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Thursday, February 14, 2013 - 10:00
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Thursday, February 14, 2013 - 10:00

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Thursday, February 14, 2013 10:00 AM

You know interest rates are low when your most conservative customers are looking to move out of the safety that certificate of deposits (CDs) provide and into dividend-paying stocks, which provide higher yields, but may not be completely risk-free.

The past few years there has been a "buzz" surrounding dividend-paying stocks, and rightly so.

Consider the average retiree who needs more income, for example. It's possible to choose the negligible 1-2% yields Treasury bonds or CDs are offering, but there's a lot more assets that offer higher yields right now. In fact, StreetAuthority Co-Founder Paul Tracy has already gone on record saying that we're headed for a "Dividend Decade" -- a period where ALL of the market's returns in the next decade will come from dividends. He's convinced that shares of companies that are tapping into their huge cash balances, or "Dividend Vaults," are the way to go.

It's not hard to see why so many investors these days are finding their answer in dividend-paying stocks.

In addition, if your investment goals include playing defense against an unstable market, then dividend-paying stocks can provide the safety and dependability you seek. The cash flow from dividends may also protect a company's share price during volatile times. The goal is to protect against losses in a down market and take advantage of the markets when they rise.

When I look for a "Dividend Vault" stock, I look for stable companies in stable industries that typically pay at least a 2% dividend.

And I just found a household stock that has raised its dividend each of the past 49 years. Better yet, I don't see the trend stopping.

The story behind this stock is nothing but extraordinary. After all, who would imagine, a mundane household item such as toothpaste would help Colgate-Palmolive (NYSE: CL) through thick and thin?

This leading global consumer products company has been around for more than 200 years and is tightly focused on internationally-recognized brands such as Colgate, Palmolive, Ajax, Suavitel, and Hill's Science Diet and Hill's Prescription Diet to name a few.

But despite strong brands in its portfolio, Colgate is best known as a global leader in oral care, with worldwide market share of roughly 45%. Its deep and loyal customer base, which has come to know and trust Colgate from generation to generation, has somewhat insulated the stock from major downturns.

Take a look at Colgate's impressive run, despite the Great Recession of 2008...

In a slow-growing economy, toothpaste has proven to be one of the most attractive and stable products, because of its impressive margins, low private-label penetration rates and high levels of brand loyalty.

All this brand loyalty comes from Colgate's 40-year history of deep and far-reaching partnerships with dentists. This has also built a firm foundation the company's presence in developing markets. Colgate's main driver has been education and awareness about oral care, which has helped the company gain leading market share of its core brands in this segment.

And management has made a major commitment to return excess cash to shareholders. As I've mentioned before, Colgate has raised its dividend payment every year for the past 49 years.

The stock is very sound from a financial perspective also. Its "AA" credit rating indicates close to zero default risk. Colgate generates very healthy cash flow from operations and uses debt efficiently. Its debt/capital ratio has averaged 0.6 during the past five years, while adjusted EBITDA covered interest expense an impressive 47 times.

On Jan. 31, the company announced 2012 fourth-quarter earnings of $1.41 per share, relatively in-line with the consensus forecast of $1.40. Consensus for this year's first quarter is running around $1.36 per share, however. Demand for Colgate's products and services have been strong, growing roughly 5% to $4.20 billion in the fourth quarter of 2012, compared with the year-ago period.

Colgate appears attractively valued with its trailing 12-month price-to-earnings (P/E) ratio at almost 22 compared to the peer group's P/E of almost 26. Return on assets is 19.86, significantly higher than the industry average of 10.70. It has had positive operating cash flow each of the past three years, with an impressive return on equity of 95.6% compared to an average of 34.7% for the industry.

Risks to Consider: Because Colgate operates in a limited number of product categories, this somewhat limits new product development. In addition, the extensive use of its brand products can diminish the visibility of the company's innovation efforts. Additionally input cost inflation can wreak havoc on management's long-term 60% gross margin target. Competition from companies such as Proctor & Gamble (NYSE: PG) has put a small dent in Colgate's market share.

Action to Take --> Having said that, Colgate is the industry leader and I do not see this changing any time soon. The positive fundamental factors for Colgate outweigh the negatives by a significant margin.

Buy Colgate-Palmolive up to $120 a share. With a 2.3% yield, this is an attractive lower-risk stock that has the ability to produce inflation-protected income. I see this stock increasing by 8-10% during the next 12 months.

P.S. -- Corporate America is sitting on a $1.7 trillion "Dividend Vault" -- and it just might save your retirement. To learn more, click here.

Jay Peroni does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.