Tuesday, December 30, 2014

Best Dividend Stocks for 2015

My goal is to find companies which pay a decent dividend today, sell at attractive valuations and can grow those dividends over time from increasing profits. If I manage to find companies that can regularly increase dividends, I would be able to live off dividends in retirement and not have to worry about inflation or having to withdraw money from my principle. In order to find good dividend stocks for further research, I start with the list of dividend champions. This list is maintained by Dave Fish, and shows companies which have managed to increase dividends for at least 25 years in a row. This is a big achievement, since it includes several recessions, wars, and world changes. If a company’s business model has managed to withstand the pressures of time, competition and changing world business environment, I want to study it for potential inclusion into my dividend portfolio. In addition, if I find that company selling at attractive valuations, I might be more inclined to act and buy, rather than sit and monitor on the sidelines.

Using the list of dividend champions, I ran the following entry criteria:

1) P/E ratio of 20 or below
2) Dividend yields above 2.50%
3) Dividend payout ratio (DPR) below 60%
4) 10 year dividend growth rate of at least 5%
5) One and three year dividend growth rates above 5%

Name
Symbol
Yrs Div Increase
P/E
Yield
DPR
PRICE
10 yr DG
Analysis
Eaton Vance Corp.
34
17.29
2.50%
40.98%
42.18
15.15%
Johnson & Johnson
52
17.4
2.60%
46.36%
105.06
10.84%
AFLAC Inc.
32
9.71
2.60%
24.45%
61.94
16.82%
Weyco Group Inc.
33
18.33
2.80%
46.91%
29.67
14.55%

ExxonMobil Corp.
32
11.73
2.90%
34.72%
93.21
9.64%
Kimberly-Clark Corp.
42
20.93
3.00%
59.47%
118.28
9.16%
Questar Corp.
35
19.39
3.10%
57.58%
25.59
6.17%

Tompkins Financial Corp.
28
15.61
3.40%
46.67%
56.18
6.25%

Chevron Corp.
27
10.43
4.10%
39.41%
113.25
10.55%
Helmerich & Payne Inc.
42
10.41
4.40%
42.57%
67.19
23.31%


Those ten companies are not automatic buys however. This is just the first part in quantitatively reducing the number of companies for research down to a more manageable level. Investors should review financials for each company and try to understand how they make money, and whether they can keep growing earnings and dividends over time.

I also view some companies like Helmerich & Payne (HP) as a potential contrarian plays, if energy prices recover in 2015 – 2016. However, H&P always paid a low portion of earnings to shareholders, which is why this otherwise cyclical company was able to increase dividends for 42 years in a row.

We also all know that a dividend portfolio should have adequate diversification in the number of companies. It also takes time to build a dividend machine that will shower the investor with cash in the future. I have been building my dividend machine for 7 years now, and I still have a lot of work to do, before it potentially covers my expenses some time around 2018. That's why the intelligent dividend investor should keep running their screen regularly, expand it to potentially cover other dividend growth stocks such as dividend contenders, and always be on the lookout for hidden dividend gems.

Full Disclosure: Long CVX, KMB, XOM, AFL, EV, JNJ

Relevant Articles:

Dividend Champions - The Best List for Dividend Investors
My Entry Criteria for Dividend Stocks
Why do I use a P/E below 20 for valuation purposes?
Dividend Investing for Financial Independence
My Dividend Goals for 2014 and after

Monday, December 29, 2014

Dividend Angels – a possible searching ground for investment opportunities

In my strategy, I have been looking for quality companies, which have managed to increase dividends every year for at least one decade. The thinking behind this requirement is that a company which raises dividends for at least ten years in a row has shown commitment to shareholders. This also reduces the risk that a company achieves a dividend growth record simply by being lucky, and not because it has the underlying fundamentals to withstand the brutal forces of economic downcycles.  I get interested when the underlying earnings per share for those companies increase in lockstep with those growing distributions. To me this is an indication that there is a good chance that this trend could continue in the future. There are no guarantees, which is why I also focus on the fundamental analysis of each company, in order to determine if earnings and dividends can go up. I get particularly interested however, when companies with a consistent track record of dividend increases, are selling at attractive valuations.

