Lanny isn’t the only one to purchase stock recently, as I re-upped a stake in one position and initiated a new position in another. Both transactions have occurred over the last couple of weeks and added a nice sum of dividend income to my portfolio. This month has been crazy for me and has been one of my highest frequency trading months since I started investing a few years ago. Let’s see which companies I added!
Purchase #1: Philip Morris International (PM)
PM has been getting a lot of attention from the dividend community recently. We are familiar with PM on this site, as Lanny recently re-upped his position in PM as well by selling his stake in LO. For him, it was a well thought out decision that made perfect sense for him and I applaud him for pulling the trigger on such a large transaction. He increased his dividend income 31% with the move. Great job Lanny! Truth be told, prior to Lanny’s move (which had a major influence on my decision), we have been discussing this stock for quite some time. Last month I performed a stock analysis over PM, showing the company has a high yield, great dividend growth history (3-year average increase of 9.7%), a strong brand portfolio, and the company’s yield is currently above its 5-year average dividend yield. Overall, PM performed well in our stock screener and meets many of the additional metrics that Lanny and I review while purchasing a dividend stock. So I had the company very high on my watch list, and once PM dipped below $80/share I could no longer sit on the sidelines. I used the funds available to purchase 6 additional shares of PM, adding $24 of projected dividend income to my portfolio.
Purchase #2: Chevron Corp. (CVX)
This purchase came out of left-field for me and was a product of the turbulent oil market a few weeks ago. For one week, there were crazy swings in the oil market causing large fluctuations in the stock prices of the major integrated companies. On the day of my purchase, Chevron experienced its second consecutive day of large decrease in price, >3% each day, and that ultimately proved too large of a decrease for me to continue to sit on the sidelines and let the opportunity pass by. I was throwing around the idea of purchased additional oil to take advantage of the current environment for a while, thinking that I wanted to purchase more oil stock in this downturn than just Schlumberger, but I wanted to be careful with my purchase. Here is why I purchased shares in Chevron as opposed to other oil companies.
- Chevron performed well in our stock screener. The company’s PE ratio, between 10 and 10.5, is below the S&P 500. Plus, CVX sports one of the lowest PE ratios in the major integrated oil industry. CVX has a relatively low payout ratio (41%) and has grown their dividend for almost 20 consecutive years.
- I mentioned this in the last bullet, but the payout ratio was critical for me in this purchase. The truth is, we do not really know how long oil prices will stay depressed and what the true impact of a long period of depressed prices will have on the major companies. So far, we have seen Shell and BP cancel projects and commit to maintaining their current dividend, but who knows how long those actions are sustainable for the company’s long-term health. With this purchase, I wanted to focus on an oil company with a lower payout ratio, as this will provide a larger safety net in the event earnings growth is hampered or stagnant for an extended period of time. With Chevron’s 40% payout ratio, I felt that the current dividend level is safer than both Shell and BP, who have payout ratios of 80% and >100%, respectively, as CVX has a higher margin of safety.
- Chevron is set to increase their dividend in April and I wanted to initiate a position prior to an announcement of an increase, buyback program, etc. from management.
- Chevron sports a current dividend yield, 4.1%, and a dividend growth rate, 7%, both in excess of my current portfolio levels. As I mentioned in my 2015 goals article, I wanted each purchase to add a stock that either has a dividend yield greater than my portfolio average and/or has a dividend growth rate in excess of my portfolio’s current level. Chevron meets both of my criteria.
While initiating a position in Chevron is riskier than other investments, especially due to the current oil environment, Chevron meets all the metrics of our stock screener and has a payout ratio that I believe can weather the current oil storm. Another fit for my portfolio would have been Exxon Mobil, as their metrics are similar (if not slightly better) than Chevron’s and Exxon is set to increase their dividend in April as well. However, Chevron’s dividend yield is nearly a percent higher and Chevron has a current ratio greater than 1 (Exxon’s current ratio is .60). Current ratio isn’t the most important metric and I use it as a compliment to our stock screener; however, in the current environment, I like the fact that Chevron has the assets to cover their short-term debts. Plus, the additional dividend yield is welcomed as well. I do not chase yield and have no problem purchasing a lower yielding stock if it is fundamentally better than the alternatives. But since Chevron and Exxon have similar fundamentals, I do not mind considering dividend yield in my final decision. Note, I am passing on two higher yielding in stocks Shell and BP because I believe Chevron has better metrics. Based on my analysis, I went ahead and purchased 10 shares of Chevron, adding $42.80 in projected dividend income to my portfolio.
I am very happy with my purchases over the last couple of weeks, as I believe I added two strong companies that will serve my dividend portfolio well in the long-term. Sure, I may face some short-term headwinds, but I have a long-term investing mentality. The two purchases added $66.80 in projected dividend income to my portfolio, and hopefully Chevron’s dividend income will be increasing shortly as well. Another wrinkle to the purchases is that the two stock purchases brings me closer to my 2015 goal of investing $15,000 in new capital to my portfolio, as both purchases were made using capital transferred from my savings account. I am almost 10% closer to accomplishing this goal!
What are your thoughts on my purchases? Would you have purchased shares in Chevron, Exxon, or neither? What about PM? Are you staying away from the tobacco industry? What purchases have you made recently? I am looking forward to hearing your comments!