Opportunities remain rather limited as the broader stock market still trades near all-time highs. But dividend growth investors who seek value, like myself, simply see this as a challenge to sharpen the proverbial pencil and shop for bargains.
I’m not saying I see any super cheap stocks out there right now, but I do see shares in some high-quality businesses trading at fair prices or near fair prices. And one can do much worse than invest in high-quality businesses at fair prices, especially if the investment time horizon is rather long-term in nature.
I initiated two new positions last month, and lo and behold, the market is doing me a favor by discounting shares in these businesses even more. I always look for an excellent opportunity to average down on shares I already own, so naturally I’m most interested in shares in these two businesses specifically. However, there’s also a third business I’m currently invested in and also looking to add to. I’ll discuss all three stocks below.
Deere & Company (DE)
I initiated a small position with this farm equipment powerhouse just last month at $88.22 per share. Shares ended last week at $86.17. If I liked it above $88, you can imagine I like it even more at near $86. Not a major pullback in price by any means, but I’ll take what I can get here.
As I referenced in the above article, I thought there was already a lot of value in shares with a P/E below 10. Even with a likely drop in earnings over the next two fiscal years or more, the long-term story looks great. You have to imagine there’s going to be more people alive on this planet two or three decades from now, and they’re going to be hungry. Deere provides the equipment necessary to grow the food to feed these people.
And growth has been fantastic. Revenue has compounded at a 7.34% rate annually over the last decade. Meanwhile, earnings per share has compounded at an annual rate 14.07% over the last 10 years.
But the real story is the dividend, and the growth of it. The yield is pretty solid right now at 2.79%, backed by a 11 consecutive years of dividend growth, and a 10-year dividend growth rate of 16.3%. Furthermore, the dividend is well-covered with a payout ratio of just 26.3%. So Deere can suffer a shock to earnings and continue paying the dividend just fine.
DE remains at the top of my watch list for a purchase this coming month.
Visa Inc. (V)
Another recent purchase for me, as I also initiated a position with this fast-growing payments processing business last month. Shares are trading at roughly the same price I paid, but I already thought that was a good price, or I wouldn’t have initiated a position in the first place. Although I plan for V to be a rather small position, I wouldn’t mind doubling my investment in this business here.
There’s just so much to like here, namely the growth in the business. Revenue has compounded annually at a rate of 14.26% over the last five years, while EPS has a CAGR of 25.09% over this same time period. These numbers are pretty eye-popping.
Now, I’m obviously typically a proud value investor, so V is a hard stock to fit in my portfolio. But the reason I like V is for the supercharged dividend income. Sure, the yield is a bit pitiful at just 0.74%. But the dividend has grown at an annual rate of 45.9% over the last five years. That’s some pretty good stuff. And I’m willing to bet that the dividend will continue to grow at a rate well into the double digits for the foreseeable future.
Visa is the type of investment that you have to have a lot of faith in, simply because there’s a lot less current income to keep an investor satisfied. You’re not getting as much of your capital returned to you in the form of a large dividend, so you’re counting on the growth. But as long as I keep V a small portion of my portfolio I’m okay with that.
General Electric Company (GE)
I last purchased shares in this massive conglomerate back in March of this year. Shares are basically flat since then, which affords me an opportunity to do a quick look at my previous analysis and buy up additional shares at the same price.
The last decade was pretty ugly for GE, both for the stock and the business. Growth has basically been non-existent, and the dividend was cut during the height of the financial crisis. However, we invest for where a company is going to go, not for where it’s been.
And I think GE has a pretty bright future. The company has massively changed over the last few years as management continues to focus more on core industrial operations and less on financial and media operations. They sold off the remaining 49% of NBCUniversal last year, and have already started the process of dramatically shrinking GE Capital. Meanwhile, the focus on the industrial side of the business continues to take shape, with the purchase of Alstom’s energy assets and strong operations in aviation. The company’s massive $200+ billion backlog is evidence of this.
The company trades at a moderate valuation of under 18 times TTM earnings, with a rather attractive entry yield of 3.41%. The payout ratio leaves room for further dividend growth, at 60.3%. And since the dividend cut in 2009, the company has been regularly and aggressively raising the dividend. I suspect that will continue.
Full Disclosure: Long DE, V, and GE.
What’s on your watch list for August? Think any of these stocks make sense here?
Thanks for reading.