Showing posts with label dividend stocks. Show all posts
Showing posts with label dividend stocks. Show all posts

Wednesday, February 19, 2014

Types of dividend growth stocks

Throughout my experience as a dividend growth investor, I have identified three types of dividend growth stocks. Each type of equities comes with a distinct set of yield and growth characteristics, which the enterprising dividend investor can use to their advantage. In my dividend portfolio, I own all types of equities, in order to benefit from long-term growth and also to add some sustainable high income in case growth doesn't turn out as expected.

The three types include:

The first type includes high yielding stocks, which typically grow distributions more slowly. Most companies in this category include utilities, telecom, real estate investment trusts and many master limited partnerships. Many of these companies are natural monopolies over a certain activity such as electricity transmission in a particular area. There could be government regulation which ensures the monopoly status in a particular region, but also limits the amount of profits and returns on capital that companies could enjoy. Others, as in the case of REITs, have properties which are already established, and would take a lot of effort from competitors to replicate that success. After all, the chances of a competitor building a new mall next to an established one are very low, as it takes time to build something and might be impractical to engage in a price war to compete for customers when you have steep upfront costs to foot. These companies generate stable streams of earnings, which do not grow quickly, but are dependable. This results in fewer dividend cuts during recessions. Because of their slow growth, such companies typically yield more than the market. Examples of companies in the first type include:

Realty Income (O) has regularly raised distributions for 20 years in a row. The company has managed to increase dividends by 6%/year over the past decade.Yield: 5.30% (analysis)

Kinder Morgan Partners (KMP)  has regularly raised distributions for 18 years in a row. The partnership has managed to increase dividends by 7.40%/year over the past decade.Yield: 6.80% (analysis)

AT&T (T) has managed to increase dividend for 30 consecutive years. Over the past decade, the company has managed to boost dividends by 4.90%/year.Yield: 5% (analysis)

The second type includes companies in the sweet spot. These are dividend stalwarts, which generate strong earnings growth, and have average or above average yields. Some of these companies tend to satisfy everyday consumer needs for medicine, cosmetics, toiletries, food, gas etc. They tend to have strong brand names and wide moats which help these companies to charge a premium price to customers. The perceived qualities of these everyday products or services, make them a preferred choice for customers, who might be willing to go out of their way in order to find what they are looking for. For example, consumers would prefer Tylenol to its generic version. Others loyally purchase Gillette shaving products on a regular basis, without hesitation. These repeatable purchases, multiplied by millions of consumers worldwide, lead to a diversified stream of revenues for the companies that sell those produtcs. These companies also invest billions in research to identify new product or services solutions for their customers, identify efficiencies to increase profitability and expand organically or through acquisitions. Examples of the companies that will provide current yield with dividend growth include:

Coca-Cola (KO) has boosted distributions for 51 years in a row. The company has managed to increase dividends by 9.80%/year over the past decade.Yield: 3% (analysis)

Johnson & Johnson (JNJ) has regularly raised dividends for 51 years in a row. The company has managed to increase dividends by 10.80%/year over the past decade.Yield: 2.90% (analysis)

Wal-Mart Stores (WMT) has managed to increase dividend for 39 consecutive years. Over the past decade, the company has managed to boost dividends by 18%/year.Yield: 2.50% (analysis)

McDonald's (MCD) has boosted distributions for 38 years in a row. The company has managed to increase dividends by 22.80%/year over the past decade.Yield: 3.40% (analysis)

The third type of dividend growth stocks includes companies with strong earnings and dividend growth, which tend to have below average yields. These are the companies that are in a growth stage, and they tend to reinvest most of their earnings back into growing the business. Such companies have the potential to deliver high total returns over time, and the rapid dividend growth from a low base could deliver double or even triple digit yields on cost after a couple decades. Some of these stocks are typically richly priced, which is why the best time to purchase them is during market declines. Investors have to closely monitor these companies, in order to make sure that future growth can materialize. Otherwise, if growth slows down, shares that are trading at higher multiples could fall pretty quickly, even if earnings are still increasing. Some of the companies on my dividend growth wish list include:

