The last month has been a roller coaster ride in the stock market. I love waking up in the morning and reading about the pre-markets and the developments that occurred overseas while I was asleep. Every time I read and hope for a downturn so I can benefit as much as possible as a dividend investor, whether it is from initiating a new position, lowering my cost basis in a stock I already own, or receiving a few extra fractional shares from a DRIP. A few weeks ago I woke up and there was a sudden decrease in the market. Sadly, I froze….I didn’t know how to allocate my idle cash and it turns out I missed a golden opportunity. I learned a very important lesson from this experience and going forward I am going to maintain a list of five stocks that I will always buy so I will be able to react instantaneously the next time the market decides to suddenly drop. After weeks of consideration, I have compiled the first installment of this list. Did any of the stocks you currently own make the cut? Let’s find out.
The first question on my mind was “where do I even start?” Should I look exclusively at stocks I currently own or should I search for new stocks? Should I set a minimum yield? You get the picture. Here were some of the requirements I used to screen stocks for this list. These requirements didn’t narrow my pool down to just five stocks since there are a lot of companies that meet the criteria listed below; however, based on the list below (which contains two of the three metrics from our stock screener), I know that my selection of five stocks will come from a strong pool of companies that have both a history and are well positioned to pay a growing dividend for a long period of time. Once the pool has been set, I will select five stocks that I believe best fit my portfolio. Here are the minimum requirements.
- Company Has Increased Their Dividend for 20 Consecutive Years – Why are we dividend growth investors? We are looking for a growing dividend income stream to propel ourselves into financial freedom at as young of an age as possible. So for this list of stocks that I am always looking to buy, I wanted to focus on stocks that have a long-term history of increasing their dividend. I stopped short of including only Dividend Aristocrats (companies that have increased a dividend for 25 consecutive years) on this list because I did not want to exclude the great companies that are on the cusp of achieving this prestigious title. So for the purposes of this installment of my “Always Buy” stock list, I lowered this threshold to 20 years.
- Company Has Either A Dividend Yield or Weighted Average Dividend Growth Rate Greater than My Current Portfolio– This unofficial rule/goal of mine stemmed from my portfolio review at the end of 2014. Lanny made a very compelling case for why we need to measure and monitor our portfolio’s weighted average dividend growth rate. After reading his piece and measuring my portfolio’s rate as of 12/31/14, I pledged to only invest in stocks that will either increase my portfolio’s yield or DGR. I don’t mind sacrificing growth rate for a higher yield. Heck, AT&T is one of the largest holdings in my portfolio and the company has a dismal dividend growth rate that barely outpaces inflation. But you know what, T’s yield is well above my portfolio’s average yield and any future investment will increase one of these two important metrics. While increasing both metrics is preferred, I will only consider stocks that exceed either my 12/31/14 weighted average dividend growth rate of 7.54% or my 12/31/14 dividend yield of 3.97% (Note: I am willing to accept stocks with a WA dividend growth rate of 7%. I lowered the limit to reflect the lower dividend growth rates that we have observed during 2015).
- Payout Ratio Below 60%– This metric is one of the three metrics of our stock screener for a reason and some form of this metric is used by most dividend growth investors in the community. We love dividends and focus solely on companies that pay a growing dividend that can be sustained for a long period of time. While we want as high of a dividend yield as possible, we would never want to invest in a company that is sacrificing the long-term safety of the company and dividend to reward shareholders in the short-term. We believe a 60% payout of earnings is a healthy balance. For more information about this metric, visit our stock screener page.
- No Oil-Related Companies – This may surprise some people and they may disagree, especially considering the oil industry has arguably been hit the hardest in 2015 and may be trading at low points. Plus, with dividend giants like Exxon Mobil, Chevron (which I purchased earlier in the year), Kinder Morgan, and Schlumberger I would be nuts not to invest in this industry. Well, after taking a hard look at my portfolio, individual oil-related companies account for ~11% of my portfolio and have heavy weights in the dividend focused mutual funds I own. So for now, I am content on this sector and will use a downturn in the market to purchase a great company that will further diversify my portfolio.
