The process of successful dividend investing is all about identifying outstanding companies, with wide moats and characterized by strong brand appeal. These companies should also be able to generate a rising stream of earnings and cashflow which would fund a growing dividend, that would create an income stream for investors that rises faster than inflation. Investors should be careful however only to select these dividend investments, which trade at reasonable valuations. One of the major reasons why US stocks have delivered almost no total returns over the past decade is because they were grossly overvalued in the late 1990’s and early 2000s. Even selecting an outstanding business like Coca-Cola (KO) one decade ago for investment would have led to low returns, because the stock was overvalued.
Back at the end of 2000, the stock was trading at $60.94, yielded 1.10% and had a P/E of 69 times earnings. As of this Friday Coca-Cola (KO) is trading at $62.92. If you add in dividends, the total returns add up to 31.60% over the past decade. Right now the company is attractively valued at a P/E of 19.40 and yielding 2.80%.
With the markets trading at their highest levels since September 2008, the pool of attractively valued dividend stocks is shrinking. Many investors are faced with the dilemma of whether to keep adding to undervalued positions which are overweight in their portfolios or simply to either remain in cash or purchase stocks that seem overpriced. As a result, it might not be a bad idea to further research stocks which are just a bit away from your entry criteria. I have highlighted seven dividend aristocrats, where I plan to add to my existing position on dips below the entry prices specified in the table:
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company derives almost 75% of its revenues from its operations in Japan, while the remaining 25% are generated in the US. In FY 2009 the company earned $3.19/share. For FY 2010 and FY 2011 it is expected to earn $5.55/share and $6.18/share. I would consider adding to my position in the stock on weakness below $48. (analysis)
Air Products and Chemicals, Inc. (APD) offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. For FY 2010 the company earned $4.74/share. For FY 2011 and FY 2012 it is expected to earn $5.65/share and $6.31/share. I would consider adding to my position in the stock on weakness below $78.40. (analysis)
Wal-Mart Stores, Inc. (WMT), which is the largest retailer in North America, operates retail stores in various formats worldwide. In 2010 the company derived a quarter of its revenues from its international operations, which are expect to grow much faster than domestic sales. In FY 2010 the company earned $3.72/share. For FY 2011 and FY 2012 it is expected to earn $4.05/share and $4.45/share. I would consider adding to my position in the stock on weakness below $48.40. (analysis)
Exxon Mobil Corporation (XOM) engages in the exploration, production, transportation, and sale of crude oil and natural gas. It also involves in the manufacture, transportation, and sale of petroleum products. In FY 2009 the company earned $3.98/share. In FY 2010 and FY 2011 it is expected to earn $5.87/share and $6.46/share. I would consider adding to my position in the stock on weakness below $70.40. (analysis)
Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology, as well as delivering engineering services and solutions to various industrial, commercial, and consumer markets worldwide. The company operates in five primary business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. In FY 2010 the company earned $2.61/share. For FY 2011 and FY 2012 it is expected to earn $3.26/share and $3.78/share. I would consider adding to my position in the stock on weakness below $55.20. (analysis)
McCormick & Company, Incorporated (MKC) engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. It operates in two segments, Consumer and Industrial. The company derives almost 60% of its sales from the US. For FY 2009 the company earned $2.27/share. For FY 2010 and FY 2011 it is expected to earn $2.61/share and $2.81/share. I would consider adding to my position in the stock on weakness below $44.80. (analysis)
3M Company (MMM), together with its subsidiaries, operates as a diversified technology company worldwide. It operates in six segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications. In FY 2009 the company earned $2.27/share. Earnings per share are expected to increase to $5.73 in FY 2010 and $6.17 by FY 2011. I would consider adding to my position in the stock on weakness below $84. (analysis)
The above selections would be best described as great companies whose stock might have gotten a little ahead of itself. Other than that, all seven stocks are expected to generate increasing earnings over in the foreseeable future, which should assist them in raising dividends like clockwork. In order to avoid overpaying, dividend investors should only consider initiating or adding to their existing positions on any weakness.
Proper position entry at attractive valuations is just one of the items dividend investors should consider in order to ensure maximum chance of success in income investing. Proper portfolio diversification is another item that would ensure that a portfolio is not overcommitted to a certain sector or individual security. Investors should also avoid placing all of their bets at the same time, but should rather spread them over time. Last but not least, investors should try to selectively reinvest dividends in the best investment situations, rather than reinvest distributions blindly into the same overvalued stock for example.
Full Disclosure: Long all companies listed above