Diary of a Dividend Diva: LTD

 | Dec 07, 2011 | 10:00 AM EST
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Today let's look at my single best dividend idea. As longtime readers will know, the Dividend Diva rotates through various sectors, collecting the dividends of each major payer along the way. Occasionally I will hold onto a name rather than rotate out, usually when the yield is sufficiently high and the capital gains prospects are strong.

One name that I have held for two years -- and yet am still bullish on -- is Limited Brands (LTD). You are probably aware of Limited's business, selling underwear and soaps under the Victoria's Secret and Bath & Body Works brands, among others. The company operates more than 3200 specialty stores around the world. I cannot think of a stock that better embodies all the characteristics I look for in a great long-term investment.

Of utmost importance, the analysts' earnings estimates have been under continuous upward revisions for the past two years as the company has continued to far outperform expectations. The chart below highlights the trend in the earnings-per-share estimate for the forward four quarters, which has been (and is still being) revised upward regularly.

Limited Brands (LTD) -- Price Vs. Estimates
Source: FactSet, using Thomson Reuters estimates

On top of great earnings performance, the company is generous with its cash flow, paying an attractive 2% yield. But, more importantly, it pays substantial special dividends on a regular basis. In fact, you can capture a $2 payout for which the stock will go ex-dividend Thursday. That is a 4.6% return, and it comes on top of the regular dividends. (A stock is likely to decline on the ex- date when the dividend is that large, but with the solid earnings momentum and reasonable valuation, I expect Limited to come back relatively quickly.) This is the second special Limited has paid in 2011, and that follows on to $4 in specials paid in 2010!

The combination of strong performance and shareholder-friendly cash policy is resulting in great total return. The stock has risen 38% over the past two years, and I see more appreciation, and income, in the quarters to come.

Limited Brands (LTD) -- Two-Year Chart
Source: Yahoo! Finance

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