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Your best ideas might already be in your circle of competence

In a previous article I outlined the difficulties I am having in allocating new cash to my portfolio. However, I mentioned that I am comfortable holding the companies I own. This is because I believe that the companies in my dividend portfolio have excellent business prospects, and also have favorable business economics.

I have spent thousands of hours poring through annual reports, press releases, analyst reports, looking at financial trends, and trying to understanding each respective business. As a result I am relatively familiar with the companies I own. While I monitor positions frequently, I am not pulling the sell trigger unless there is a dividend cut. I do reserve the right to sell if other activities happen, that could cause me to question the business prospects for the company. For example, I have sold companies before, when I found comparable securities at much better valuations. In those occasions, I have traded up either by obtaining better growth prospects, or better yields.

Of course, if the securities I sold became attractive again, I would purchase them at the lower valuations. Unfortunately, great securities are typically close to being fairly valued, and quite often stay overvalued for extended periods of time. As a result, it is fairly rare to find comparable securities with similar business characteristics, while selling at better valuations.

This exercise helped me reach a Eureka moment: My best ideas are already in my portfolio It is true that some of them are overvalued, and not worth adding to at current prices. However, I am perfectly fine holding on to these stocks and doing nothing for 20 – 30 years. My second “a-ha” moment was that for many of the companies I do not own, but would consider to be “best ideas”, I am already familiar with them.

For many of the companies I own, I would welcome the next recession as a buying opportunity. Other than that, the problem I would be facing is that fresh capital will be accumulating whether I contribute money or not. As a result, I would have to find more uses for the capital. Luckily, I am well-versed in the components of the Dividend Champion and Dividend Achiever lists. I keep scanning them for opportunity, and learning about each business that I find appealing. For me, an appealing business is one that I expect to be around in 10 -20 and even more than 30 years.

For example, I believe that Hershey (HSY) would be around for the next 30 years (and beyond), while delivering a product that customers associate with quality that they are willing to pay a rising price for. This pricing power will deliver rising profits and dividends for the company’s shareholders. Unfortunately, while holding on to this cash machine could be a smart long-term strategy for existing investors, the stock is overvalued at 25.70 times forward earnings for new investors. However, I would keep monitoring the company, and would love to initiate a position at the next hiccup of the enterprise or during the next recession.

I also believe that the products of Brown-Forman (NYSE:BF.B) would be around for at least 30 years from now. The stock price is overvalued at the moment at 23 times forward earnings. However, I am not seeing a comparable alternative that is substantially cheaper, to make it worthwhile my time and effort to replace Brown-Forman with it. The other company needs to be comparable from a quality perspective, but from a valuation perspective needs to be both cheaper and also meet my entry criteria.

A few companies I already own, which I find attractively priced today include:

ConocoPhillips (NYSE:COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. This dividend achiever has raised distributions for 13 years in a row. Over the past decade, it has raised dividends by 15.10%/year. Currently, the stock trades at 11.20 times earnings and yields 4.10%. Check my analysis of ConocoPhillips.

Chevron Corporation (NYSE:CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend achiever has raised distributions for 26 years in a row. Over the past decade, it has raised dividends by 9.60%/year. Currently, the stock trades at 9.70 times earnings and yields 3.30%. Check my analysis of Chevron.

Dr Pepper Snapple Group, Inc. (NYSE:DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. This company has raised distributions since 2010. Currently, the stock trades at 15.30 times earnings and yields 3.20%. Check my analysis of Dr Pepper.

McDonald’s Corporation (NYSE: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 distributions for 36 years in a row. Over the past decade, it has raised dividends by 28.40%/year. Currently, the stock trades at 17.40 times earnings and yields 3.20%. Check myanalysis of McDonald’s.

Wal-Mart Stores, Inc.(NYSE:WMT) operates retail stores in various formats worldwide. The company operates in three segments: Walmart U.S., Walmart International, and Sam's Club. This dividend champion has raised distributions for 39 years in a row. Over the past decade, it has raised dividends by 18.10%/year. Currently, the stock trades at 14.60 times earnings and yields 2.50%. Check my analysis of Wal-Mart.

Target Corporation (NYSE:TGT) operates general merchandise stores in the United States. This dividend champion has raised distributions for 46 years in a row. Over the past decade, it has raised dividends by 18.60%/year. Currently, the stock trades at 16.10 times earnings and yields 2.50%. Check my analysis of Target.

Full Disclosure: Long BF-B, COP, CVX, DPS, MCD, TGT, WMT

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Dividend Growth Investor
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