 0.43 16 1.0

2006 0.37 16 1.3

2005 0.32 7 1.4

 EATON CORPORATION PLC

Eaton Corporation plc operates as a power management company

worldwide. Its Electrical Products segment offers electrical components,
industrial components, residential products, wiring devices, and structural
support systems, as well as single phase power quality, emergency lighting,
fire detection, circuit protection, and lighting products.
Website: http://www.eaton.com
RANKINGS; OVERALL; #57, WITHIN INDUSTRIALS; #6

Category Value Ranking

Dividend Yield 3.08 72

Dividend Growth 12 101

Trailing Price/Earnings 14.4 67

S&P Financial Rating A+ 80

Beta 1.3 200

Ranking Score 520

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.20 12 3.5

2014 1.96 17 2.9

2013 1.68 11 2.2

2012 1.52 12 2.8

2011 1.36 26 3.1

2010 1.08 8 2.1

2009 1.00 - 3.1

2008 1.00 16 4.0

2007 0.86 16 1.8

2006 0.74 19 2.0

2005 0.62 15 1.9

 NEXTERA ENERGY INC.

NextEra Energy, Inc., through its subsidiaries, generates, transmits, and

distributes electric energy in the United States and Canada. The company
generates electricity from gas, oil, solar, coal, petroleum coke, nuclear, and
wind sources.
Website: http://www.nexteraenergy.com
RANKINGS; OVERALL; #58, WITHIN UTILITIES; #5

Category Value Ranking

Dividend Yield 3.08 73

Dividend Growth 8 147

Trailing Price/Earnings 19.3 130

S&P Financial Rating A 120

Beta 0.7 50

Ranking Score 520

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 3.08 6 3.0

2014 2.90 10 2.7

2013 2.64 10 3.1

2012 2.40 9 3.5

2011 2.20 10 3.6

2010 2.00 6 3.9

2009 1.89 6 3.6

2008 1.78 9 3.5

2007 1.64 9 2.4

2006 1.50 6 2.8

2005 1.42 9 3.4

 TEXAS INSTRUMENTS INC.

Texas Instruments Incorporated designs, manufactures, and sells

semiconductors to electronics designers and manufacturers worldwide. It
operates through two segments, Analog and Embedded Processing.
Website: http://www.ti.com
RANKINGS; OVERALL; #59, WITHIN TECHNOLOGY; #8

Category Value Ranking

Dividend Yield 2.52 116

Dividend Growth 21.5 41

Trailing Price/Earnings 22.7 176

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 523

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.40 13 2.6

2014 1.24 16 2.3

2013 1.07 49 2.4

2012 0.72 29 2.3

2011 0.56 14 1.9

2010 0.49 9 1.5

2009 0.45 10 1.7

2008 0.41 37 2.6

2007 0.30 130 0.9

2006 0.13 18 0.5

2005 0.11 22 0.3

 MAGNA INTERNATIONAL INC.

Magna International Inc. develops, manufactures, engineers, supplies, and

sells automotive products. It operates through North America, Europe, Asia,
and Rest of World segments.
Website: http://www.magna.com
RANKINGS; OVERALL; #60, WITHIN INDUSTRIALS; #7

Category Value Ranking

Dividend Yield 1.73 173

Dividend Growth 24.5 30

Trailing Price/Earnings 11.5 26

S&P Financial Rating A 120

Beta 1.2 175

Ranking Score 524

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 0.88 16 1.7

2014 0.76 19 1.4

2013 0.64 16 1.6

2012 0.55 10 2.2

2011 0.50 138 3.0

2010 0.21 320 0.8

2009 0.05 -84 0.7

2008 0.32 10 4.2

2007 0.29 -24 1.4

2006 0.38 - 1.9

2005 0.38 3 2.1

 AETNA INC.

Aetna Inc. operates as a health care benefits company in the United States.
It operates through three segments: Health Care, Group Insurance, and
Large Case Pensions. The Health Care segment offers medical, pharmacy
benefit management services, dental, behavioral health, and vision plans on
an insured basis, and an employer-funded or administrative basis.
Website: http://www.aetna.com
RANKINGS; OVERALL; #61, WITHIN HEALTHCARE; #8

Category Value Ranking

Dividend Yield 0.93 231

Dividend Growth 78.5 3

Trailing Price/Earnings 14.9 71

S&P Financial Rating A 120

Beta 0.90 100

Ranking Score 528

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.00 11 0.9

2014 0.90 13 1.0

2013 0.80 14 1.2

2012 0.70 56 1.5

2011 0.45 1025 1.1

2010 0.04 - 0.1

2009 0.04 - 0.1

2008 0.04 - 0.1

2007 0.04 - 0.1

2006 0.04 - 0.1

2005 - - -
 CAPITAL ONE FINANCIAL CORPORATION

Capital One Financial Corporation operates as the bank holding company

for the Capital One Bank (USA), National Association (COBNA); and
Capital One, National Association (CONA), which provide various
financial products and services in the United States, the United Kingdom,
and Canada.
Website: http://www.capitalone.com
RANKINGS; OVERALL; #62, WITHIN FINANCIAL; #8

Category Value Ranking

Dividend Yield 1.95 160

Dividend Growth 12.5 92

Trailing Price/Earnings 9.8 7

S&P Financial Rating A 120

Beta 1.1 150

Ranking Score 529

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.50 25 1.9

2014 1.20 26 1.5

2013 0.95 375 1.2

2012 0.20 - 0.4

2011 0.20 - 0.5

2010 0.20 -62 0.5

2009 0.53 -66 1.4

2008 1.50 1264 4.7

2007 0.11 - 0.2

2006 0.11 - 0.1

2005 0.11 - 0.1

 ANTHEM INC.