There are approximately 350 companies which have managed to increase dividends for at least ten years in a row. US companies have historically been really good about maintaining a stable and increasing dividend payments to shareholders. This is evidenced by the consistent increase in dividends per share of companies in the S&P 500 index as well over the past 50 – 60 years. I have found that there are even more companies, which tend to increase dividends gradually over time, just not every single year.

Continue Reading on Seeking Alpha

Full Disclosure: Long ETN, GIS, K, BAX

Relevant Articles:

The ten year dividend growth requirement
- Investors Should Look for Organic Dividend Growth
How to read my stock analysis reports
Should Dividend Investors Ever Break Their Rules?
Dividend Champions - The Best List for Dividend Investors

Saturday, December 27, 2014

Best Dividend Investing Articles of 2014

I am about to close the seventh consecutive year of running this website (the 7 year anniversary is January 19, 2015). You can see a list of all articles posted since inception here. I believe that the reason why I have been successful as a dividend investor comes down to the same traits I exhibit while running this website. Those traits include the ability to have a strategy, to do my own homework in selecting investments, follow that plan through thick and thin, and be patient and persistent over long periods of time. This website helps me write down and crystallize my thoughts about investing, makes me accountable to do the work in order to have an opinion on companies to invest it, and network with other investors with similar goals like mine.

It also helps me to stick to my strategy, and not deviate too much into unknown investment territory where I do not have the same edge as in dividend growth investing. The patience, persistence and perseverance are important traits for every dividend investor to have. When I started with this site in 2008 I was not discouraged that the amount of money I had to invest was not very high.  I kept writing on this site even when I was working 100 hours/week for several weeks in a row in 2012. I also kept posting when I was working 60 hours weeks for several years. This is the type of tenacity I need to have in order to succeed in anything. For example, I kept investing throughout the past 7 years, which included a steep bear market in 2007 – 2009, multiple corrections in 2010, 2011, 2012, and 2014, and fears of double dip recessions, wars, inflation, deflation and QE. I believe that the ability to save every month, putting it to work in a diversified portfolio of quality dividend growth stocks every month, and then selectively reinvesting those dividends, will help me reach my goals of covering my expenses from dividend income somewhere around 2018.

Now that this self-advertisement is over, I wanted to share with you the five articles posted in 2014, which readers found the most useful.

- The Dividend Kinds List for 2014

- How to retire in 10 years with dividend stocks

- My Dividend Goals for 2014 and after

- Seven Sleep Well at Night Dividend Stocks

- How to Become a Successful Dividend Investor

I wanted to thank you for reading Dividend Growth Investor website. I enjoy hearing from people that read the site often, and have learned a lot from many interactions with these investors. I wanted to wish everyone Happy Holidays! Good luck in your dividend investing journeys!

PS I also want to thank those five dividend investing blogs for sending readers to my site in 2014. Those include:

Dividend Mantra

Dividend Growth Stocks, Dividends Value and TheDiv-Net

Passive Income Pursuit

Drip Investing

The Dividend Guy Blog

Monday, December 22, 2014

Should you purchase dividend stocks at 52 week highs?

Many investors I know follow different investment principles, such as that to "Buy low, sell high" and "Buy and hold forever". To many investors, purchasing dividend paying stocks at 52 weeks highs or all-time-highs seems like anathema, since it would run contrary to their beliefs of buying low.

I expect businesses I own to keep expanding, selling more products, generating higher revenues and earnings, while showering me with more cash dividends each year. In the meantime, those rising earnings and dividend make businesses more valuable over time, as they increase their intrinsic value. Therefore, in a somewhat efficient marketplace for securities, I expect stock prices of successful businesses to follow and keep hitting all-time-highs over time. Of course, I do not focus on stock prices as much, as I do on values. I have found that focusing too much on meaningless short-term stock price fluctuations is not helpful to my long-term wealth building. This is because I feel the urge to do something, which is dangerous to the compounding of wealth. As a long-term investor, the goal is to set-up a portfolio, and look at annual reports, and quarterly press releases as well as major announcements such as dividend increase, mergers & acquisitions to name a few.  I focus on valuation today, compare valuations between different companies between industries, and make estimates of future growth based on sustainability of business model ( does the company have any moat).

