Despite the dismal market this week, two of our companies announced dividend increases.

AFLAC (AFL) initiated a 7% hike increasing their dividend to $.30 a share. The stock now has a current yield of 2.4%. The company has also made a commitment to buy back stock. They may buy back as much as 3 million shares by the end of 2010 and plan to purchase 6 million shares in 2011.

Illinois Tool Works (ITW) announced a 105 dividend increase to$.34 per share. The stock has $2.55 in free cash flow per share and a current dividend yield of 3%.

Good news for International Business Machine (IBM), bad news for investors. On August 2nd, IBM sold $1.5 billion of 3 year debt at a 1% interest rate. This rate is a mere .3% higher than government debt with a 3 year maturity and 50% less than the dividend yield on the common stock.

The Wall Street Journal had a great article talking about IBM’s remarkable track record of being able to issue low rates on bonds right before the Federal Reserve raises rates (link to article: http://blogs.wsj.com/marketbeat/2010/08/05/is-big-blue-flashing-a-bond-warning/?mod=wsjcrmain).

Pretty smart for IBM. If they used the proceeds to buy back their own stock, they are borrowing at 1% to get 2% on their dividend so even if the stock went nowhere they are still ahead of the game. If their track record holds true, this is bad news for bond holders. Higher rates will mean losses for bond investors.
Our advice? Buy the stock with a 2% dividend yield and put it away for the next 5 years.