Anthem, Inc., through its subsidiaries, operates as a health benefits

company in the United States. It operates through three segments:
Commercial and Specialty Business, Government Business, and Other. The
company offers a spectrum of network-based managed care health benefit
plans to large and small employer, individual, Medicaid, and senior
markets.
Website: http://www.antheminc.com
RANKINGS; OVERALL; #63, WITHIN HEALTHCARE; #9

Category Value Ranking

Dividend Yield 1.62 181

Dividend Growth 20.6 44

Trailing Price/Earnings 16.3 90

S&P Financial Rating A 120

Beta 0.90 100

Ranking Score 535

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.50 43 1.7

2014 1.75 17 1.4

2013 1.50 30 1.6

2012 1.15 15 1.9

2011 1.00 - 1.5

2010 - - -

2009 - - -

2008 - - -

2007 - - -

2006 - - -

2005 - - -
 CATERPILLAR INC.

Caterpillar Inc. manufactures and sells construction and mining equipment,

diesel and natural gas engines, industrial gas turbines, and diesel-electric
locomotives worldwide.
Website: http://www.caterpillar.com
RANKINGS; OVERALL; #64, WITHIN INDUSTRIALS; #8

Category Value Ranking

Dividend Yield 3.22 63

Dividend Growth 8 143

Trailing Price/Earnings 13.2 49

S&P Financial Rating A+ 80

Beta 1.3 200

Ranking Score 535

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 3.01 16 3.8

2014 2.60 52 2.8

2013 1.72 -12 1.9

2012 1.96 9 2.2

2011 1.80 5 2.0

2010 1.72 2 1.8

2009 1.68 8 3.0

2008 1.56 18 3.5

2007 1.32 20 1.8

2006 1.10 21 1.8

2005 0.91 17 1.6

 INFOSYS LIMITED

Infosys Limited, together with its subsidiaries, provides business

consulting, technology, engineering, and outsourcing services in North
America, Europe, India, and internationally.
Website: http://www.infosys.com
RANKINGS; OVERALL; #65, WITHIN TECHNOLOGY; #9

Category Value Ranking

Dividend Yield 1..91 166

Dividend Growth 12.5 94

Trailing Price/Earnings 19.7 136

S&P Financial Rating A++ 40

Beta 0.9 100

Ranking Score 536

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 0.36 20 2.0

2014 0.30 43 1.9

2013 0.21 -8 1.4

2012 0.23 21 1.5

2011 0.19 -39 1.4

2010 0.31 158 0.7

2009 0.12 -45 0.8

2008 0.22 450 1.5

2007 0.04 -71 0.6

2006 0.14 250 0.9

2005 0.04 185 0.3

 MEDTRONIC PLC.

Medtronic plc manufactures and sells device-based medical therapies

worldwide.
Website: http://www.medtronic.com
RANKINGS; OVERALL; #66, WITHIN HEALTHCARE; #10

Category Value Ranking

Dividend Yield 1.63 180

Dividend Growth 15.5 66

Trailing Price/Earnings 19.1 129

S&P Financial Rating A++ 40

Beta 1.0 125

Ranking Score 540

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 1.52 25 2.0

2014 1.22 9 1.7

2013 1.12 8 1.9

2012 1.04 7 2.5

2011 0.97 8 2.4

2010 0.90 10 2.3

2009 0.82 13 1.8

2008 0.75 50 2.2

2007 0.50 14 0.9

2006 0.44 13 0.8

2005 0.39 22 0.6

 FORD

Ford Motor Company manufactures and distributes automobiles worldwide.

The company operates through two sectors, Automotive and Financial
Services. The Automotive sector develops, manufactures, distributes, and
services vehicles, parts, and accessories.
Website: http://www.ford.com
RANKINGS; OVERALL; #67, WITHIN CONSUMER
DISCRETIONARY; #3

Category Value Ranking

Dividend Yield 3.86 34

Dividend Growth 19 49

Trailing Price/Earnings 14 61

S&P Financial Rating B+ 200

Beta 1.3 200

Ranking Score 544

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 0.60 20 4.0

2014 0.50 25 3.1

2013 0.40 100 2.6

2012 0.20 - 1.8

2011 - - -

2010 - - -

2009 - - -

2008 - - -

2007 - - -

2006 0.25 -38 3.2

2005 0.40 - 3.8

 BECTON, DICKINSON AND COMPANY

Becton, Dickinson and Company develops, manufactures, and sells medical

devices, instrument systems, and reagents worldwide.
Website: http://www.bd.com
RANKINGS; OVERALL; #68, WITHIN HEALTHCARE; #11