Many of the quality businesses I focus on here tend to increase intrinsic value over time. As a result, waiting for the perfect price might let you sitting in the dust. This doesn’t mean to throw all caution out the window and buy regardless of valuation, and without requesting some margin of safety in the event that future is not as rosy as expected. However, if you find a company that sells at an all-time high and say 19 – 20 times earnings, you might have to start accumulating shares if you believe there are good prospects down the road. If earnings per share double in seven years, and the P/E compressed to 15 – 16, the stock could still end up much more expensive in 7 years. If you add in the missed compounding from reinvested dividends, the opportunity cost of sitting in cash might be pretty high.

If you think about it, the all-time high of Coca-Cola from 1987 is much lower than the range it sells for today. In fact, if you purchased Coca-Cola at 52 week highs as long as it sold below 20 times earnings throughout history, you would have done pretty well for yourself. It is true that it is much better to buy quality dividend growth stocks at the lowest prices possible. If you have a long-term horizon like me, that spans at least 15 – 20 years from now, you can afford to view one or two year periods as mere noise.

To me, it is more important to focus my attention on the best values at the moment, and then analyze them for future growth. If the best value today sells at an all-time-high, I would not be worried. I actually read a study, which found that actually purchasing companies that hit all-time-highs has resulted in above-average gains to investors. I know that this was more of a timing strategy than buy and hold, but the results are nevertheless very interesting. The more experience I gain, the more I realize that getting the right entry price is important. However, it is much more important to identify a quality earnings and dividend grower, which manages to earn more money over time, and thus making the business more valuable. If the company has the type of business that sells a unique product, has strong pricing power, and has great earnings growth visibility, then it is fine to pay 20 times earnings for it. This is the type of situation that Warren Buffett describes in his famous saying " It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

My dividend growth strategy is essentially a strategy of following long-term trends in company fundamentals, specifically their dividend rates. Essentially, once I purchase shares in a company, I hold on for as long as the company raises dividends. Even if a company stops growing dividends, I will keep holding on to it, but allocate them elsewhere. It is important to reinvest dividends selectively, into the best values and qualities found at the moment, and not mindlessly reinvest into the same company regardless of valuation. If valuations become too overstretched however, such as in situations where future growth expectations do not justify a P/E of 40, it might make sense to dispose of the security. The situation where I typically have done most of my selling is after a dividend cut. I have found in analyzing my investments that selling a mildly overvalued company to purchase a mildly undervalued is mostly a mistake. If I identify a mistake in the original thinking I may have done, that led me to an investment in the first place, I would sell as well.

On the other side of the equation, just because a company is cheap, and is selling at a 52 week low does not mean it is an automatic buy. Investors who only focus on stock prices, without understanding anything about the business, growth prospects, are probably speculating.

To summarize, just because a company is selling at a 52 weeks high, does not mean that it should not be considered or it should be sold automatically. A new investor should evaluate the value by looking at business fundamentals, catalysts for future earnings growth, and valuation before committing their hard-earned money to work. For those who already hold shares in a company which is hitting a 52 week or an all-time-high,  they should continue monitoring their investment, and check whether earnings are growing and that there are catalysts for further growth. One of the hardest things for investors to do is to just hold on to their best ideas, as they prove them right, and not sell and buy something that appears cheaper but leaves the investor worse off in the long-run.

Full Disclosure: Long KO and BRK.B

Relevant Articles:

Dividend Cuts - the worst nightmare for dividend investors
Why would I not sell dividend stocks even after a 1000% gain?
How to read my stock analysis reports
Three Characteristics of Successful Dividend Investors
Reinvest Dividends Selectively

Friday, December 19, 2014

Should I hold on to American Realty Capital Properties (ARCP)?

There have been some recent developments over at American Realty Capital Properties (ARCP). First of all, on Monday, the REIT said Nicholas Schorsch, its founder and chairman, and David Kay, its chief executive, stepped down. Chief Operating Officer Lisa Beeson also resigned. The happened approximately six weeks after American Realty Properties disclosed accounting irregularities that erased more than a third from the company’s market value. Then the company’s credit rating was downgraded to a notch below investment grade by Moody’s. To many investors, those are new facts to take into consideration.

Prior to that, I did do some tax loss harvesting. I essentially doubled up my exposure in early November, bought a put, and then 31 days later sold the original shares and the put. I was expecting to essentially keep my shares and do nothing with them, but then decided to think about it again. In this article, I am going to outline my thinking for selling and against selling. Just as a reminder, just because I do something, doesn't mean it is a recommendation for you to act on. Everyone’s situation is different, which is one a one size fit all approach or article should be taken as advise.

