Wednesday, January 9, 2013

Load up on dividend stocks from a fiscal cliff selloff

Nowadays, everyone knows what the fiscal cliff is all about as news channels, websites and newspapers have explained everything there is to the matter. Now that we are past “fiscal cliff” territory, the markets have been jittery. Despite the recent relief rally, some spending deals have only been postponed by a few months. In addition, the uncertainty around the US debt ceiling is another factor that could weigh in on investors sentiments.

Fears of the effect of this fiscal cliff and hitting the debt ceiling on the economy, could drive stock prices down. As a dividend investor however, my holding period is forever. I am a firm believer that if I choose the companies with the right fundamentals, with solid competitive advantages and a strategy to grow earnings, I can ignore market fluctuations. This is particularly true, since I purchase dividend stocks at attractive valuations. Many investors view stocks simply as lottery tickets, and Wall Street is viewed as a giant casino. These investors are forgetting the fact that stocks represent ownership of real businesses that provide something of value to their customers.

I focus on businesses generating growing amounts of excess free cash flow and then regularly raise dividends. As dividends always represent a positive return on investment, I would generate returns even if the market is down. In addition, even if the markets closed for 5 or 10 years, my investments would still generate a positive cash return on aggregate in the form of dividends.

If the fiscal cliff sends stocks tumbling by 10% - 20%, I would be a buyer on dips. Many companies with solid operating performance would be even cheaper. A market decline also offers the opportunity to buy shares in companies, which are perennially overvalued.

I plan on adding to my positions in the following companies on dips:

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company has raised distributions for 50 years in a row, and has raised them by 9.80%/year over the past decade. Currently, Coca-Cola trades at 19.70 times earnings and yields 2.70%. I would be a buyer if the stock drops to $34 - $35/range. Check my analysis of the stock for more detail.

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised distributions for 5 years in a row. Currently, Philip Morris International trades at 17.30 times earnings and yields 3.90%. I would be a buyer on dips. Check my analysis of the stock for more detail.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised distributions for 38 years in a row, and has raised them by 18.10%/year over the past decade. Currently, Wal-Mart Stores trades at 14.20 times earnings and yields 2.30%. I would be a buyer on dips below $64/share. Check my analysis of the stock for more detail.

YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally. The company has raised distributions for 9 years in a row, and has raised them by 17.80%/year over the past five years. Currently, YUM! Brands trades at 20.10 times earnings and yields 2%. I would be a buyer on dips below $54/share.

The following stocks have the potential to grow earnings over time, which should increase their value. In addition, increased earnings would allow these companies to boost investor dividends.

Full Disclosure: Long KO, YUM, PM, WMT

Relevant Articles:

Wal-Mart Stores (WMT) Dividend Stock Analysis 
Coca-Cola Company (KO) Dividend Stock Analysis 
PepsiCo (PEP): A Better Value than Coca Cola (KO)
How to get dividend investment ideas

This post was included in the Carnival of Personal Finance #396 hosted by Financial Coach Adam Hagerman.

1 comment:

  1. I've been thinking myself that stocks will go down further as we approach the debt ceiling limit again. We will have to wait and see.


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