Category Value Ranking

Dividend Yield 1.69 176

Dividend Growth 12.5 91

Trailing Price/Earnings 22.1 165

S&P Financial Rating A++ 40

Beta 0.8 75

Ranking Score 547

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.40 10 1.7

2014 2.18 10 1.9

2013 1.98 10 2.2

2012 1.80 10 2.4

2011 1.64 11 2.0

2010 1.48 12 2.0

2009 1.32 15 1.9

2008 1.14 16 1.3

2007 0.98 14 1.3

2006 0.86 19 1.4

2005 0.72 20 1.3

 STRYKER CORPORATION

Stryker Corporation, together with its subsidiaries, operates as a medical

technology company. The company operates through three segments:
Orthopaedics, MedSurg, and Neurotechnology and Spine.
Website: http://www.strykercorp.com
RANKINGS; OVERALL; #69, WITHIN HEALTHCARE; #12

Category Value Ranking

Dividend Yield 1.49 190

Dividend Growth 23.5 32

Trailing Price/Earnings 24.2 188

S&P Financial Rating A++ 40

Beta 0.90 100

Ranking Score 550

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.42 13 1.5

2014 1.26 15 1.3

2013 1.10 22 1.5

2012 0.90 20 1.7

2011 0.75 19 1.5

2010 0.63 320 1.2

2009 0.15 -63 1.1

2008 0.40 21 1.0

2007 0.33 50 0.4

2006 0.22 100 0.4

2005 0.11 22 0.3

 AMERICAN EXPRESS COMPANY

American Express Company, together with its subsidiaries, provides charge

and credit payment card products and travel-related services to consumers
and businesses worldwide.
Website: http://www.americanexpress.com
RANKINGS; OVERALL; #70, WITHIN FINANCIAL; #9

Category Value Ranking

Dividend Yield 1.34 199

Dividend Growth 13 87

Trailing Price/Earnings 15.1 77

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 553

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 1.10 - 1.4

2014 1.10 -11 1.4

2013 1.24 88 1.0

2012 0.66 -17.5 1.4

2011 0.80 11 1.5

2010 0.72 - 1.7

2009 0.72 - 1.8

2008 0.72 14 3.9

2007 0.63 11 1.2

2006 0.57 19 0.9

2005 0.48 33 0.9

 COLGATEPALMOLIVE CO.

Colgate-Palmolive Company, together with its subsidiaries, manufactures

and markets consumer products worldwide. It operates in two segments:
Oral, Personal and Home Care; and Pet Nutrition.
Website: http://www.colgatepalmolive.com
RANKINGS; OVERALL; #71, WITHIN CONSUMER STAPLES; #13

Category Value Ranking

Dividend Yield 2.26 135

Dividend Growth 11 111

Trailing Price/Earnings 29 220

S&P Financial Rating A++ 40

Beta 0.7 50

Ranking Score 556

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.50 6 2.2

2014 1.42 7 2.1

2013 1.33 9 2.0

2012 1.22 7 2.3

2011 1.14 12 2.5

2010 1.02 20 2.5

2009 0.86 10 2.1

2008 0.78 11 2.3

2007 0.70 11 1.8

2006 0.63 13 1.9

2005 0.56 17 2.0

 UNITED TECHNOLOGIES CORPORATION

United Technologies Corporation provides technology products and

services to building systems and aerospace industries worldwide.
Website: http://www.utc.com
RANKINGS; OVERALL; #72, WITHIN INDUSTRIALS; #9

Category Value Ranking

Dividend Yield 2.23 139

Dividend Growth 10 126

Trailing Price/Earnings 17.2 104

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 559

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.56 8 2.4

2014 2.36 7 2.1

2013 2.20 8 1.9

2012 2.03 9 2.5

2011 1.87 10 2.6

2010 1.70 10 2.2

2009 1.54 14 2.2

2008 1.35 15 2.5

2007 1.17 15 1.5

2006 1.02 16 1.6

2005 0.88 26 1.6

 NORFOLK SOUTHERN CORPORATION –

Norfolk Southern Corporation, together with its subsidiaries, engages in the

rail transportation of raw materials, intermediate products, and finished
goods.
Website: http://www.nscorp.com
RANKINGS; OVERALL; #73, WITHIN INDUSTRIALS; #10

Category Value Ranking

Dividend Yield 2.35 124

Dividend Growth 12 102

Trailing Price/Earnings 17.3 105

S&P Financial Rating A+ 80

Beta 1.1 150

Ranking Score 561

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.36 6 2.6

2014 2.22 9 2.0

2013 2.04 11 2.2

2012 1.94 17 3.1

2011 1.66 19 2.3

2010 1.40 3 2.2

2009 1.36 11 2.6

2008 1.22 27 2.6

2007 0.96 41 1.9

2006 0.68 42 1.4

2005 0.48 33 1.1

 BLACKROCK, INC.

