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The adrenalin rush of buying the next undervalued-turnaround-misunderstood stock is intoxicating — more so if the stock jumps just after you bought it. But the security of the boring dividend-paying stocks is hard to ignore.
Being quite young and at the beginning of my investing life, I have ignored dividend growth investing so far. But I realize now that I need to start allocating a part of my portfolio to dividend-paying stocks.
You can find many articles which describe ways to pick dividend growth stocks.
In this article, I want to concentrate on stocks I am considering as a possible addition to my portfolio. Most of these stocks are near their yearly lows and have a track record of paying dividends which have outgrown inflation.
The first pick is GlaxoSmithKline Plc (GSK). Glaxo is a British pharmaceutical giant with £27.4 billion in sales (in 2011). It has three main businesses and the sales are divided among them as follows.
Few of its major consumer brands are Horlicks, Iodex, Aquafresh, Sensodyne, Panadol and Lucozade.
Like many of its peers, Glaxo is grappling with patent cliff. Its bestselling drug Adavir/Seretide with sales of £7 billion in 2009 lost its patent protection in the U.S. in 2010 and is going to lose it in Europe in 2013. Even with such a huge setback, Glaxo’s sales have not suffered by that much.
Glaxo is a very shareholder friendly company. It was formed by a merger in 2000 and so the dividend history for the company is only 12 years old. In the chart below you will see the dividend figures for 2002 to 2011.
The total return of Glaxo (dividend plus buyback) is around the average of its peers.
The compounded increase rate for the dividend was 6.4%. At current prices, the company has a yield of 5.3%.
Glaxo is Neil Woodford’s second largest holding and makes up nearly 8% of his portfolio. If you do not know Mr. Woodford, he is arguably the most famous investor from Britain.
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You don't discuss it, but be careful about future projections from GSK's pipeline. There's little if anything on the horizon. For at least the past decade their Discovery departments worldwide have been barren of success - despite huge investment. Being in the business, my view is they simply did not have, and still do not have, drug hunters with the right set of skills - unlike the 70s and into the 80s when they were one of the best.
Neil Woodford may be the most prominent UK investor, but certainly not the best in my opinion. Earlier this year he unloaded all his Tesco holdings after the company posted reduced outlook, straight into the arms of a waiting Buffett who was scooping it up. His portfolio is currently loaded with dividend-producing pharma stocks like GSK and AZN - safe bets.