Reasons to sell American Realty Capital Properties (ARCP)

1. The cost of capital will increase as a result of the credit downgrade. According to WSJ “Moody’s said the return to a stable outlook would require the resolution of the accounting issues and the timely filing of its third quarter and 2014 financial results. Missteps in resolving its accounting issues and other concerns could lead to another possible downgrade”

This would not be felt right away, but when significant amounts of debt need to be refinanced after 2016, this could be costly. Of course, if the audit does not uncover anything new, then chances are that financial statements will be submitted with the SEC, and the credit rating up for review. Thus, this could or could not affect anything. The nice thing is that in the short-term, credit should not be an issue, because maturities are stacked up and debt does not mature all at once but is spread out over time. In the long-run, access to credit could impede FFO.

2. There was an accounting problem, affecting FFO/share by a few cents/cents. Accounting errors do happen, but the problem with this error was that it was concealed, leading to departure of two key executives in October. While an error of a few cents/share is not that much, it could be an indication that financial reporting is not accurate. If the financials are not accurate, then whoever is putting their money in American Realty Capital Properties (ARCP) is speculating, not investing. Speculation is fine, but it is riskier since the person putting their money in something they hope is doing well, rather than objectively analyzing cold data. The uncertainty is definitely killing a lot of the investors out there.

3. The other reason for selling would be if the company lowered its dividends to shareholders. Given the high yield today, I believe that a dividend cut is already factored into the price. At a price of $8/share, a dividend yield of 6% would translate into an annual payment of 48 cents/share. As a dividend growth investor, I usually sell after the dividend cut is announced, in order to avoid situations where I stick to a position due to behavior failures as an investor. If things get better, and distributions resume their growth, I would get back in. However, if the dividend were cut, I would expect a lot of extra selling by investors and prices falling even lower potentially.

4. Another reason to sell is in order to harvest tax losses. An investor could sell, and buy back in 31 days. Of course, the stock price might go higher during that time period. Or it could go lower, making you feel/look like a genius.

5. For many investors, selling American Realty Capital Properties (ARCP) today is because they seem overwhelmed by the negative news about it. Many investors read all the news releases, then articles on popular blogs or Seeking Alpha and get worried. For some, they sell because they want to “sleep well at night”. In my opinion, this is a bad reason to sell, because most of the companies one holds on to, usually end up having some type of difficulty. While the problems of American Realty Capital Properties (ARCP) are large ( accounting errors (or even fraud), management shake-ups indicating more problems ahead), an investor should not be selling merely because things are tough and they are scared. If you want to sleep well at night, keep your money in FDIC insured CD’s. If one is unwilling to hold on to a stock falling by 50%, then stocks might not be the correct vehicle for them. Also, if one spends all of their time checking stock prices, news about companies they own, people’s opinions on them , or worrying, then maybe they are speculating and not really investing for the long term. However, if they sell because the new information changes their perspective about the company's prospects, they lose faith in management, or they believe the new information makes it difficult to hold due to unreliable financial information, then that is a valid reason to sell.

Reason to hold American Realty Capital Properties (ARCP) ( and potentially buying ARCP)

1. The Real Estate Investment Trust owns thousands of properties under long-term triple net leases. Payments are contractually scheduled to escalate over time, and almost all of the lease costs (rent, taxes, utilities) are paid by the lessee (the tenant). Since those leases are long-term in nature, it would be very difficult for the tenant to get out of them. Therefore, the majority of revenues from those leases are relatively stable. There are some revenues related to sales and management of non-traded REITs. With all the hoopla around the trust, a large portion of those revenues will be going lower. But still, the properties and leases are not going away. Those have a value.

2. The other reason for holding on to the stock is that the value of the properties under its ownership is potentially higher than the current market price. Of course, the value of those properties at $13.25/share was provided by David Kay, who has resigned from the company. So those numbers should be taken with a grain of salt. Assuming the leases are not made up, they should have a value that could be realized. I would say that financing a property that is leased under a 10 year lease might be easier, even if your credit rating is not stellar.