BlackRock, Inc. is a publicly owned investment manager. The firm

primarily provides its services to institutional, intermediary, and individual
investors. It also manages accounts for corporate, public, union and industry
pension plans, insurance companies, third-party mutual funds, endowments,
foundations, charities, corporations, official institutions, and banks.55 East
52nd Street
Website: http://www.blackrock.com
RANKINGS; OVERALL; #74, WITHIN FINANCIAL; #10

Category Value Ranking

Dividend Yield 2.38 122

Dividend Growth 23 34

Trailing Price/Earnings 18.3 116

S&P Financial Rating A 120

Beta 1.2 175

Ranking Score 567

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 8.72 13 2.5

2014 7.72 15 2.2

2013 6.72 12 2.1

2012 6.00 0.3 2.9

2011 5.98 50 2.6

2010 4.00 28 2.1

2009 3.12 - 1.3

2008 3.12 16 2.3

2007 2.68 60 1.2

2006 1.68 40 1.1

2005 1.20 20 1.1

 COMCAST CORPORATION

Comcast Corporation operates as a media and technology company

worldwide. It operates through Cable Communications, Cable Networks,
Broadcast Television, Filmed Entertainment, and Theme Parks segments.
Website: http://www.comcast.com
RANKINGS; OVERALL; #75, WITHIN FINANCIAL; # 11

Category Value Ranking

Dividend Yield 1.72 172

Dividend Growth 49.5 10

Trailing Price/Earnings 20 140

S&P Financial Rating A 120

Beta 1.0 125

Ranking Score 567

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 1.00 12 1.7

2014 0.90 15 1.5

2013 0.78 20 1.5

2012 0.65 44 1.7

2011 0.45 18 1.9

2010 0.38 27 1.7

2009 0.30 20 1.6

2008 0.25 - 1.1

2007 - - -

2006 - - -

2005 - - -
 CVS HEALTH CORPORATION

CVS Health Corporation, together with its subsidiaries, provides integrated

pharmacy health care services in the United States. The company operates
through Pharmacy Services and Retail Pharmacy segments.
Website: http://www.cvshealth.com
RANKINGS; OVERALL; #76, WITHIN HEALTHCARE; #13

Category Value Ranking

Dividend Yield 1.42 192

Dividend Growth 26 24

Trailing Price/Earnings 22.5 172

S&P Financial Rating A+ 80

Beta 0.9 100

Ranking Score 568

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.40 27 1.4

2014 1.10 22 1.1

2013 0.90 38 1.3

2012 0.65 30 1.3

2011 0.50 43 1.2

2010 0.35 13 1.0

2009 0.31 19 1.0

2008 0.26 13 0.9

2007 0.23 44 0.6

2006 0.16 7 0.5

2005 0.15 15 0.6

 VALERO ENERGY CORPORATION

Valero Energy Corporation operates as an independent petroleum refining

and marketing company in the United States, Canada, the Caribbean, the
United Kingdom, and Ireland.
Website: http://www.valero.com
RANKINGS; OVERALL; #77, WITHIN ENERGY; #7

Category Value Ranking

Dividend Yield 2.76 98

Dividend Growth 6 168

Trailing Price/Earnings 8.8 3

S&P Financial Rating A+ 80

Beta 1.4 225

Ranking Score 574

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.70 62 2.8

2014 1.05 24 2.1

2013 0.85 31 1.7

2012 0.65 116 1.9

2011 0.30 50 1.4

2010 0.20 -66 0.9

2009 0.60 5 3.6

2008 0.57 19 2.6

2007 0.48 60 0.7

2006 0.30 58 0.6

2005 0.19 46 0.4

 SEMPRA ENERGY

Sempra Energy operates as an energy services holding company worldwide.

The company’s San Diego Gas & Electric Company segment transmits and
distributes electricity and/or natural gas.
Website: http://www.sempra.com
RANKINGS; OVERALL; #78, WITHIN UTILITIES; #6

Category Value Ranking

Dividend Yield 2.68 104

Dividend Growth 12.5 100

Trailing Price/Earnings 23.1 177

S&P Financial Rating A 120

Beta 0.8 75

Ranking Score 576

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.80 6 2.7

2014 2.64 5 2.4

2013 2.52 5 2.8

2012 2.40 25 3.4

2011 1.92 23 3.5

2010 1.56 - 3.0

2009 1.56 14 2.8

2008 1.37 10 3.2

2007 1.24 3 2.0

2006 1.20 3 2.1

2005 1.16 16 2.6

 CARDINAL HEALTH

Cardinal Health, Inc. operates as a healthcare services and products

company worldwide. The company operates in two segments,
Pharmaceutical and Medical.
Website: http://www.cardinalhealth.com
RANKINGS; OVERALL; #79, WITHIN HEALTHCARE; #14

Category Value Ranking

Dividend Yield 1.62 182

Dividend Growth 17.5 54

Trailing Price/Earnings 26.3 201

S&P Financial Rating A++ 40

Beta 0.9 100

Ranking Score 577

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 1.41 13 1.7

2014 1.25 15 2.0

2013 1.09 24 2.5

2012 0.88 7 2.1

2011 0.82 11 2.1

2010 0.74 23 2.3

2009 0.60 15 1.5

2008 0.52 44 0.9

2007 0.36 - 0.5

2006 0.36 140 0.5

2005 0.15 25 0.3

 VIACOM, INC.

