Over the years, I have learned a lot about investing. One of the most important lessons is to always be prepared and have a watch list ready to go for when the moment strikes. That’s why Lanny developed a Top 5 Foundation Dividend Stock List early on to help identify those “cornerstone” companies that investors at all levels should consider for a strong DGI portfolio.
Using the three easy, but important, metrics of our Dividend Stock Screener, I have created an “Always Buy” list for myself. That way, when the market suddenly drops and I don’t have an up to date listing prepared, I know where to look for investment opportunities. Going forward, I will update this list annually to make sure the investment choices are up to date. See my current 5 Always Buy Stocks!
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.
- 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 – 2020 Update – I originally excluded oil companies from this listing due to the fact I was overweight in the oil sector. Since the article was published, the oil industry has twice experienced periods where the price of crude oil collapsed. During each time, one of my oil holdings slashed their dividend significantly. The first dividend cut was Kinder Morgan in 2016 and the second was Occidental Petroleum in 2020. How can you say that a company is an “Always Buy” when it is in such a volatile sector. I may purchase more oil companies in the future, but I will not consider them an “Always Buy.”
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 March 20, 2020):
Company #1: 3M Company (MMM) – 3 Yr DGR: 8.78%, Consecutive Annual Dividend Increases: 61 – I purchased shares of 3M years ago and have continued to build my position in 2020. It has been one of my favorite holdings and I will continue to add while the price is right. 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.
**2020 Update: 2020 has also been challenging as the impact of Coronavirus is being felt around the world. Even with that in mind, the company still has a solid dividend payout ratio that is in line with our stock screener.
Company #2: Emerson Electric (EMR) – 3 Yr DGR: 1.21%, Consecutive Annual Dividend Increases: 63- 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 $148.13 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.
**2020 Update: EMR’s dividend growth continues to remain low. I will consider replacing EMR by the end of 2020 if their dividend growth does not improve.
Company#3: Johnson and Johnson (JNJ) – 3 Yr DGR: 5.90%, Consecutive Annual Dividend Increases: 57 – 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’s impressive brand portfolio consists of items that are found in everyone’s households. This is always a huge bonus for me 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.
**2020 Update: This may be my chance to add to my position in JNJ. The company’s price is finally coming down and they have earned a place on Lanny’s Coronavirus dividend stock watch list. Further, they are one of the companies that manage their balance sheet well.
Company #4: Pepsi (PEP) – 3 Yr DGR: 8.39%, Consecutive Annual Dividend Increases: 48 – 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.
**2020 Update: I added PEP to my portfolio a few years ago when the price fell below $100 per share. Their share price is hovering around the $100 per share mark at this time. Their yield is once again above 3.5% percent. If it ever crosses 4.00%, I will have to add to my position.
Company #5: Target (TGT) – 3 Yr DGR: 3.55%, 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. 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.”
**2020 Update: 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. They haven’t performed as other companies during these challenge times, but that isn’t surprise. To me, it demonstrates that I made the right choice adding them to my Always Buy listing over other, more cyclical companies.
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!