3. The third reason to hold is if one believes that the company would not go under. This is a belief that those problems that the company has are temporary of nature (despite the fact that management has really screwed up big time). A pass-through entity like American Realty Capital Properties (ARCP) would pay a dividend as long as it earns taxable income. Hence, an investor who only focuses on current weaknesses and projects them onto the future is doing what investors have been doing from the dawn of stock market investing – potentially missing the big picture by extrapolating recent losses into infinity. Investors tend to overreact to good news, and overreact to bad news. If the REIT is cleaned up, chances are it could deliver a nice stream of dividends to shareholders going forward.

4. Most investors now believe that Nicholas Schorsch was a toxic influence, hence his departure is actually bullish for the company. Most investors might not know about another REIT that Schorsch built up aggressively in the early 2000s -American Financial Realty Trust. The trust grew rapidly as well, but ultimately the growth was too quick again, and Schorsch was ousted. American Financial Realty Trust, cut dividends by 30% after he was ousted in 2006. The company was ultimately acquired in the next year by Gramercy Capital (GKK). The trust didn’t go under, as it sought to sell assets, reduce liabilities, and match dividends to revenues. The share price was flat for most of 2006 and early 2007, after which it fell by 50%. This was probably due to the beginning of the financial crisis. If interest rates start going up, and REITs in general lose investor appetite, this would be bad news for investors in the REIT.

5. The fifth reason is because most of sales that investors do are not optimal. I have reviewed the sales of companies I have done, and the subsequent purchases, and have found out that in most situations I would have been better off simply to hold on to the original company. Selling is difficult, and it does not mean to never sell. But if one sells when they are scared, they are essentially letting emotions run them. When things are bad, all you get is negative headlines and negative facts. The problem of course is that very often those get priced into the company. Inexperienced investors (myself included) tend to project recent headlines into infinity and sell. However, those experiences have made me think that a large portion of investing is based on facts and data, and the rest is based on personal experiences, biases and common sense. Sometimes however, it might make sense to ignore the data and have a belief that things could get better. I know that when I sold GE, I was expecting it to go under after the dividend cut, since many of the dividend cutters of 2008 went under. I also thought that BP had a lot of issues in 2010, which is why I sold after the cut. In reality, if a company can survive a crisis, it could deliver decent returns. Most investors lack the patience to hold a company stock that has a large loss. However, this is the price to pay for earning equity returns – volatility, uncertainty and negativity. I witness investors losing patience over companies like Intel (INTC), who failed to increase dividends. They sold, and then the shares went up and the dividend was increased – the company had merely experienced short-term weakness. However this weakness was projected onto the future into the potential demise of the company. Same was true for Apple (AAPL) in 2012 – 2013. Many investors, myself included, believed that the future is bleak, but they were proven incorrect.

6. The sixth reason is somewhat correlated with the fifth. It is the concept of opportunity cost. If I sold American Realty Capital Properties (ARCP) today, I would deploy the capital elsewhere. However, other triple-net REITs like Realty Income (O), W.P. Carey (WPC) or National Retail Properties (NNN) look pricey today. Hence, it might not make sense to buy them if I sold. In addition, even after a dividend cut, I could see how ARCP could still offer better yields than the above mentioned REITs and possibly faster distribution growth. (although it will be riskier). I could also purchase oil companies with the proceeds, like ConocoPhillips (COP), Exxon Mobil (XOM) or Chevron (CVX). However, energy companies like those sell a commodity whose prices fluctuate greatly. Hence their income is going to be more volatile and less dependable than that of a company like American Realty Capital Properties (ARCP) which has long-term triple net leases that are stable and growing over time.

What I decided to do

When I purchased this REIT, I violated my entry criteria since I purchased a stock with only 2-3 years’ worth of dividend increases. I also chased yield, and did not really dig into the financials, which were not comparable due to the steep pace of acquisitions. Based on my experience of looking at/following financial markets for 16 - 17 years, companies that grow to fast or change strategies too quickly are dangerous and possibly run for the benefit of management egos, not shareholders. The rapid acquisition growth, lack of long-term track record, lack of comparable financials, prior history of Nick Schorsch with AFRT and fat dividend yield, was something that should have raised a red flag for me, yet I kept buying the stock on three occasions in 2013. Now we know that the financials are not very clean, and we have management shake-ups, which means that we might have bigger problems potentially under the surface. Selling the stock today would be the obvious choice, since I am now speculating of whether the company will do fine or not. I do not know whether the financials are fine or not, hence I cannot do an objective analysis of the situation. As Buffett likes to put it, this company is on the “too hard” pile. This is the pile of items to ignore, because based on publicly available information, it is difficult to make a decision. I would assume however that even if the financials are worse than expected, the nature of the business itself has a stable core of long-term triple net leases with dependable revenues. I believe that a large portion of uncertainty is already priced into the company. The dividend cut could lower stock prices – or it could not. What I am saying is that I made a mistake buying American Realty Capital Properties (ARCP) in the first place – hence by selling I am correcting that mistake.