Viacom Inc. operates as an entertainment content company in the United

States and internationally. The company creates television programs,
motion pictures, short-form video, applications, games, consumer products,
social media, and other entertainment content. It operates in two segments,
Media Networks and Filmed Entertainment.
Website: http://www.viacom.com
RANKINGS; OVERALL; #80, WITHIN CONSUMER
DISCRETIONARY; #4

Category Value Ranking

Dividend Yield 1.92 164

Dividend Growth 16.4 59

Trailing Price/Earnings 13 45

S&P Financial Rating B++ 160

Beta 1.1 150

Ranking Score 578

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 1.46 16 2.3

2014 1.26 10 1.5

2013 1.15 10 1.8

2012 1.05 31 2.3

2011 0.80 166 1.8

2010 0.30 - 0.90

2009 - - -

2008 - - -

2007 - - -

2006 - - -

2005 - - -
 SYSCO CORPORATION

Viacom Inc. operates as an entertainment content company in the United

States and internationally. The company creates television programs,
motion pictures, short-form video, applications, games, consumer products,
social media, and other entertainment content. It operates in two segments,
Media Networks and Filmed Entertainment.
Website: http://www.sysco.com
RANKINGS; OVERALL; #81, WITHIN CONSUMER STAPLES; #14

Category Value Ranking

Dividend Yield 3.32 54

Dividend Growth 5.5 174

Trailing Price/Earnings 25.5 197

S&P Financial Rating A+ 80

Beta 0.8 75

Ranking Score 580

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.19 3 3.1

2014 1.16 5 3.3

2013 1.11 4 3.5

2012 1.07 4 3.7

2011 1.03 4 3.5

2010 0.99 5 3.6

2009 0.94 11 3.7

2008 0.85 15 2.7

2007 0.74 12 2.2

2006 0.66 18 2.1

2005 0.56 17 1.6

 SUNCOR ENERGY INC.

Suncor Energy Inc. operates as an integrated energy company. The

company primarily focuses on developing petroleum resource basins in
Canada’s Athabasca oil sands.
Website: http://www.suncor.com
RANKINGS; OVERALL; #82, WITHIN BASIC MATERIAL; #4

Category Value Ranking

Dividend Yield 2.92 85

Dividend Growth 25 27

Trailing Price/Earnings 21 151

S&P Financial Rating A 120

Beta 1.3 200

Ranking Score 583

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.14 12 3.1

2014 1.02 34 2.9

2013 0.76 52 2.0

2012 0.50 16 1.5

2011 0.43 8 1.5

2010 0.40 33 1.0

2009 0.30 50 0.8

2008 0.20 5 1.0

2007 0.19 27 0.3

2006 0.15 25 0.3

2005 0.12 9 0.3

 AMERIPRISE FINANCIAL INC.

Ameriprise Financial, Inc., through its subsidiaries, provides various

financial products and services to individual and institutional clients in the
United States and internationally.
Website: http://www.ameriprise.com
RANKINGS; OVERALL; #83, WITHIN FINANCIAL; #12

Category Value Ranking

Dividend Yield 2.15 147

Dividend Growth 21.5 36

Trailing Price/Earnings 15.9 86

S&P Financial Rating A 120

Beta 1.3 200

Ranking Score 589

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.59 15 2.1

2014 2.26 12 1.7

2013 2.01 41 1.8

2012 1.43 64 2.3

2011 0.87 23 1.8

2010 0.71 4 1.2

2009 0.68 6 1.8

2008 0.64 14 2.7

2007 0.56 27 1.0

2006 0.44 300 0.8

2005 0.11 - 0.3

 THE BOEING COMPANY

The Boeing Company, together with its subsidiaries, designs, develops,

manufactures, sells, services, and supports commercial jetliners, military
aircraft, satellites, missile defense, human space flight, and launch systems
and services worldwide.
Website: http://www.boeing.com
RANKINGS; OVERALL; #84, WITHIN INDUSTRIALS; #11

Category Value Ranking

Dividend Yield 2.81 90

Dividend Growth 7 159

Trailing Price/Earnings 21 150

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 589

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 3.64 25 2.5

2014 2.92 51 2.3

2013 1.94 10 1.4

2012 1.76 5 2.3

2011 1.68 - 2.3

2010 1.68 - 2.6

2009 1.68 5 3.1

2008 1.60 14 3.8

2007 1.40 17 1.6

2006 1.20 20 1.4

2005 1.00 30 1.4

 PFIZER INC.

