As we all know, the stock market is at an all time high. That is despite the fact that earnings for the US corporations have been flat for a few quarters. Of course, it is doubtful that those earnings as whole will not be higher a decade or two from now. But in the day to day noise that many ordinary investors operate in, this sounds like an unbearably long period of time ( it shouldn’t be that way).
Many investors have been distrustful about the stock market, after a relentless rise in equities over the past 7 – 8 years. Some have sold out large amounts of stock, and are waiting on the sidelines with cash. Others have been building up cash, and are waiting for an opportunity to buy shares at a lower price. But valuations on quality assets are at the high range, and have remained their for quite some time, making that group impatient. A third group has been putting money to work every month, but is likely having a harder time finding attractively valued companies.
I understand the frustration of all groups. After all, high stock prices in relation to earnings are great for those who are looking to sell stock. However, they are not good for savers like you and me, who happen to be able to put money to work every month. While it is great to see my net worth grow so much over time, I do not like the fact that I am priced out of some of the greatest dividend paying blue chips today. After all, if entry prices are lower, this means that I can buy future dividend income at a discount. When you obtain more future income for less dollars today, you got yourself a bargain. This would allow you to reach your financial goals much closer. If you on the other hand are dealt a tougher hand with higher overall valuations, you will have to spend a few extra years of saving to compensate for the insane valuations out there. Unfortunately, the best things to do is to stick to our plan and adapt to a situation.
As a dividend investor, I go through several hurdles in my process, in order to come up with something to invest in.
First, I look for companies that have a long track record of regular annual dividend increases. This should weed out a lot of companies, whose earnings are not stable enough to generate a strong track record of regular dividend increases. I look for companies that have been able to grow dividends for at least ten years in a row.
Second, I look at the earnings record over the past decade, in order to determine whether we have the earnings growth to support further dividend growth. I try to focus on companies, which have stable earnings throughout the economic cycle. I am not interested in companies which are earning a lot this year, but accomplished that because of luck that may not be replicatable in the future. I try to determine if those industries can continue winning and making more money. This is the secret recipe that will produce higher dividends over time and higher values of the business. This is compounding. You do not want companies who manage to grow dividends solely by expanding the dividend payout ratio, because there is a natural limit to this growth.
Third, I look for quality companies that are attractively valued. I want to buy quality businesses that will grow earnings and dividends, and compound over time. A low valuation in itself is not a reason to buy, if earnings are not growing because your dividend income will be unable to keep up with inflation. I also try to focus on companies with stable earnings, rather than cyclicals whose profits are more difficult to estimate and rely upon. We want dividend payments that are reliable, and have a lower chance of being cut during the next recession. I want to buy these companies at attractive valuations, and I want to avoid overpaying massively for future growth. Buying the best business in the world won’t make you any money, if you overpay dearly for it.
Last, it is important to do all of this as part of your own investment process, and not by chasing tips. If you have an investment process, you have a higher chance of being able to generate ideas on a regular basis, and not have to rely on others imperfect research. Plus, you will eliminate guesswork and self-doubt from your process, which may be counterproductive at the next dip, and cause you to sell your shares. If you buy shares without doing any research, merely because you read about the company on someones website, you may regret it later. It is not a good idea because you may not stick around for this investment to bear fruit for you. You need to invest in companies you are willing to sit on through thick or thin, and not bail out at the first sign of trouble.
The other thing about having an investment process, is that you should always be on the lookout to improve that process and always try to tilt the odds in your favor. For example, if you are not happy with the potential returns in the current environment, you should do everything within your control to keep your investment costs low. This means investing through a tax-deferred account, which could potentially allow you to buy stocks at a 25% - 30% discount. It could also mean avoiding or deferring taxes on dividend income and capital gains, so you have more money to compound for you. It also means paying the lowest commissions possible, without sacrificing the quality of the brokerage of course. In addition, it is also helpful to focus on low-hanging fruit with guaranteed returns such as a 401 (k) match from an employer, or employer stock you can purchase at a discount and immediately sell. Alternatively, I have found selling puts at prices below todays to be a helpful activity, which could allow me to buy stocks at a discount, if exercised.
After going through my process, I came with a list of a few dividend champions companies, which I believe to be fairly valued today.
