Surprised?
I had a little extra time on my hands before jetting off to Omaha to see Warren Buffett (Trades, Portfolio) in person, so I figured I’d make use of it.
I didn’t think I’d be able to put another post out before the end of the month, but I just have so many ideas in my head at all times. And one of those ideas right now is attractively valued dividend growth stocks for next month’s round of buying. I’m always on the hunt with my BB gun in tow, and May should be no different.
What you’ll see below are some targets I’m looking at for the month of May. I think they all offer quality, value, and growth… to varying degrees. And this watch list is obviously customized to my specific needs and portfolio, so you might be looking at totally different stocks. But I think there’s a lot to like here and a great place to start additional research if you see something you like.
As always, I tend to telegraph my purchases beforehand, leaving little to surprise. So the odds are good that I’ll end up purchasing one or more stocks from the list below during the month of May. I anticipate having enough capital for at least one stock, but it’s quite possible, depending on how things go, that I’ll be able to make two or three purchases. I still have some free trades stored up with my Scottrade account, so I may make use of those.
Let’s see what kind of opportunities we might have!
Union Pacific Corporation (UNP, Financial)
This is a stock I’ve been eyeing for some time now, as it also made an appearance on last month’s watch list. And there’s a good reason for that: it’s an outstanding business. With amazing built-in competitive advantages, I’d love to be able to build a position in this company. The stock is down more than 10% YTD, which seems to be an opportunity here. This stock would make a great complementary investment to my holding in Norfolk Southern Corp. (NSC). Railroads are truly one of my favorite business models, so I’d like to eventually get my hands on a few different high-quality railroads, diversifying across geography and shipping mixes.
UNP has increased its dividend for the past nine consecutive years. But even more impressive is the dividend growth – the five-year dividend growth rate is an astounding27.3%. Meanwhile, the current yield of 2.06% is more than 30 basis points higher than the five-year average. The P/E ratio of 18.23 indicates the stock is roughly fairly valued here, but that’s a discount to the broader market even while the company has grown at an outstanding rate over the last decade. UNP is currently at the top of my list.
W.P. Carey Inc. (WPC)
I initiated a position in WPC last month and the stock is now about 3.5% lower. I tend to look to average down on a stock after it’s fallen at least 5%, but I think WPC is already quite attractively valued here. This real estate investment trust’s quality is very clear, with a great track record of growth, excellent diversification across countries and industries, and great metrics in terms of tenant management and occupancy rates.
The stock currently yields 5.88%, which is certainly appealing in this low-rate environment. Meanwhile, you get a 10-year dividend growth rate of 7.5% on top of that, with a growth rate that’s actually accelerating. And though it’s not a household name, WPC has actually increased its dividend for the past 18 consecutive years. The P/FFO is 14.20right now, which I think offers a lot of value. I recently performed a dividend discount model analysis and concluded that the stock could be worth up to $99/share. Just a lot to like here. And since I initiated a rather small position in the company, I have some room here to double it in the short term while still allowing myself some room for further opportunities down the road.
Apple Inc. (AAPL, Financial)
Apple was one of two tech stocks I bought last month – the other being Microsoft Corporation (MSFT). Both had excellent quarters, but MSFT’s stock has shot up past the price at which I’d be willing to pay. So that leaves AAPL still available for me. I have a very small position here, but I’m definitely willing to increase it. Revenue for FQ2 was up more than 27% year-over-year, which is incredible when you look at the base from which it increased – and revenue beat expectations by $2 billion. Don’t hear of something like that everyday. They also increased the dividend by 11% and upped the buyback authorization by $50 billion to $140 billion total. Lastly, growth in China is particularly encouraging, with China revenue up 71% YOY.
I valued AAPL just last month and concluded it’s roughly fairly valued right now. But I’m never opposed to paying a fair price for a great business; it’s only overpaying that I admonish. The only issue is that I valued the stock with 15% dividend growth for the first ten years; this most recent increase is below that. Nonetheless, this is a great business that I think is roughly worth its asking price right now. Furthermore the P/E ratio of 15.90 is actually lower now than it was last month after the blowout quarter. The new yield of1.62% isn’t much to write home about, but the dividend is growing fairly aggressively.
Diageo PLC (DEO, Financial)
This is probably a dark horse for this month, but it’s a stock I’ve long wanted to get my hands on. Though recent results haven’t been fantastic with declining volume and flat revenue growth, this is the world’s leading producer of branded alcoholic beverages. Brands like Johnnie Walker, Smirnoff, Crown Royal, and Captain Morgan are just a sampling of what DEO offers. This is a long-term investment in a company that is experiencing what will likely be short-term issues (including currency effects). I’m betting the world won’t stop drinking the branded beverages DEO produces, which I think allows for odds that favor me.
The stock isn’t particularly cheap, however. The P/E is roughly 21 right now. But the yield of 2.99% is about as high as it’s been over the last five years and DEO has increased its dividend for five consecutive years (in dollar terms). The five-year dividend growth rate is a respectable 8.3%, especially in relation to the yield. It’s not my favorite stock right at this moment, but I do hope to initiate a position at some point. I’m definitely keeping my my eye on DEO.
Archer Daniels Midland Company (ADM, Financial)
This stock made my watch list for March, but I just still haven’t found the right mixture of capital and opportunity to pick this one up. ADM is one of the world’s largest agricultural commodity processors, and, like DEO, the odds are on the long-term investor’s side here as the world will very likely continue to eat and require ADM’s services. This is an industry that I’m not exposed to yet, and I can’t think of a better company to start things off with. The only thing I worry about here is that ADM provides a commoditized product with very little pricing power. But their long-term track record is evidence that they continue to do well over long periods of time.
ADM has increased its dividend for the past 40 consecutive years. That speaks for itself, but if you need more proof of quality – the 10-year dividend growth rate is 12.3%. Combining that with an entry yield of 2.29% and you can see why there’s a lot to like here. The stock appears attractively valued right now with a P/E ratio of 14.25. This is one of the few stocks with 40 or more years of dividend growth that I’d like to own but don’t yet.
Conclusion
So that’s where my attention is currently at. I’m seeing some opportunities to not only increase the size of recently initiated stakes in WPC and AAPL, but also a very real chance to initiate a position in one of the other companies listed above. It’ll really just depend on how much capital I have available over the coming weeks.
I can see myself doubling AAPL with another small transaction, which would possibly leave enough capital left for two other stock purchases. UNP and WPC are most appealing to me right now in that regard.
Could be another exciting month. So stay tuned!
Full Disclosure: Long NSC, WPC, AAPL, and MSFT.
