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When Dividend Investors Can Break Their Rules

Finding value above and beyond some investing rules

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The three stocks I bent my rules for included:

Family Dollar (FDO) had been yielding approximately 2% when I purchased it in 2008. Even during that turbulent time for stocks, the company had been performing impressively, by opening new stores and renovating existing ones to increase their appeal. Given the fact that Family Dollar stores are in smaller communities, and offer low prices to consumers, the financial crisis has been good for business. A consumer that wants to buy a loaf of bread is more likely to stop by a Family Dollar store rather than a Wal-Mart. And we all know that stopping by the store for a loaf of bread might expose consumers to buy something else in the process. I also used the weakness in early 2013 to increase my position slightly.

While I purchased shares of Visa (V) in 2011, I liked the long term growth potential for the company. In addition, Warren Buffett was buying Visa as well. Visa and MasterCard (MA) are essentially a duopoly that provides global consumers with the opportunity to do cashless transactions. While consumers would still use cash going forward, I would expect the number of credit and debit card transactions to increase over time not just in the U.S. but globally as well.

In fact, credit and debit card usage outside U.S. is not as widespread. This could mean decades of growth for Visa and MasterCard. I also like the toll-booth like business model, where credit card issuers do not take on any credit risk, but simply process information. I purchased the shares at a yield of 1% and a P/E that was less than 20..

What attracted me to Yum! Brands (YUM) was the fact that it was rapidly expanding in China and had more room for future additions of capacity. McDonald’s (MCD) had not been as successful in China as Yum! Brands, which is due to the fact that the operator of KFC offered something that appeals to the consumers better than burgers and fries. At the time of purchase, current yield was about 2%, although the company had announced plans to hike dividends significantly, and my forward dividend yield was 2.50%. I also used the declines in early 2013 to put another half position in the stock.

This pure dividend growth strategy is slightly riskier than the type where I purchase higher yielding stocks as well as companies in the sweet spot. That is why I only implement it in as one of the strategies in a broadly diversified dividend portfolio. For the three stocks mentioned above, I actually allocated a lower amount of capital than I would for a company like Johnson & Johnson  in order to limit risk.

Full Disclosure: Long V, YUM, FDO

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