Pfizer Inc., a biopharmaceutical company, discovers, develops,

manufactures, and sells healthcare products worldwide. The company
operates through Global Innovative Pharmaceutical (GIP); Global Vaccines,
Oncology and Consumer Healthcare (VOC); and Global Established
Pharmaceutical (GEP) segments
Website: http://www.pfizer.com
RANKINGS; OVERALL; #85, WITHIN HEALTHCARE; #15

Category Value Ranking

Dividend Yield 3.28 57

Dividend Growth -5 229

Trailing Price/Earnings 24.6 191

S&P Financial Rating A++ 40

Beta 0.8 75

Ranking Score 592

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 1.12 8 3.3

2014 1.04 8 3.3

2013 0.96 9 3.1

2012 0.88 10 3.5

2011 0.80 11 3.7

2010 0.72 -10 4.1

2009 0.80 -37.5 4.4

2008 1.28 10 7.2

2007 1.16 21 5.1

2006 0.96 26 3.7

2005 0.76 12 3.3

 T. ROWE PRICE GROUP, INC.

T. Rowe Price Group, Inc. is a publicly owned asset management holding

company. The firm provides its services to individuals, institutional
investors, retirement plans, financial intermediaries, and institutions.
Website: http://www.troweprice.com
RANKINGS; OVERALL; #86, WITHIN FINANCIAL; #13

Category Value Ranking

Dividend Yield 2.56 112

Dividend Growth 11 115

Trailing Price/Earnings 17.9 111

S&P Financial Rating A+ 80

Beta 1.2 175

Ranking Score 593

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 2.08 18 2.7

2014 1.76 16 2.1

2013 1.52 12 1.8

2012 1.36 10 2.1

2011 1.24 15 2.2

2010 1.08 8 1.7

2009 1.00 4 1.9

2008 0.96 28 2.7

2007 0.75 27 1.2

2006 0.59 20 1.4

2005 0.49 22.5 1.4

 CORNING INC.

Corning Incorporated manufactures and sells specialty glasses, ceramics,

and related materials worldwide. The company operates through five
segments: Display Technologies, Optical Communications, Environmental
Technologies, Specialty Materials, and Life Sciences.
Website: http://www.corning.com
RANKINGS; OVERALL; #87, WITHIN INDUSTRIALS; #12

Category Value Ranking

Dividend Yield 2.31 128

Dividend Growth 19.5 48

Trailing Price/Earnings 13.5 57

S&P Financial Rating B++ 160

Beta 1.3 200

Ranking Score 593

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 0.36 -30 1.8

2014 0.52 33 1.7

2013 0.39 22 2.2

2012 0.32 39 2.5

2011 0.23 15 1.7

2010 0.20 - 1.0

2009 0.20 - 1.0

2008 0.20 100 2.1

2007 0.10 - 0.4

2006 - - -

2005 - - -
 DOMINION RESOURCES INC.

Dominion Resources, Inc. produces and transports energy in the United

States. The company operates through three segments: Dominion Virginia
Power (DVP), Dominion Generation, and Dominion Energy.
Website: http://www.dom.com
RANKINGS; OVERALL; #88, WITHIN UTILITIES; #7

Category Value Ranking

Dividend Yield 3.66 42

Dividend Growth 7.5 150

Trailing Price/Earnings 25.2 193

S&P Financial Rating B++ 160

Beta 0.7 50

Ranking Score 595

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.59 8 3.7

2014 2.40 7 3.1

2013 2.25 7 3.5

2012 2.11 7 4.1

2011 1.97 8 3.7

2010 1.83 5 4.3

2009 1.75 11 4.5

2008 1.58 8 4.4

2007 1.46 6 3.1

2006 1.38 3 3.3

2005 1.34 3 3.5

 AUTOMATIC DATA PROCESSING INC.

Automatic Data Processing, Inc., together with its subsidiaries, provides

business process outsourcing services worldwide. The company operates
through two segments, Employer Services and Professional Employer
Organization (PEO) Services.
Website: http://www.adp.com
RANKINGS; OVERALL; #89, WITHIN TECHNOLOGY; #10

Category Value Ranking

Dividend Yield 2.29 130

Dividend Growth 10.5 117

Trailing Price/Earnings 27.8 211

S&P Financial Rating A++ 40

Beta 0.9 100

Ranking Score 598

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.95 4

2014 1.88 11 2.3

2013 1.70 10 2.2

2012 1.55 9 2.9

2011 1.42 6 2.7

2010 1.34 8 3.0

2009 1.24 19 3.1

2008 1.04 25 3.1

2007 0.83 22 2.2

2006 0.68 7 1.6

2005 0.61 7 1.4

 HONEYWELL INTERNATIONAL INC.

Honeywell International Inc. operates as a diversified technology and

manufacturing company worldwide.
Website: http://www.honeywell.com
RANKINGS; OVERALL; #90, WITHIN INDUSTRIALS; #13

Category Value Ranking

Dividend Yield 2.04 154

Dividend Growth 9 132

Trailing Price/Earnings 18.7 122

S&P Financial Rating A++ 40

Beta 1.1 150

Ranking Score 598

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.15 15 2.1

2014 1.87 11 1.9

2013 1.68 10 1.8

2012 1.53 12 2.4

2011 1.37 13 2.5

2010 1.21 - 2.3

2009 1.21 10 3.1

2008 1.10 10 3.4

2007 1.00 10 1.6

2006 0.91 10 2.0

2005 0.83 11 2.2

 METLIFE INC.