Since my rule is to sell after a dividend cut, and I do expect a dividend cut, I am going to cut my losses there. If the REIT cuts dividends, but then starts raising them again, I would give it a second look. I would keep the few shares I have in an IRA account though, and have dividends reinvested. I am essentially disposing of approximately 80% of my exposure to American Realty Capital Properties (ARCP) (all the shares in taxable accounts). My way of monitoring companies is by owning a few shares in many, receiving alerts on press releases, annual and quarterly reports, and major news on them.

I am also considering selling, because I am realizing that the relentless increase in stock prices, have caused me to soften my entry criteria, in order to put capital to work. When I make my entry criteria less rigid, I am opening the can of worms to buy securities which look cheap, but which might lack in quality. If I compromise on the purchase side, then I am not really sticking to my original strategy, and then I am mostly hoping and speculating, rather than investing. When I buy a company like Johnson & Johnson (JNJ), I expect growth in dividends from a stable time tested company with a long-term track record. If things change, I know that dividends will be cut and I should sell. With a company like American Realty Capital Properties (ARCP) that I bought without requiring as much in terms of track record and management integrity, I do not have a good idea of when I should sell. This is because I didn't really have a good idea of why I bought in the first place. Thus when I don't follow my entry rules, I do not really have the edge, which is dangerous when it comes to investing.

Being too lenient is costly, as I have also been doing dangerous things like buying stocks on margin, in one of my accounts and also selling puts for premiums. Luckily, I have been profitable as stock prices have been rising on those endeavors. I believe the time to cut back on margin and options trading is now, so that I am in a better position to endure the next bear market. Being overconfident in my abilities, being more lenient on my investing criteria, speculating in derivatives and using margin could be the slippery start of a dangerous path towards financial destruction.

I am also in the process of selling approximately 80% of my position in Gazprom (OGZPY), covering almost all puts sold (except for BP, General Mills (GIS) and a General Electric (GE) expiring in 2015 and 2016).  Those positions did not match my goal of generating a reliable dividend income that grows over time, and comes from a diversified portfolio of dividend growth companies. While Gazprom could be worth $15 - $20/share easily in a decade, it could also be worth less if sanctions are not lifted timely and Russia is further pushed into a second Cold War. My long-term investment goal is not to speculate on prices, but look for ways to generate sustainable income to live off in a few years. My near term goal is to de-leverage and reduce all margin activities and options selling to minimum in 2015.

For 2015, I will focus on maxing out my 401 (k), SEP and Roth IRA’s and HSA in the first half of the year. This should save me money on taxes, meaning I would have more money to keep to my name and invest. I have also cut recurring expenses like housing, transportation and auto insurance, which should also let me keep more money and invest. I am also going to be more stringent on quality from companies I invest in on a going forward basis.

Full Disclosure: Long ARCP, OGZPY, JNJ, GE, GIS,

Relevant Articles:

What should I do with American Realty Capital Properties (ARCP)
American Realty Capital Properties (ARCP) Dividend Stock Analysis
Five Things to Look For in a Real Estate Investment Trusts
The right time to sell dividend stocks
Dividend Cuts - the worst nightmare for dividend investors

Wednesday, December 17, 2014

What dividend stocks would I buy if I were just starting out as an income investor?

I have been investing in dividend growth stocks and discussing dividend growth stocks on this site since early 2008. I have learned that dividend investors need to be flexible, and constantly be on the lookout for attractive investments.

This is because companies from different sectors are attractive at different times. In addition, there are many companies within a sector that could have strikingly different fundamentals and valuations. It is very rare that the whole market and all sectors are cheap at the same time, like they were in 2008 – 2009. For someone who invests a little every month however, I need to find cheap stocks with attractive economics and good prospects all the time. I do not believe in keeping too much cash in my brokerage account, and waiting for the perfect opportunity that might or might not materialize. I would much rather have the capital work for me and start its compounding process right away.

