I usually screen the list of dividend champions and dividend contenders about once every month using my entry criteria, in order to find attractively valued securities. In addition, I also review dividend increases every week, in order to uncover hidden dividend gems.
After I come up with a list of cheap companies, I try to perform a more detailed review of financials, business prospects and competitive strengths, in order to gain a more thorough understanding of the company’s business model.
In most cases however, chances are that I have analyzed before the companies on the dividend champions and dividend contenders lists. As a result, I just check the last time anything material happened between my analysis time and the purchase date. The beauty of dividend investing is that knowledge is cumulative – if you understood the business model of Coca-Cola in 2011, along with risks and opportunities, your knowledge is most likely still relevant. Things could change over time of course, as Coca-Cola (KO) acquired North America bottling operations from CCE in 2010. For most of your dividend champions, there are not going to be changes in the business model over several years. By reviewing the annual reports, one can easily keep up with any other annual changes like new markets, new products as well as obtaining information about the most recent trends in fundamentals.
Unfortunately, most of the companies I usually focus on have been overpriced. For the companies that I find attractively priced today, I already have an above average allocation to them. Unfortunately, my principles of holding a diversified portfolio prevent me from concentrating my holdings too much. For example, I find Phillip Morris International (PM) and Chevron (CVX) to be attractively priced today. Unfortunately, all two of these companies are in the top five of my holdings. As a result, I would need to look elsewhere for opportunities.
There are also many opportunities with the oil and gas majors these days, many of which trade under 10 times earnings, and offer above average yields. However, investors should avoid concentrating portfolios too much in a given sector. This is because oil and gas companies earnings could suffer if commodity prices dropped from here. If your income portfolio has more than 15 - 20% in a given sector, chances are you might be overly concentrated to it.
Another attractive factor behind dividend investing however is that once you select a great company at a good price, you can simply hold on to it. You can choose to perform small portfolio tweaks here and there, but even if you don’t you should still do just as well doing little. Monitoring your positions is important as well however, as things do change over time. If I were retired and living off my portfolio, I would not really care whether stocks are up or down, as long as fundamentals are intact and companies are showering me with cash on a recurring basis. As an investor in the accumulation phase however, the problem is that while you would benefit from dividend growth, you would fail to turbocharge your income growth because you are not reinvesting your pile of growing dividend payments.
I have been able to identify several companies with low price/earnings ratios, adequate dividend coverage and yields, which have good long-term business and dividend growth prospects:
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. The company has raised distributions for 30 years in a row, and has a five year dividend growth rate of 10.90%/annum. Currently, the stock is trading at 9.70 times earnings and yields 2.30%%. Check my analysis of Aflac.
Ameriprise Financial, Inc. (AMP), through its subsidiaries, provides a range of financial products and services in the United States and internationally. The company has raised distributions for 9 years in a row, and has a five year dividend growth rate of 20.60%/annum. Currently, the stock is trading at 17.20 times earnings and yields 2.40%. Check my analysis of Ameriprise Financial.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has raised distributions for 26 years in a row, and has a five year dividend growth rate of 9.20%/annum. Currently, the stock is trading at 9.60 times earnings and yields 3.10%. Check my analysis of Chevron.
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, and has a five year dividend growth rate of 13.10%/annum. Currently, the stock is trading at 17.30 times earnings and yields 3.80%. Check my analysis of Philip Morris International.
Target Corporation (TGT) operates general merchandise stores in the United States. The company has raised distributions for 46 years in a row, and has a five year dividend growth rate of 20.50%/annum. Currently, the stock is trading at 16.80 times earnings and yields 2.40%. Check my analysis of Target Corporation.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised distributions for 39 years in a row, and has a five year dividend growth rate of 13.50%/annum. Currently, the stock is trading at 15.40 times earnings and yields 2.40%. Check my analysis of Wal-Mart Stores.
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. The company has raised distributions for 13 years in a row, and has a five year dividend growth rate of 13.10%/annum. Currently, the stock is trading at 10.70 times earnings and yields 4.20%. Check my analysis of ConocoPhillips.
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. The company has raised distributions for 36 years in a row, and has a five year dividend growth rate of 13.90%/annum. Currently, the stock is trading at 18.20 times earnings and yields 3.10%. Check my analysis of McDonald’'s.
In modifying my entry criteria, I can accept a shorter streak of dividend increases, and even a lower current yield. However, I would never sacrifice on company quality, and I would not purchase shares trading above twenty times earnings.
Full Disclosure: Long AFL, CVX, PM, TGT, WMT, COP, APD
- High Yield Dividend Stocks in Gurus' Portfolio
- Top dividend stocks of Warren Buffett
- Top dividend stocks of George Soros