This was a busy week. After a month or so, my wife’s Roth IRA finally transferred from Capital One Investing to Ally Investing. With this transfer came a sign-up bonus and free trades for 3 months. So if you haven’t noticed, Lanny and I have been busy putting these free trades to work. We’ve had plenty of small purchases! When my wife’s account transferred over, there was some cash available from previous transfers and liquidated partial shares. So I decided to put the money to work and add to two positions that she currently owned!
Stock Purchase #1 – AT&T (T)
This has been quite the year for AT&T. The company’s stock price is down 17% YTD. Finally, the company was able to exit the courtroom as their merger with Time Warner Cable was approved. With this, AT&T has significantly increased their content debt, and free cash flow. Now, the newly merged company is figuring out the way to merge their products and adjust their product offerings. Personally, I just switched to AT&T for cable and internet based on an awesome promotion in my area! How could I say no to switching to a company that I own?
With all purchases, I’ll run AT&T through our stock screener. I’ll assume a stock price of $31.93 (my purchase price), and annual dividend of $2.00/share, and forward EPS of $3.51/share (average analyst estimates per Yahoo! Finance).
- P/E Ratio – Using the figures above, I calculated a P/E Ratio of 9.1X. This is well below the S&P 500 and even below Verizon (>11X). An easy pass!
- Payout Ratio <60% – Well, we always use 60% as a benchmark. However, we both understand that there are industries that typically have high payout ratios. This includes industries such as the telecom industry, utilities, tobacco, etc. Even considering this fact, I calculated a payout ratio of 57%. Plus, in their last earnings release, management increased their expected adjusted earnings to $3.50/share. So post-merger, there is plenty of room to grow their dividend or pay down debt going forward.
- History of Increase Dividends – AT&T is a Dividend Aristocrat after-all. This alone shows that the company has demonstrated their ability to increase their dividend. The dividend growth rate isn’t that impressive. But man is that annual $.01/share increase in their quarterly dividend consistent!
- Dividend Yield > 5-Year Average Yield – AT&T’s current dividend yield is 6.3% (rounded), which is greater than their 5-year average dividend yield of 5.5%. This is a potential signal of a stock being undervalued. For more information about this metric, check out our article from a few years ago!
AT&T performed very well in our screener, making the decision to add to my wife’s position pretty easy. In total, we purcahsed 24 shares of AT&T at $31.93/share. This purchase added $48 in forward dividend income. Why did I pick 24 shares versus more or less? Well, my wife had owned 76 shares already. So this purchase increased her total position to 100 total shares. Now, she will receive $200 from AT&T annually! I just couldn’t resist rounding out this position.
Stock purchase #2 – Dominion energy (d)
Earlier in the year, we purchased 43 shares of Dominion Energy in my wife’s Roth IRA. I had left the position alone for a while, as I was happy with the overall size. However, after the brokerage transfer and the AT&T purchase, the account had about $500 in cash remaining. This would potentially allow me to purchase 7 shares of D and round our position to 50 totals shares. But first, before the purchase, I had to run D through our stock screener as well. I’ll assume a stock price of $71.38 (my purchase price), and annual dividend of $3.34/share, and forward EPS of $4.11/share (average analyst estimates per Yahoo! Finance).
- P/E Ratio – Using the figures above, I calculated a P/E Ratio of 17.36X. This is below the S&P 500’s ratio, which is historically in the low to mid 20 range
- Payout Ratio <60% – D’s payout ratio is approximately 81% using the figures above. I mentioned earlier that utility industries typically have high dividend payout ratios. So I am not as concerned about D exceeded our metric today. However, if the amount were over 90%, I would reconsider my answer.
- History of Increase Dividends – Unlike T, D is not a Dividend Aristocrat. However, that doesn’t mean the company hasn’t been increasing their dividend. D has increased their dividend for 14 consecutive years and has a 5-year average dividend growth rate of 8%. This is a great DGR for a company that is yielding over 4.6%.
- Dividend Yield > 5-Year Average Yield – Dominion Energy’s current dividend yield is 4.6% (rounded), which is greater than their 5-year average dividend yield of 3.8%. Once again, another sign that the company is potentially undervalued.
After the results of the stock screener, I decided to purchase 7 shares of Dominion Energy, adding $23.38 to our forward dividend income. Now, we own 50 shares that produce $167 in annual dividend income.
Interestingly, neither of these stocks were on my last watch list. However, I was excited for the chance to continue building positions in my wife’s portfolio. Plus, it doesn’t hurt that I got quite the bang for my buck with this purchase. One stock had a dividend yield of 4.6% and the other had a dividend yield of 6.3% at the time of purchase. So I was able to add $71 in forward income with only investing $1,265 in cash. All in all, not a bad week. I look forward to hearing your thoughts about the investment purchases and any other suggested investments you may have! Onward and upward.