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Dividend Challengers with High Growth Rates and Bullish Outlook

Dividend Challengers are stocks that have raised distributions to shareholders over a period of more than five consecutive years but less than 10 years.  These stocks will continue to grow their dividend for years to come.  These results in a higher yield to cost in the coming years as the dividend increases while the initial investment costs stay the same.  This is how investors can create a stock with a dividend yield in double-digits in 10 to 20 years.  The stocks identified in this analysis possess 5-year dividend growth rates greater than 20%.  In addition, these stocks all have an equity summary score indicating a bullish outlook from analysts.  Here are five Dividend Challengers with a bullish outlook.

Accenture (ACN), formerly Andersen Consulting, is a leading global management consulting, technology services and outsourcing enterprise, with operations in 48 countries, serving 17 industries. The company seeks to use its extensive knowledge of industries and business processes to help clients identify new business and technology trends, and to formulate and implement solutions to boost revenue, enter new markets, and deliver products and services more efficiently.  ACN is trading at $64.50 with a dividend yield of 2.09%.  In the past year, ACN increased its dividend by 63%.  ACN has a 5-year dividend growth
rate of 30%.  It has an equity summary score of 8.7 out of 10 for a BULLISH outlook.  The 12-month target price of $71 is based on a peer-premium P/E of 17.9X our calendar 2012 EPS estimate of $3.96. We think a premium P/E is warranted given what we see as ACN’s healthy new bookings and a solid balance sheet that has nearly $5.6 billion in cash and cash equivalents and little debt.

From the first coffee and donut shop opened by Canadian hockey star Tim Horton in 1964, Tim Hortons (THI) has grown into Canada’s largest quick service restaurant chain, specializing in coffee, baked goods and home style lunches. In 2006, the company went public after Wendy’s International, Inc. (WEN), which had bought the company in 1995, completed an initial public offering of a minority stake and subsequently distributed the remaining shares to WEN shareholders on September 26, 2006. THI is trading at $53.54 with a dividend yield of 1.57%.  In the past year, THI increased its dividend by 23.5%.  THI has a 5-year dividend growth rate of 24.5%.  It has an equity summary score of 8.7 out of 10 for a BULLISH outlook.   The 12-month target price of $58 is based on our relative analysis. We apply a 21X P/E multiple to our 2012 EPS estimate, which is slightly above its peer average of about 19X.

Cummings (CMI) is a global equipment company makes and services diesel and natural gas engines, electric power generation systems and engine-related component products.  CMI has over 600 company-owned and independent distributor locations and about 6,500 dealer locations in over 190 countries and territories. CMI’s key markets are the on-highway, construction, and general industrial markets.  CMI is trading at $120.04 with a dividend yield of 1.34%.  In the past year, CMI increased its dividend by 52%.  CMI has a 5-year dividend growth rate of 34.7%.  It has an equity summary score of 9.6 out of 10 for a VERY BULLISH outlook.  The 12-month target price of $152 values the shares at 15X our 2012 EPS estimate of $10.13, in the middle of CMI’s five-year historical P/E range of 4.3X-23.9X. We think we are still in the early stages of a new earnings up cycle that we expect to last for several years.

The Williams Companies (WMB) primarily gathers, processes and transports natural gas. Operations are concentrated in the Rocky Mountains, the Gulf Coast, and on the Eastern Seaboard. On January 3, 2012, WMB completed the separation of its midstream and exploration businesses into two publicly traded companies via a tax-free spin-off to Williams’ shareholders. WMB is now an energy infrastructure company focused on North America.  WMB is trading
at $30.81 with a dividend yield of 3.38%.  In the past year, WMB increased its dividend by 107%.  WMB has a 5-year dividend growth rate of 23.5%.  It has an equity summary score of 7.7 out of 10 for a BULLISH outlook.  The 12-month target price of $33 is based on 22X our 2012 EPS estimate, in line with its six
year historical multiple average.

Coco-Cola Femsa (KOF) ADT is a Mexican bottler that produces, distributes and markets Coca-Cola, Fanta and other Coca-Cola trademark beverages in Mexico, Central America, Colombia, Venezuela, Argentina & Brazil.  Over the past year the stock has pleased investors by producing strong relative performance. Its 28% advance led 94% of stocks in the TWI Intl Index (similar to the S&P ADR Index) and 87% of the Latin American stocks in that index.
KOF is trading at $105.91 with a dividend yield of 1.96%.  In the past year, KOF increased its dividend by 80%.  KOF has a 5-year dividend growth rate of 44%.  It has an equity summary score of 7.3 out of 10 for a BULLISH outlook.

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Covered Call Trades for August 2011

As we get close to July expiration, we are looking for covered call trades with August expiration.  We just got a terrible jobs report so the market will continue to be choppy.  The U.S. economy added a paltry 18,000 jobs in June, and the unemployment rate climbed to 9.2 percent from 9.1 percent as laid off government workers continued to join the ranks of the unemployed. There were also 44,000 fewer jobs created than previously reported for April and May.  The dismal jobs report also comes just days after the Federal Reserve ended its quantitative easing program, under which it purchased $600 billion in Treasury securities.  This uncertainity will continue to affect market prices.

