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The Good, the Bad and the Ugly – Dividend Stocks (MCD, TGT, WMT, LOW, WAG)

To make our world easier to understand and explain, we like to organize and categorize things into groups for ease of reference. Dividend Stocks are no different. They can be placed into a few categories based on their historic performance and expectations for the future. Here are three broad categories and some representative selections from each:

The Good

As you might guess, these are dividend stocks that are doing exactly what they should do - consistently raising their dividends each year in spite of troubled economic times. Some of these companies are in sectors that are less affected by the economic downturn, but they have one thing in common: They are well-managed by executives that understand the importance of growing the companies' dividends.

Below are five companies with double-digit dividend increases in 2011:

McDonald's Corp. (NYSE:MCD) | Yield 3.0%

Raised its dividend 14.8% in 2011 for the 35th consecutive annual increase

Target Corp. (NYSE:TGT) | Yield: 2.3%

Raised its dividend 20.0% in 2011 for the 44th consecutive annual increase

Wal-Mart Stores Inc. (NYSE:WMT) | Yield: 2.5%

Raised its dividend 20.7% in 2011 for the 37th consecutive annual increase

Lowe's Companies (NYSE:LOW) | Yield: 2.5%

Raised its dividend 27.3% in 2011 for the 49th consecutive annual increase

Walgreen Company (WAG) | Yield: 2.7%

Raised its dividend 28.6% in 2011 for the 36th consecutive annual increase

The Bad

These are companies that hold their dividends flat. Dividend growth investors are looking for companies that can consistently raise their dividends year after year. Sometimes a company can't do this this. Instead of cutting the dividend, they hold it flat and try to weather the economic storm. This may not always be a bad thing, because it shows that management understands the importance of maintaining its dividend. Many dividend investors, myself include, may overlook a single flat year.

Here are several companies with their last dividend increase more than a year ago:

Weyco Group Inc. (NASDAQ:WEYS)

Yield: 2.8% | Flat since May 2010

Meridian Bioscience Inc. (NASDAQ:VIVO)

Yield: 4.3% | Flat since January 2010

United Bankshares Inc. (NASDAQ:UBSI)

Yield: 4.9% | Flat since December 2009

Universal Health Realty Income Trust (NYSE:UHT)

Yield: 6.6% | Flat since June 2010

CenturyLink Inc. (NYSE:CTL)

Yield: 7.9% | Flat since March 2010

Once a stock freezes its dividend at the current rate, I treat that as a significant warning signal. If I don't own the stock, I will not consider initiating a position in it, and if I do own the stock I will not make any additional purchases made until its outlook improves or deteriorates to the point it is sold.

The Ugly

These are companies that cut their dividends. For investors in dividend growth stocks, there is nothing worse than a dividend cut. Remember, a growing income is the reason we bought the stock in the first place.

Fourth quarter 2008 was the worst period for dividend cuts since 1956 when Standard & Poor's started keeping records. Fortunately, things have improved since then, but there is still a steady trickle of companies that have cut their dividend after years of growing or maintaining it.

Below are several companies that recently cut or eliminated their dividends:

Heritage Financial Group Inc. (HBOS)

Yield: 1.1% | Cut its dividend in February 2011 after 6 years of increases

Hudson City Bancorp (HCBK)

Yield: 5.7% | Cut its dividend in April 2011 after 12 years of increases

Getty Realty Corp. (GTY)

Yield: 6.6% | Cut its dividend in September 2011 after 11 years of increases

Investors Real Estate Trust (IRET)

Yield: 7.3% | Cut its dividend in June 2011 after 39 years of increases

Over the long term, the best companies to add to our dividend portfolios are those that will continue raising their dividends even during economic downturns. These stocks tend to have conservative payouts of less than 50%, which allows them to maintain their dividends during the tough times. They also have growing sales and earnings — you can't continue to pay higher dividends unless you have the earnings and cash to back it up.

Full Disclosure: Long MCD, WMT. See a list of all my dividend growth holdings here.

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