MetLife, Inc. provides life insurance, annuities, employee benefits, and

asset management products in the United States, Japan, Latin America,
Asia, Europe, and the Middle East.
Website: http://www.metlife.com
RANKINGS; OVERALL; #91, WITHIN FINANCIAL; #14

Category Value Ranking

Dividend Yield 2.88 89

Dividend Growth 7 162

Trailing Price/Earnings 8.9 4

S&P Financial Rating A 120

Beta 1.4 225

Ranking Score 600

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.48 11 2.9

2014 1.33 32 2.5

2013 1.01 36 1.9

2012 0.74 - 2.3

2011 0.74 - 2.4

2010 0.74 - 1.7

2009 0.74 - 2.1

2008 0.74 - 2.1

2007 0.74 25 1.2

2006 0.59 13 1.0

2005 0.52 13 1.1

 VENTAS INC.

Ventas, Inc. is a publicly owned real estate investment trust. The firm
engages in investment, management, financing, and leasing of properties in
the healthcare industry.
Website: http://www.ventasreit.com
RANKINGS; OVERALL; #92, WITHIN REAL ESTATE
INVESTMENT; #2

Category Value Ranking

Dividend Yield 4.67 15

Dividend Growth 7.7 148

Trailing Price/Earnings 46 241

S&P Financial Rating B+ 200

Beta 0.8 75

Ranking Score 679

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %
2015 3.04 2 4.7

2014 2.97 8 4.1

2013 2.74 10 4.8

2012 2.48 8 3.8

2011 2.30 7 3.1

2010 2.14 4 4.1

2009 2.05 - 4.7

2008 2.05 8 6.1

2007 1.90 20 4.2

2006 1.58 10 3.7

2005 1.44 11 4.5

 WELLS FARGO & COMPANY

Wells Fargo & Company provides retail, commercial, and corporate

banking services to individuals, businesses, and institutions.
Website: http://www.wellsfargo.com
RANKINGS; OVERALL; #93, WITHIN FINANCIAL; #15

Category Value Ranking

Dividend Yield 2.69 103

Dividend Growth 6.0 170

Trailing Price/Earnings 13 46

S&P Financial Rating A 120

Beta 1.2 175

Ranking Score 679

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.48 10 2.7

2014 1.35 17 2.7

2013 1.15 47 2.5

2012 0.78 90 2.5

2011 0.41 105 2.3

2010 0.20 -60 1.5

2009 0.49 -62 0.7

2008 1.30 10 1.8

2007 1.18 9 4.4

2006 1.08 8 3.9

2005 1.00 8 3.0

 3M COMPANY

3M Company operates as a diversified technology company worldwide.

Website: http://www.3m.com
RANKINGS; OVERALL; #94, WITHIN INDUSTRIALS; #14

Category Value Ranking

Dividend Yield 2.60 111

Dividend Growth 4.5 185

Trailing Price/Earnings 22.2 168

S&P Financial Rating A++ 40

Beta 1 125

Ranking Score

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 4.10 20 2.6

2014 3.42 35 2.7

2013 2.54 8 2.1

2012 2.36 7 1.8

2011 2.20 5 2.5

2010 2.10 3 2.7

2009 2.04 2 2.4

2008 2.00 4 2.5

2007 1.92 4 3.5

2006 1.84 10 2.3

2005 1.68 19 2.4

 UNITED PARCEL SERVICE, INC.

United Parcel Service, Inc., a package delivery company, provides

transportation, logistics, and financial services in the United States and
internationally. It operates in three segments: U.S. Domestic Package,
International Package, and Supply Chain & Freight.
Website: http://www.ups.com
RANKINGS; OVERALL; #95, WITHIN CONSUMER
DISCRETIONARY; #5

Category Value Ranking

Dividend Yield 2.92 86

Dividend Growth 7 164

Trailing Price/Earnings 21.5 160

S&P Financial Rating A 120

Beta 0.90 100

Ranking Score 630

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 2.92 9 2.9

2014 2.68 8 3.0

2013 2.48 9 2.4

2012 2.28 10 2.4

2011 2.08 11 3.1

2010 1.88 4 2.8

2009 1.80 - 2.6

2008 1.80 7 3.1

2007 1.68 11 3.3

2006 1.52 15 2.4

2005 1.32 18 2.0

 DIAGEO PLC

Diageo plc produces, markets, and sells alcoholic beverages worldwide. It

offers scotch and Irish whiskey, gin, vodka, rum, beer and spirits, Irish
cream liqueurs, wine, Raki, tequila, Canadian and American whiskey,
Cachaça, and brandy, as well as adult beverages and ready to drink
products.
Website: http://www.diageo.com
RANKINGS; OVERALL; #96, WITHIN CONSUMER
DISCRETIONARY; #6

Category Value Ranking

Dividend Yield 3.05 75

Dividend Growth 3.5 189

Trailing Price/Earnings 24.2 187

S&P Financial Rating A+ 80

Beta 0.90 100

Ranking Score 631

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 3.46 3 3.0

2014 3.37 12 2.7

2013 2.99 8 2.6

2012 2.77 7 3.1

2011 2.60 14 3.5

2010 2.28 -4 3.5

2009 2.37 -13 4.1

2008 2.73 4 3.3

2007 2.63 - 3.4

2006 - - -

2005 - - -
 J.P. MORGAN CHASE & CO.