Also, we are in the earnings season so watch all trades to know when the company reports.  The stocks selected for August are fairly consistent as I had to pull several companies due to high volatility and a bearish outlook.  Cummings (CMI) and Potash (POT) should be steady plays.  New plays include energy with Peabody Energy (BTU) and gold explorer Newfield Mining (NFX).  Both of these stocks have a put-call ratio of .267 which indicates significant call volume interest (bullish).  The chart belows shown all August covered call trades.

Covered Call Trades for August

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Monthly Income Portfolio – July Update

July Results - Click to enlarge

In the past, we have been expressing the view the equity markets were oversold and a rebound was likely to occur at any time.  Last week’s oversized bounce was probably due to two factors, the parliamentary vote in Greece forestalling a near term default event and the end of QE2 with the resulting bubble in the Treasury market that began deflating.  For the time being rising interest rates are reflecting a return to the “risk-on” condition.

As we caught an upturn in the market, all of our positions are deep in profits. We have captured 90% or more of the total profits in most of our put positions. Even though we are 10 days from expiration of July options, we will take profits on all five positions today. This will give us a total of $3,992.50 profit in less than one month. This is a return of 3.99% on the starting balance of $100,000. These positions were initated on June 27 so we are only 6 trading days (8 total days) into the trade. This is an annualized return of 182% which is hard to beat in most portfolios. Here is the positions today before selling them (see July Results).

Since July options expire on July 16, we will add new positions for August expiration.  We closed all July put positions so we did not get any stock put to us.  The new positions are shown in the chart below (see new positions).  We will write more puts on Under Armour (UA), Cummings (CMI) and Coach (COH): all with new strike prices in August 2011.  We will add two new stocks with put writes: MetroPCS Communications (PCS) and Celgene (CELG).    This creates a total of $6,190 in premiums received from selling August puts from these new positions (see the breakdown by position in chart).   This is a return of 5.98% based on the portfolio value of $103, 579.37 shown in chart.   In addition we invested $3,978 of our profits in 650 shares of Alpine Total Dynamic Dividend Fund (AOD) which pays a monthly dividend and has a yield of 10.7%.  We will continue to invest profits in monthly dividend payers.

New Positions - Click to enlarge

Under Armour, Inc. (UA) is engaged in the development, marketing and distribution of branded performance apparel, footwear and accessories for men, women and youth. The Company’s products are sold worldwide and are worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as consumers with active lifestyles. Its products are offered in over 23,000 retail stores worldwide. Most of its products are sold in North America. The Company’s trademarks include UNDER ARMOUR, HEATGEAR, COLDGEAR, ALLSEASONGEAR and the Under Armour UA Logo. The Company’s product offerings consist of apparel, footwear and accessories for men, women and youth.
Cummins Inc. (CMI) designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust aftertreatment, fuel systems, controls and air handling systems. The Company sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. It has four segments: Engine, Power Generation, Components and Distribution. It serves its customers through a network of more than 600 company owned and independent distributor locations and more than 6,000 dealer locations in more than 190 countries and territories. In November 2010, it purchased a majority interest in a previously independent North American distributorship. On January 4, 2010, it acquired the 70% interest in Cummins Western Canada (CWC). In April 2011, the Company sold its exhaust business to Global Tube.
Coach, Inc. (COH) is a marketer of fine accessories and gifts for women and men. Coach’s product offerings include handbags, women’s and men’s accessories, footwear, business cases, jewelry, wearables, sunwear, travel bags, fragrance and watches. Coach operates in two business segments: Direct-to-Consumer and Indirect. During the fiscal year ended July 3, 2010, the Company introduced Poppy, which offers a variety of silhouettes. It also introduced additional lifestyle collections. The accessories include women’s and men’s small leather goods, novelty accessories and women’s and men’s belts. The Company’s footwear is distributed through select Coach retail stores, and over 950 United States department stores. The wearables category consists of jackets, sweaters, gloves, hats and scarves, including both cold weather and fashion. During fiscal 2010, Estee Lauder Companies Inc., through its subsidiary, Aramis Inc., became Coach’s fragrance licensee.
MetroPCS Communications, Inc. (PCS) is a wireless telecommunications provider in the United States measured by the number of subscribers served. The Company offers wireless broadband mobile services under the MetroPCS brand in selected metropolitan areas in the United States. The Company provides a variety of wireless communications services to its subscribers on a no long-term contract, paid-in-advance basis. As of December 31, 2010, the Company had approximately 8.1 million subscribers. Its products and services include voice services, data services, custom calling features and advanced handsets. At December 31, 2010, the Company had thirteen operating segments based on geographic regions within the United States: Atlanta, Boston, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco and Tampa/Sarasota.
Celgene Corporation (CELG) is a global integrated biopharmaceutical company. The Company is primarily engaged in the discovery, development and commercialization of therapies designed to treat cancer and immune-inflammatory related diseases, such as immunomodulation and intracellular signaling pathways in hematology, oncology and immune-inflammatory diseases. Its primary commercial-stage products include REVLIMID, VIDAZA, THALOMID (inclusive of Thalidomide Celgene and Thalidomide Pharmion), ABRAXANE and ISTODAX. Other sources of revenue include sales of FOCALIN to Novartis Pharma AG (Novartis), which is a licensing agreement with Novartis, which entitles it to royalties on FOCALIN XR and the entire RITALIN family of drugs. On January 15, 2010, it acquired Gloucester Pharmaceuticals, Inc. (Gloucester), which is a privately held pharmaceutical company. On October 15, 2010, the Company acquired Abraxis BioScience, Inc. (Abraxis).
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