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. Now, it is my turn to put together my own unique list of stocks to buy.
I created this list using the three simple metrics of our Dividend Stock Screener. What’s unique about this list, versus our standard watch list, is that my goal is to create a long-term watch list. Thus, the timeframe of this watchlist is: forever. That way, when the market suddenly drops, I know where to look for investment opportunities. See my 5 stocks to buy!
The Process for selecting the 5 stocks to buy
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 dividend 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 high quality 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 to build growing dividend income stream to propel ourselves towards financial freedom ASAP. Therefore, for this listing, I want to focus on stocks that have a long-term history of increasing their dividend. This ensures that we are focusing on companies that have conservatively managed their balance sheet to ensure an increasing dividend payment to shareholders through good times and bad.
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. Lowering the threshold to 20 years of consecutive dividend increases for this listing means that the company has increased their dividend during the Dot-com bubble, Global Financial Crisis, and potentially, the COVID-19 pandemic. A 20 year threshold easily achieves the criteria I am looking to achieve.
Payout Ratio Below 60%
This metric is one of the three metrics of our stock screener for a reason. We wouldn’t even consider investing in a dividend stock without first reviewing their dividend payout ratio. Yes, it is THAT CRITICAL of a metric.
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 in order to reward shareholders in the short-term. Dividend growth investing requires a long-term mindset and patience. Paying an unsustainably high dividend with a payout ratio greater than 100% is a non-starter for us.
The dividend payout ratio sweet spot is 40%-60%. We believe this allows a company to adequately invest their earnings back in the company while paying a strong dividend to their shareholders. Our ears instantly perk once we see a payout ratio in that range.
No Oil-Related Companies
This, to me, is hilarious. When I initially published this post in 2015, I excluded oil companies to my weighting in the sector. However, since the article was published, the oil industry has twice experienced periods where the price of crude oil collapsed. I’m no longer exluding oil companies from my listing due to my portfolio weightings. Rather, I am excluding oil due to the unpredictability and wild swings of the price of oil.
In both instances, the price of oil collapsing caused companies I own to cut their dividend. In the first round it was Kinder Morgan and in the second round it was Occidental Petroleum and Royal Dutch Shell. The dividend cuts were absolutely devastating to our forward dividend income. We cannot control the price of oil, especially when private companies are competing with major state sponsored oil giants. Therefore, I simply cannot consider an oil company an always buy company for this reason.
The Five Stocks to buy now, always and forever
Now it is time for the fun part. As I mentioned earlier, the process above identified a lot of great companies. It was honestly hard to narrow down the list to just 5 stocks to buy. However, with the five companies listed below, I am confident that I would always invest in a high quality dividend growth stock with a history of increasing their dividend.
Since the list was initially published in 2015, I have updated the stock information and metrics to keep the information current (Information current as of June 30, 2020) and discussed any significant changes to the company. After all, it has been over 5 years since this was initially published. However, to keep some of the original character of the article and understand my mindset back when I created this list, I left some of the initial commentary for each stock.
Now, let’s dive into my 5 stocks to buy!
Company #1: 3M Company (MMM) – 3 Yr DGR: 8.44%, Consecutive Annual Dividend Increases: 61
I purchased shares of 3M years ago and have continued to build my position in 2020. At the start of the pandemic, I was aggressively adding shares when the price was in the $140 per share – $150 per share range. This Dividend King has been one of my favorite holdings and I will continue to add while the price is right.
3M sports an amazing brand portfolio. Their brands include Post-It notes, Scotch Tape, Scotch-brith, FIltrete, and Nexcare. Those are just their strong consumer facing brands. 3M is a large, conglomorate with a great presence in the healthcare, manufacturing, energy, automotive, and many other industries. The company’s strong product diversification and strength within each sector is the reason why it is always on my radar. When times are tough, the company has many levers to pull to generate revenue, cash flow, and support their dividend.
**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
Emerson Electric is a diversified industrial company. The company has two major divisions and classifications for the sectors they operate in: Automation Solutions and Commercial & Residential Solutions. Emerson operates worldwide and is on the forefront of bringing new technology, energy and industrial solutions to their customers. Once integrated, the company is not easy to replace. The high sticking power in diversified industries is very appealing to me.
I initiated a position in this Dividend King in 2015. Howevrer, I have not added to my position since. Unfortunately, the company’s dividend growth rate has slown to a screeching halt over the last few years. The dividend yield + dividend growth rate for the company continues to slide. This has been the one major knock against the company since I initiated my postion several years ago.
**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. I have a few ideas and tricks up my sleeve.
Company#3: Johnson & Johnson (JNJ) – 3 Yr DGR: 6.01%, Consecutive Annual Dividend Increases: 57
Johnson & Johnson is one of our foundation stocks and the G.O.A.T for a reason! 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, as I love consumer staple stocks. The list includes Tylenol, Motrin, Zyrtec, Benadryl, Nuetrogena, Aveeno, Rogaine, Lubriderm, and so on. Trust me, I could list plenty of more if I wanted to.
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. That will be my target goal as I continue to build my position in the coming years.
**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, despite all of the dividend cuts due to the pandemic, Johnson & Johnson actually increased their dividend in April. That is why we love JNJ!
Company #4: Pepsi (PEP) – 3 Yr DGR: 8.32%, 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.
Interestingly, this is still holding true over the years. In my mind, the Frito Lay product line is a HUGE benefit for the giant that sets it a part from their peers. The odds that a consumer is purchasing one of their beverages or snacking on a bag of their chips is pretty high. Personally, I love eating Doritos! There snacks are delicious and so is their dividend yield and dividend growth rate. How could you not add this Dividend Aristocrate to your “Always Buy” stock list?
**2020 Update: I added PEP to my portfolio a few years ago when the price fell below $100 per share. Their share price came close to falling below this mark in March. However, like the rest of the market, it has just taken off. So for now, I will continue watching the company and patiently waiting for the right time to strike.
Company #5: Target (TGT) – 3 Yr DGR: 3.23%, 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.”
That was quite the take when selecting Target. Over the last few years, Target has transformed and significantly improved their brand, product offerings, and consumer shopping experience. My wife is a religious Target shopper and has a Red Card. We are constantly shopping there for our household items. The company continues to make things better, easier, and faster for consumers, from purchase to returns. Their brand loyalty is strong as well. That, along with the fundamentals, are reasons why this company made the cut.
**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 has performed very well in the pandemic. Plus, our purchases at the store increased significantly since our daughter was born. We use Target brand diapers, formula, and all the other supplies we can. They are very cost effective for parents. After crunching the numbers and buying the stuff for our duaghter, it solidified Target’s position on this listing!
I’ve mentioned it now several time throughout the article. It is all about finding, and investing, in high quality dividend growth stocks with a history of increasing their dividend. There are plenty of great stocks to choose from. Cutting the list down to these 5 was difficult, but a lot of fun. Now it is time to put my pen down and start investing in these wonderful 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? Thanks everyone, I am looking forward to your comments!