Family Dollar (FDO) has boosted distributions for 38 years in a row. The company has managed to increase dividends by 13.60%/year over the past decade.Yield: 1.70% (analysis)

Casey's General Stores (CASY) has managed to increase dividend for 14 consecutive years. Over the past decade, the company has managed to boost dividends by 19.10%/year.Yield: 1.10% (analysis)

Yum! Brands (YUM) has boosted distributions for 10 years in a row. The company has managed to increase dividends by 15.10%/year over the past five years.Yield: 2% (analysis)

Full Disclosure: Long O, KMR, KO, JNJ, WMT, MCD, FDO, CASY, YUM

Relevant Articles:

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Monday, June 3, 2013

My Dividend Portfolio Looks Much Better than I Expected

Many of my stocks reached all-time-highs over the past few months. When I purchase my stocks, I usually expect a decent current yield in the 2% – 4%, followed by a P/E of 15 – 20, and a growth in earnings and dividends that averages at least 6%/annually. So far, it has averaged 7% - 10%. As a result, short-term fluctuations in the price of a company which I purchase for say $100/share today which yields 3% and trades at a P/E of 16 would not bother me too much. I would expect such company to realistically trade at about $200/share in a decade or so, still yield approximately 3% and trade at a P/E of about 16. Over that decade, it could trade as high as 25 times earnings and as low as 10 times earnings. The only difference is that its earnings and dividends have doubled over the period. My whole premise of the idea that I won’t sell even at a 1,000% gain is based on this mental model.

Of course, in real life, things never progress in a linear fashion. If you looked at P/E ratios of companies like Wal-Mart (WMT) or Coca-Cola (KO) over the past 10 - 15 years, you would not be surprised to see them over 30 in not one, but at least several occasions. Over the past four years, most of the companies I have usually added to were the likes of Colgate-Palmolive (CL), Johnson & Johnson (JNJ) & Kimberly-Clark (KMB). Right now many of these companies look very overvalued, which is pretty scary. I actually isolated the following companies, whose P/E ratios per Yahoo! Finance exceeded 20. I then excluded MLPs, REITs for whom earnings per share and P/E ratios do not provide comparable results.


Being the lover of annual reports, and digging around data, I went through this list searching for the answer of an obvious question. The question running through my mind was whether it still made sense for me to hold on to these companies. Now, I am not a die-hard buy and hold despite everything type of investor, and a crazy valuation could lead me to sell an otherwise fantastic company. This of course depends on each particular situation. However, I do believe that taking small profits on the few amazing ideas I might be lucky enough to stumble upon in my lifetime would probably be very detrimental to my finances. I could sit-out temporary overvaluations in securities, for which future growth could compensate me well for holding on during a moderate level of craziness. Craziness for a company like Brown-Forman (BF-B) could be a P/E above 30, whereas for a company like Con Edison (ED), craziness could be anything above 18 – 20 times earnings.

However, in my studies of investing, I have learned to dig for information. Most of the information on earnings per share from sources like Yahoo! Finance might be abnormally low, because certain one-time adjustments have reduced it. My next step would be to look at analyst estimates for the current year and the next one, coupled with digging around press releases from the company, in order to evaluate whether those estimates have any merit.

Just by looking at P/E ratios, the stocks in the table look very overvalued. However, if you look at forward earnings, only a couple of those look somewhat overvalued.

For example, looking at Johnson & Johnson (JNJ), it looks terribly overvalued at 23 times earnings. However, by applying forward EPS of $5.41/share, the stock looks much more reasonably priced. While not included on this table, Kimberly-Clark (KMB) looks expensive at 21.06 times earnings and EPS of $4.60. But based on 2013 forward earnings of $5.73/share, it looks cheap at 16.90 times forward earnings. Of course, if analysts are overly optimistic on this company and actual earnings are significantly less, then Johnson & Johnson would be overpriced today.