I usually start with a list of dividend growth stocks like the dividend champions, and then narrow down based on my entry criteria. I usually notice that many of the most attractive companies are from a single sector or sectors. I then look at each company that meet my entry screen, and delve further into trends in revenue, expense, earnings, returns and dividends over the preceding decade. I also read annual reports and analyst reports to gain an understanding of the company and its inner workings.

The typical dividend stocks I purchased since 2008 included the likes of Colgate-Palmolive (CL and Kimberly Clark (KMB) up until 2012. Over the past two years however, I have been hard pressed to find good ideas among the typical suspects of the preceding 5 years. As a result, I have been looking for other income investments.

Right now, the best values I could find are in Energy sector.  As I mentioned before however, I want to be diversified across time, industries, and not pile everything at once in one sector or company. Safety of capital is important to me. I also find a few consumer staples that are cheap, although not as many as in 2012. I also identified a few other good stocks, with favorable business prospects from other sectors below:

Ticker
Name
Yrs Div Gro
10 yr DG
P/E
Yield
Analysis
(ACN)
Accenture
9
     23.10
     17.00
       2.50
(AFL)
AFLAC Inc.
32
     16.82
       9.40
       2.60
(BAX)
Baxter International Inc.
8
     12.43
     14.70
       2.90
(CB)
Chubb Corp.
32
       9.24
     13.60
       1.90
(COP)
ConocoPhillips
14
     15.70
     14.20
       4.60
(CVX)
Chevron Corp.
27
     10.55
     12.50
       4.10
(DEO)
Diageo plc
15
       5.88
     17.80
       3.00
(ETN)
Eaton Corp. plc
5
     13.83
     14.00
       2.90
(GIS)
General Mills
11
       9.95
     18.20
       3.20
(IBM)
International Business Machines
19
     19.37
       9.60
       2.70
(JNJ)
Johnson & Johnson
52
     10.84
     17.50
       2.60
(K)
Kellogg Company
10
       5.95
     16.80
       3.00
(KMB)
Kimberly-Clark Corp.
43
       9.16
     19.70
       3.00
(MCD)
McDonald's Corp.
39
     22.80
     18.30
       3.80
(PEP)
PepsiCo Inc.
42
     13.71
     20.60
       2.70
(PM)
Philip Morris International
7
     11.70
     16.70
       4.70
(RSG)
Republic Services Inc.
12
     37.48
     19.90
       2.90
(UL)
Unilever
19
       6.10
     19.60
       3.50
(UTX)
United Technologies
21
     14.48
     16.40
       2.10
(XOM)
ExxonMobil Corp.
32
       9.64
     14.00
       3.10

I have not included real estate investment trusts or master limited partnerships, because those are a little bit more challenging to research from the standpoint of a beginner investor.

That being said, I am not envious of the investor who starts their dividend investing journey today. It is much more challenging to find quality companies selling at attractive valuations today, than it was 7 years ago. If someone were putting a set amount of cash to work every single month for several years however, the math should work well in their favor due to the fact that intrinsic valuations rise over time as companies earn more and thus pay more dividends. The power of dividends to grow over time, and for those dividends to be reinvested into more dividend producing investments should not be underestimated. In addition, if we get the bear market in stocks that everyone has been waiting for, the beginner investor would be able to deploy their cash at much better entry prices.

However, if the investor has a lump-sum to invest, the best idea might be to spread purchases over the next 12 - 24 months, especially if they are relatively new to the world of dividend investing. The importance of quality in selecting investments and the need for continuous education cannot be underestimated. To me, a quality company is the one which manages to have recurring revenues and earnings, which tend to increase over time and do that without much lumpy-ness. To achieve that, a company needs to have strong competitive advantages such as strong brands, advantages of scale or location, being a cost leader, and/or selling a unique product that commands pricing power. Check this article on wide-moat companies for more information.

Full Disclosure: I have a position in all companies mentioned above

Relevant Articles:

Seven wide-moat dividends stocks to consider
Five Metrics of Successful Dividend Companies
How to create a bulletproof dividend portfolio
Why Sustainable Dividends Matter
Dividend Growth Investing is a Perfect Strategy for Young Investors

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