Aflac Incorporated (AFL) provides supplemental health and life insurance products. It operates through two segments, Aflac Japan and Aflac U.S. This dividend champion has raised distributions for 33 years in a row. In the past decade, the dividend has risen by 13.60%/year. Earnings per share have risen from $2.95 in 2006 and are expected to hit $6.69 in 2016. The stock is selling at 10.80 times forward earnings and yields 2.30%. Check my analysis of Aflac for more information on the company.
Target Corporation (TGT) operates as a general merchandise retailer. This dividend champion has raised distributions for 49 years in a row. In the past decade, the dividend has risen by 19.60%/year. Earnings per share have risen from $3.21 in 2007 and are expected to hit $5.14 in 2017. The stock is selling at 13.90 times forward earnings and yields 3.40%. Check my analysis of Target for more information on the company.
T. Rowe Price Group, Inc. (TROW) is an asset management holding company. The firm provides its services to individuals, institutional investors, retirement plans, financial intermediaries, and institutions. This dividend champion has raised distributions for 30 years in a row. In the past decade, the dividend has risen by 16.30%/year. Earnings per share have risen from $1.90 in 2006 and are expected to hit $4.37 in 2016. The stock is selling at 16.70 times forward earnings and yields 2.90%. Check my analysis of T. Rowe Price for more information on the company.
W.W. Grainger, Inc. (GWW) distributes maintenance, repair, and operating supplies; and other related products and services that are used by businesses and institutions. This dividend champion has raised distributions for 45 years in a row. In the past decade, the dividend has risen by 17.40%/year. Earnings per share have risen from $4.24 in 2006 and are expected to hit $11.96 in 2016. The stock is selling at 19.30 times forward earnings and yields 2.10%. Check my analysis of W.W. Grainger for more information on the company.
Medtronic plc (MDT) manufactures and sells device-based medical therapies worldwide. This dividend champion has raised distributions for 39 years in a row. In the past decade, the dividend has risen by 14.30%/year. Earnings per share have risen from $2.41 in 2007 and are expected to hit $4.66 in 2017. The stock is selling at 18.90 times forward earnings and yields 1.90%.Check my analysis of Medtronic for more information on the company.
Franklin Resources, Inc. (BEN) is a publicly owned asset management holding company. Through its subsidiaries, the firm provides its services to individuals, institutions, pension plans, trusts, and partnerships. This dividend champion has raised distributions for 36 years in a row. In the past decade, the dividend has risen by 16.20%/year. Earnings per share have risen from $1.62 in 2006 and are expected to hit $2.70 in 2016. The stock is selling at 12.60 times forward earnings and yields 2.10%. Check my analysis of Franklin Resources for more information on the company.
Eaton Vance Corp. (EV), through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. It also provides investment management and counseling services to institutions and individuals. This dividend champion has raised distributions for 35 years in a row. In the past decade, the dividend has risen by 11.60%/year. Earnings per share have risen from $1.17 in 2006 and are expected to hit $2.09 in 2016. The stock is selling at 16.90 times forward earnings and yields 3%. Check my analysis of Eaton Vance for more information on the company.
Chubb Limited (CB) provides property and casualty insurance and reinsurance products worldwide. This dividend achiever has raised distributions for 23 years in a row. In the past decade, the dividend has risen by 11.60%/year. Earnings per share have risen from $6.91 in 2006 and are expected to hit $9.84 in 2016. The stock is selling at 13.20 times forward earnings and yields 2.10%. Check my analysis of Chubb for more information on the company.
Commerce Bancshares, Inc. (CBSH) operates as the bank holding company for Commerce Bank that provides retail, corporate, investment, trust, and asset management products and services to individuals and businesses. It operates through three segments: Consumer, Commercial, and Wealth. This dividend champion has raised distributions for 48 years in a row. In the past decade, the dividend has risen by 4.80%/year. Earnings per share have risen from $1.99 in 2006 and are expected to hit $2.74 in 2016. The stock is selling at 17.20 times forward earnings and yields 1.90%. This one is a company that I need to place on my list to post here within the next couple of weeks. Please stay tuned.
Full Disclosure: Long CB, EV, MDT, GWW, TROW, AFL, TGT,
- 13 Dividend Aristocrats for Further Research
- The importance of having your own unique investment process
- Taxable versus Tax-Deferred Accounts for Dividend Investors
- 24 Dividend Champions for Further Research
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