For those companies that still look overvalued, I am going another step. I estimate what the company is going to earn in a decade, then estimate the total in dividends I will receive over the next decade and then slap a P/E multiple for this time in 2023. My estimates are conservative in regards to growth, although not as conservative in regards to multiples.

For example, Brown-Forman (BF-B) is expected to earn $2.70 in 2013. I believe that by 2023, it could easily earn $6/share and trade at a P/E of 20. In addition, I would expect that Brown-Forman would pay its shareholders approximately $20 -$25/share over the next decade. This means that investors paying $70/share today, might end up doubling their money in a decade. This translates into a return of approximately 7%/year. Those of you reading this article in 2023 would likely use this article as an example of why people should never make predictions. Either way, it is my best case based upon widely available information on consumption on liquor worldwide, historical growth rates, and assumptions for the future revenues, earnings and dividends.

For Automated Data Processing (ADP), I like the fact that it offers business services such as payroll processing to small and medium sized businesses. These businesses outsource certain functions like payroll to ADP, which benefits from scale of transactions processing, constant improvement in technology and depreciation in technology equipment prices. But most importantly, ADP benefits from building and maintain relationships with businesses, which would be less likely to switch processors just to save a few bucks. Over the past decade, EPS grew by 5%/year. If we project this growth forward, this means ADP would likely earn $4.82/share in 2023, which at a P/E of 20 translates into $96.40/share. If dividends also grow at 5%/year, this means that an investor can expect to receive $23 in dividends over the next decade. This translates into a total return of about 6%/year. Check my analysis of ADP.

I purchased Visa (V) in 2011, because I liked the story about credit card processing business, the fact that there are only two major companies in the game, and the opportunity behind growth of cashless transactions worldwide. These were the reasons why I initiated a position in the stock despite the fact that the company has only been publicly traded since 2008. I expect Visa to either double or triple earnings per share over the next decade. This could translate in EPS ranging from $15 to $20 by 2023. At a P/E of 20, this translates into $300 - $400/share. I expect dividends to increase at the high end of these projections, and triple by 2023. Thus, I wouldn’t be surprised if Visa shareholders receive about $25 in dividends over the next decade, with annual dividends reaching $4/share that year.

The return assumptions for the three stocks above, ignore dividend reinvestment, which would likely increase the annual returns slightly.

Nucor (NUE) is the odd one out, as it is a cyclical stock. The demand for steel fluctuates with the cycles in the economy, meaning that profits and revenues are highest at the peak of the cycle, and very depressed at the trough. This is why cyclical companies usually appear overvalued when their stock prices are low, and cheap when their prices are high. During the last boom, Nucor earned $5.98/share in 2008. In addition, the company kept raising its regular dividend even during the lean years after that. The thing that appeals to me is the fact that during the boom years through 2007 – 2008, Nucor paid special dividends every quarter to shareholders. Management was smart enough to realize that this boom in profits would likely be a short term event, yet they still wanted to keep the streak of dividend increases going, and reward long-term shareholders as well. This is why if you simply look at trends in dividends per share, you might see a decrease in 2008. However, the regular dividend amount was never cut, but actually increased. If the US economy keeps expanding, we might see growth in earnings per share, and a lot of special dividends from Nucor. This is the one stock where I cannot provide a ten year guidance of earnings and dividends, but would likely hold on to either way. You get a stable and slowly rising dividend payment, plus a “lottery type” opportunity for special dividends when times are really good. Check my analysis of Nucor.

As a long-term investor, my holding period is in years for some stocks that don’t work out as well, to decades for the ones that keep delivering results over and over again. As such, it was helpful for me to go over my positions above. Overall, when I looked at what seemed to be the most overvalued stocks in my portfolios, I found out that there is nothing to be scared about. Some of the valuations were high either because of one-time events depressing earnings per share, and in those situations forward earnings per share showed a more reasonable valuation. In other scenarios, I reassessed the reason as to why I held on to certain stocks, and whether it still made sense to hold on to them.