The Five “Always Buy” Stocks
Now it is time for the fun part. As I mentioned earlier, the process above identified a lot of great companies. Trust me, I wish I had the capital to invest in every company that meets the criteria above, For now, I will settle for selecting five stocks that I would realistically purchase with my capital in the event the stock market takes another sudden downturn. My list is as follows:
- 3M Company (MMM) – 3 Yr DGR: 19.54%, Consecutive Annual Dividend Increases: 57 – MMM was the most recent addition to my portfolio and it has quickly become one of my favorite company. This company sports an amazing brand portfolio and has rewarded shareholders greatly recently. Even though my first position was large compared to the rest of my portfolio, I would happily add to my stake if the stock price were to suddenly fall. For more details about the company, check out the mini-analysis I performed in my MMM purchase article.
- Emerson Electric (EMR) – 3 Yr DGR: 5.56%, Consecutive Annual Dividend Increases: 58 – Similar to MMM, I initiated a position in EMR in 2015 and would love to add more. I fell in love with the company after I performed a stock analysis in July and honestly, I have no idea how it didn’t make our list of foundation stocks for every dividend investor’s portfolio. The company has been a dividend machine over the last half century and this Dividend Aristocrat is set to announce a dividend increase at the beginning of November. Currently my position generates $72.80 in forward dividend income. Ideally though, I would love to receive at least $100 annually from EMR. In my opinion, it is such a great dividend paying company that I would have no problem quickly escalating it to one of the largest stakes in my portfolio. Don’t worry everyone, EMR still passes one of the criteria listed even though the average dividend growth rate is lower than my portfolio’s weighted average due to the company’s current dividend yield!
- Johnson and Johnson (JNJ) – 3 Yr DGR: 7.11%, Consecutive Annual Dividend Increases: 53 – Alright everyone, I promise this will be the last stock on the list that I currently own. Unlike EMR though, JNJ is one of our foundation stocks and rightfully so! JNJ has been paying/consistently increasing their dividend for a long time and it seems like every recent dividend increase has been in the mid to high single digit range! Johnson and Johnson sports an impressive brand portfolio as well, which is always a huge bonus for me as I love stocks that own a large brand of products that are found in everyone’s house. Like MMM and EMR, I have a solid position in the company but man would I love to receive over $100 in dividend income annually for this company. The next downturn may present too great of an opportunity to pass up!
- Pepsi (PEP) – 3 Yr DGR: 8.89%, Consecutive Annual Dividend Increases: 43 – In 2014 I performed a stock analysis over the beverage giant and determined that the company was too expensive to purchase at the time. The beauty of building this list is that it allows me to expand my scope to include stocks that are typically trade at a premium (a P/E ratio above the S&P 500) that may become discounted in the event there is a pullback in the market. In my opinion, PEP would be a perfect stock to add in such a scenario. Even though PEP has a lower yield than KO, I selected PEP instead due to the diversified product portfolio, and lower payout ratio. I am jealous that Lanny is a shareholder and I am not.…hopefully this will change one day in the near future!
- Target (TGT) – 3 Yr DGR: 18.95%, Consecutive Annual Dividend Increases: 48 –This last spot was a tough one to fill and TGT barely edged out Caterpillar, which has made many appearances on our website over the last six months. I chose TGT over CAT despite of the lower yield because TGT typically trades at a higher multiple, TGT would represent a new industry in my portfolio since I already own an industrial equipment company, TGT performed very well when we ran the company through our stock screener last year and TGT has been on a dividend growth tear over the last half-decade. It is not that CAT is a bad company, which is validated by the communities view on the company, I just would prefer to use a sudden drop in prices to initiate a new position in a company that typically trades at a higher multiple. What aggravates me is that I almost initiated a position at the same time as Lanny (back when TGT was going through their credit card crisis) but chose to allocate my capital elsewhere. In hindsight, I should have taken the no-brainer investment while the window was open!
What are your thoughts on my list? Do you have a list of stocks that you are always willing to purchase? Would you have passed on any of the companies I included? Would you have selected Target or Caterpillar with the last spot? Thanks everyone, I am looking forward to your comments!