JPMorgan Chase & Co. is a financial services firm. It operates through four
segments: Consumer & Community Banking, Corporate & Investment
Bank, Commercial Banking & Asset Management.
Website: http://www.jpmorganchase.com
RANKINGS; OVERALL; #97, WITHIN FINANCIAL; #16

Category Value Ranking

Dividend Yield 2.73 100

Dividend Growth -3.5 228

Trailing Price/Earnings 10.7 17

S&P Financial Rating A 120

Beta 1.2 175

Ranking Score 640

Yearly Dividend Growth Average Dividend

Date
Dividend % Yield %

2015 1.72 9 2.7

2014 1.58 10 2.5

2013 1.44 20 2.5

2012 1.20 20 2.3

2011 1.00 400 2.6

2010 0.20 - 2.4

2009 0.20 -87 0.5

2008 1.52 3 1.3

2007 1.48 9 4.8

2006 1.36 - 3.3

2005 1.36 - 2.8

 MAXIM INTEGRATED PRODUCTS, INC.

Maxim Integrated Products, Inc. designs, develops, manufactures, and

markets various linear and mixed-signal integrated circuits worldwide. The
company also provides a range of high-frequency process technologies and
capabilities for use in custom designs.
Website: http://www.maximintegrated.com
RANKINGS; OVERALL; #98, WITHIN TECHNOLOGY; #11

Category Value Ranking

Dividend Yield 3.45 52

Dividend Growth 6.0 171

Trailing Price/Earnings 56.6 244

S&P Financial Rating B++ 160

Beta 1.0 125

Ranking Score 752

Yearly Dividend Growth Average Dividend

Date
Dividend % Yield %

2015 1.12 8 3.5

2014 1.04 8 3.4

2013 0.96 8 3.3

2012 0.88 14 3.4

2011 0.84 5 3.7

2010 0.80 - 4.3

2009 0.80 7 5.3

2008 0.75 21 3.1

2007 0.62 30 2.0

2006 0.48 12 1.2

2005 0.38 26 0.9

 KEYCORP.

KeyCorp operates as the bank holding company for KeyBank National

Association that provides various retail and commercial banking services to
individual, corporate, and institutional clients in the United States.
Website: http://www.key.com
RANKINGS; OVERALL; #99, WITHIN FINANCIAL; #17

Category Value Ranking

Dividend Yield 2.75 100

Dividend Growth -24 247

Trailing Price/Earnings 10.4 15

S&P Financial Rating B 240

Beta 1.15 150

Ranking Score 752

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 0.29 16 2.1

2014 0.25 14 1.8

2013 0.22 22 1.6

2012 0.18 80 2.1

2011 0.10 150 1.3

2010 0.04 -55 0.5

2009 0.09 -91 1.7

2008 1.00 -32 11.7

2007 1.46 6 6.2

2006 1.38 6 3.6

2005 1.30 5 3.4

 APPLE INC.

Apple Inc. designs, manufactures, and markets mobile communication and

media devices, personal computers, and portable digital music players to
consumers, small and mid-sized businesses, education, and enterprise and
government customers worldwide.
Website: http://www.apple.com
RANKINGS; OVERALL; #100, WITHIN TECHNOLOGY; #12

Category Value Ranking

Dividend Yield 1.65 179

Dividend Growth -39 348

Trailing Price/Earnings 17 101

S&P Financial Rating A++ 40

Beta .90 100

Ranking Score 768

Yearly Dividend Growth Average Dividend Yield

Date
Dividend % %

2015 1.98 9 1.7

2014 1.81 11 2.2

2013 1.63 329 2.3

2012 0.38 - 0.5

2011 - - -

2010 - - -

2009 - - -

2008 - - -

2007 - - -

2006 - - -

2005 - - -
Copyright © 2016 by Timothy J. McIntosh. All rights reserved.
Published by Eckerd Press Co. San Antonio, Texas.
This is a work of non-fiction
Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system,
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Library of Congress Cataloging-in-Publication Data:
McIntosh, Timothy J.
The Snowball Effect; A Winning Investment Strategy of Using Dividend &
Interest Reinvestment to Help You Retire on Time
Includes bibliographic references and index
ISBN-10: 0-692-75530-6
ISBN-13: 978-0-692-75530-3
1. Portfolio Management 2. Investments 3. Dividends
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1