Monday, December 16, 2013

Five Dividend Payers to Consider for 2014 and beyond

Many investors find it difficult to put more money in the stock market nowadays, given the rapid rise in stock prices this year. As stock indexes are hitting all-time-highs several times in 2013, it is very difficult to commit when you have talks of ending the stimulus, which could potentially cripple the already fragile economic recovery.

As a dividend investor, I do not pay attention to these items. Despite all of those negative factors, there are attractively valued companies in almost any market environment. The current one is no exception. I focus my attention on picking individual securities in businesses I understand, rather than the overall macroeconomic factors. I try to uncover companies which have strong competitive advantages, trade at fair valuations, and have catalysts for long term growth. I then buy them, and plan on holding them forever.

The goal of dividend investing is to generate a rising stream of income in order to pay monthly expenses. Dividend income is always positive and is more stable than capital gains, which makes it a preferred way to live off your portfolio. With dividend investing, your retirement income is not reliant on the wild swings of stock prices, unlike traditional asset depleting strategies like the four percent rule.

In other words, with dividend paying stocks you earn a positive return on your money no matter if the stock price goes up or down. The beauty of dividend growth stocks is that by regularly growing dividends, they provide investors with more cash over time, which also makes the stock more valuable to investors at the same time. As a result, a company that yields 3% today but grows dividends by 10%/year, would yield 6% on cost in 7 years and 12% on cost in 14 years.

I am finding value in the following companies, which have strong recognizable brands, sell at fair valuations and could increase earnings over the next 15 – 20 years. I believe that each one of these companies would be a very good addition to a diversified dividend portfolio. As mentioned above, these companies would be great long term holdings to hold “forever”. They are selling at good prices to acquire today, and are good candidates for holding in 2014 and for a long time after that.

Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has raised dividends for 46 years in a row. Over the past decade, Target has managed to boost dividends by 18.60%/year. Currently, the stock trades at 17 times earnings and yields 2.70%. Check my analysis of Target for more information about the company.

General Mills, Inc. (GIS) produces and markets branded consumer foods in the United States and internationally. This dividend achiever has raised dividends for 10 years in a row. Over the past decade, General Mills has managed to boost dividends by 8.70%/year. Currently, the stock trades at 17.70 times forward earnings and yields 2.90%. Check my analysis of General Mills for more information about the company.

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This dividend champion has raised dividends for 46 years in a row. Since the spin-off from parent Altria Group in 2008, Philip Morris International has managed to boost dividends by 15%/year. Currently, the stock trades at 16.30 times earnings and yields 4.40%. Check my analysis of PMI for more information about the company.

McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend champion has raised dividends for 38 years in a row. Over the past decade, McDonald’s has managed to boost dividends by 28.40%/year. Currently, the stock trades at 17.30 times earnings and yields 3.30%. Check my analysis of McDonald’s for more information about the company.

Realty Income Corporation (O) is a publicly traded real estate investment trust. This dividend achiever has raised dividends for 19 years in a row. Over the past decade, Realty Income has managed to boost dividends by 4.20%/year. Currently, the stock trades at 15.60 times Funds from Operations (FFO) and yields 5.90%. Check my analysis of Realty Income for more information about the company.

Full Disclosure: I have a position in all the companies listed above

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  1. I just bought MCD and TGT this month. I also hold KRFT, similar to GIS but with a 4% yield. Why do you prefer GIS?

  2. Any concern that Morningstar just removed TGT's economic moat rating down to no moat?

  3. I still like WMT more than TGT.

  4. DGI,
    Startling news today from MMM. A unexpected 35% unscheduled dividend increase (they usually announce a raise in the divi in February). MMM plans a increase in share buybacks and plans acquisitions. They have been commenting for a while about how great business has been. Got in around $80 a share. While it is looking a bit expensive, I'm not so sure now after this announcement. You gotta love it!


  5. DGI,

    Like the picks!

    TGT is trading significantly below my cost basis, so I'm looking to average down when I get some capital.

    Best wishes!


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