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. Going forward I am going to maintain a list of five stocks that I will always buy. That way, 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 are the requirements I used for this list. These requirements didn’t narrow my pool down to just five stocks. Especially since there are a lot of companies that meet the criteria listed below; however, based on the list below, I know that my selection of five stocks will come from a strong pool of dividend growth stocks. 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 towards financial freedom ASAP. So for this listing, I want to focus on stocks that have a long-term history of increasing their dividend. I stopped short of including only Dividend Aristocrats on this list. I didn’t 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. But you know what? T’s yield is well above my portfolio’s average yield. Thus, 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%. **2019 Update: I am lowering the dividend growth threshold to 6% due to the slowing dividend growth observed. And my portfolio’s dividend yield as of 3/31/19 is 3.20%.
- Payout Ratio Below 60%– This metric is one of the three metrics of our stock screener for a reason. 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, sustainable dividend. 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 and this article Bert wrote explaining the metric in detail.
- No Oil-Related Companies – This may surprise some people and they may disagree. Especially considering the oil industry has arguably been hit hard in recent years. 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. **2019 Update: This continues to remain true. Since the article was published, I have added Exxon Mobil and Occidental Petroleum to my dividend 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. My list is as follows (Information updated as of May 2019):
- 3M Company (MMM) – 3 Yr DGR: 9.67%, Consecutive Annual Dividend Increases: 60 – I purchased shares of 3M years ago. It has been one of my favorite holdings ever since. This company sports an amazing brand portfolio and has rewarded shareholders greatly over the last decade. Starting in 2019, the company faced a pullback based on litigation and slowing growth. With that, the company still has a solid dividend payout ratio that is in line with our stock screener.
- Emerson Electric (EMR) – 3 Yr DGR: 1.04%, Consecutive Annual Dividend Increases: 62 – 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 2015. The company has been a dividend machine over the last half century. Currently my position generates $142.17 in forward dividend income. Don’t worry everyone, EMR still passes one of the criteria listed above. This is even though the average dividend growth rate is lower than my portfolio’s weighted average rate. **2019 Update: EMR’s dividend growth continues to remain low. I will consider replacing EMR in 2020 if their metrics do not start to improve.
- Johnson and Johnson (JNJ) – 3 Yr DGR: 6.27%, Consecutive Annual Dividend Increases: 56 – Unlike EMR though, JNJ is one of our foundation stocks and rightfully so! JNJ has been paying and consistently increasing their dividend for a long time. Further, it seems like every recent dividend increase is in the mid to high single digit range! Johnson and Johnson sports an impressive brand portfolio as well. This is always a huge bonus for me. I love stocks with large brand portfolios 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: 9.77%, Consecutive Annual Dividend Increases: 47 – In 2014 I performed a stock analysis over the beverage giant and determined that the company was too expensive to purchase at the time. Years later though, the price fell and I had an opportunity to initiate the position. Why did I consider Pepsi over Coke on this listing? Even though PEP has a lower yield than KO, I selected PEP instead due to the diversified product portfolio, and lower payout ratio. **2019 Update: PEP was added to my portfolio a few years ago when the price fell below $100 per share.
- Target (TGT) – 3 Yr DGR: 4.57%, Consecutive Annual Dividend Increases: 47 – 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. Here is what I said when I initially created this list in 2015: “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. 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.” Since I wrote this in 2015, TGT has become a large position in my portfolio. It is one that I will hold for a long time. The company continues to evolve and battle Amazon and Walmart. Even with CAT’s large dividend increase in 2019, I’m still happy TGT’s number 5 on my list.
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!