Full Disclosure: Long D,V, NUE,TFX, BF-B,K,LOW,CL, EV, ADP, JNJ, YUM, ED, KMB,

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Tuesday, May 14, 2013

Attractively valued dividend stocks to consider today

With the stock market hitting all-time highs pretty much every day, there are not that many stocks that have low valuations today. Some of my favorite companies such as Coca-Cola (KO) are trading at over 22 times earnings, which is above what I am willing to pay for this otherwise excellent business.

As a result I focused on the list of dividend champions, and uncovered the following attractively valued companies with low p/e ratios. I tried to look for dividend champions with yields above 2%, payout ratios below 60% and P/E ratios around 16 or lower. Despite the fact that current yields on this list are low, these companies offer good values in today’s overheated market. With low dividend payout ratios and attractive dividend growth, these low valuations offer a great entry point for investors who have at least ten or twenty years to let the investment compound.


I also added Ameriprise Financial (AMP) to this list, because I was researching it for inclusion to my portfolio, despite the fact that the company has raised distributions for less than 25 years. As most of these companies yield less than 2.50%, I would monitor them and try to add on dips. For example, back in April, I initiated a position in IBM (IBM) when the stock market punished the stock below $200/share, thus locking a 2% yield for a low valuation business with excellent EPS growth potential. Early in 2013 I was able to add to positions in Yum! Brands (YUM) and Family Dollar (FDO) after investors punished the stocks as well. That is why any type of irrational weakness must be explored by the enterprising dividend investor. Despite the high P/E on Johnson & Johnson (JNJ) today, it looks like the company trades at a P/E of around 15 based on forward 2013 estimates, so it could be one company to check out. The ability to look beyond the numbers could uncover attractively valued stocks in todays market.

While I would not be adding to my positions in Coca-Cola (KO) or Colgate-Palmolive (CL) at current valuations, the 13 companies listed above will be the types of stocks to consider when adding new money to my portfolio on dips. This should be done of course only after thoroughly researching the business, and then paying an attractive entry price.

The traditional blue chip companies I have held on for so many years, such as Coca-Cola, Colgate-Palmolive and many others which have attracted my new capital contributions for the past five years are no longer making sense to buy. As a result, the overvalued markets have caused me to be more creative in uncovering successful businesses, that can deliver better performance in the future. I am willing to purchase a stock yielding 2% today, if the valuation is low at say 15 times earnings and if there are catalysts for future growth. At the end of the day, a company yielding 2%-2.50% that trades at a P/E of less 15 that grows dividends above 7%/year will be more valuable than a company yielding 3.00%, trading at a P/E of over 22 and growing at 7%.

I would try to avoid value traps during the individual analysis I perform. I would try to stay away from known problems that can be disastrous. As a result, I am avoiding technology stocks like Intel (INTC), which might not be able to grow earnings per share over the next decade per my analysis of the situation. In addition, I did not include Cardinal Health (CAH) on this list, because it has been losing customers such as Walgreens (WAG), and has contracts with CVS (CVS) up for renewal in June. That is despite the fact that Cardinal Health has raised dividends for 17 years, trades at a P/E of 13.60 and yields 2.60%

I would much rather avoid losing money, than miss out on the next hot stock. The importance is to focus on quality, which unfortunately usually lies in the eyes of the beholder. A small leak can sink a big ship. Companies which are losing customers, companies that have advantages which are not durable (such as tech companies), or companies which are cyclical are to be avoided. I am not interested in companies which look undervalued today, but whose profitability might suffer, thus making them overvalued in hindsight.

Full Disclosure: Long IBM, KO, CL, AFL, APD, CVX, MDT, UTX, WMT, WAG, AMP

Relevant Articles:

Is Intel Corporation the Ultimate Value Trap for Investors?
How to invest when the market is at all time highs?
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