Dividend Diplomats October Watch List

About a month ago we published our September formal Watch List.  A lot has changed over the last month.  We have received a ton of dividends, the S&P 500 has been on a decline of 4.33% through October 17th.  With October nearly in the rear-view mirror, it is time to update our watch list for the end of October and creep into November.

Stock Watch List

Lanny’s October Watch List

Similar to last month, my target is a yield above 3%, strong fundamentals going forward with dividend growth rates of 5% or more.  The declination of 4.3% has opened up so many opportunities that it is tough to keep my feet still.  So difficult that last Friday I dumped $3K into the market spread over three stocks, as I was Locked, Cocked & Ready to Unload!  I picked up MCD, GSK & more of T, which ultimately added $151 to my dividend income… and no, 151 is a coincidence (insert Diageo stock purchase here! haha).  However, even after I purchased them on Friday… there may have been even further downward momentum, so let’s get into the 3 stocks on my watch list!

  1. McDonald’s (MCD):  Similar to when they were on my last month watch list, and how I purchased them last Friday at $92.55 per share, the stock closed at $91.04 or a further 1.63% drop.  Here are the quick metrics on why it remains on my watch list:
    1. Position in my portfolio: It only remains at 5.55% of my individual portfolio, even after picking up more shares last week.  I now own over 42 shares but this still remains a relatively small piece to my portfolio, to where I wouldn’t mind having more.
    2. Dividend Metrics: The current yield is at 3.73%, especially after they recently increased the dividend 5%.  The payout ratio remains below 60% and this is a long term dividend play, as it is a wonderful dividend aristocrat.  This is a great stock to own and to belong in a DRIP, to where you see the powerful benefits of dividend reinvesting.
    3. The historical yield is much less than where it is now and also, the stock is down year-to-date 6.17%.  Further, the P/E ratios are becoming more in line now with an undervalued metric of approximately 15.81 based on an EPS expectation of $5.76/share.  This favors well and would be a great fit at the moment.
  2. National Grid (NGG): I bet this throws a curveball, given my most recent Consolidated Edison (ED) analysis and my debate of selling out of FirstEnergy (FE) and into them.  National Grid is a $52B in market cap company, based overseas in the UK, but has operations in the US as well, such as – New York & Massachusetts (two big states with population that is high).  They are in an industry where it is a need – energy/utilities, and they have a big holding of users.  Further, Net income has been strong and I have been a part owner for years (3+ years actually, possibly even 4).  WithFirstEnergy, they take roughly 7% of my portfolio.  Here are reasons why they are on my October watch list:
    1. Need vs Want: They are in the business because people need them.  People need to use electricity and energy – NationalGrid is an international player in the market.  I like buying stocks that are based on fulfilling a need of the people – recession proof as they say, right?
    2. Dividend Metrics: Due to the ADR nature of the stock on the US markets (American Depository Receipt), they pay a very variable 2x per year dividend.  However, they have increased their dividend using a 5 year average (including a special dividend in 2010) of over 20%!  Further, the payout ratio based on projected EPS figures stands in at 76%, higher than normal, but what I usually see for a utility company, I wouldn’t be sure how often/if they could keep up the large dividend increases.  Further, current yield based on last 12 month dividend history = $3.46/$70.44 = 4.90% – a very solid yield for a utility company – not too high and definitely not low.
    3. The last month the stock has been hit by 2.59% from a high of approximately $73 down to the $70.44 as of Friday.  However, year-to-date they are up about 7.8% and have a price to earnings (earnings estimate of $4.52) is around 15.58.  Maybe not the best bet – but definitely a stock to keep your eyes on.  For some reason, I want a utility that is priced maybe a little better, even if MCD above is trading a little bit higher than this, I feel NGG historically has a lower P/E.
  3. Canadian Imperial (CM): Ah, the Canadian Bank giant!  At $405B in total assets, this is a behemoth of a Canadian bank and stands out substantially to the financial industry.  You can consider this one of the big 6 Canadian banks out there.  I’ve owned them for a little while and they have performed quite well and you’ll see why I own them and why they are on my watch list currently.  Let’s dig in:
    1. Position in my portfolio: Given that I love banks and that I know them inside and out with my auditing experience on financial institutions for going on 4 years, one would think I would own many banks or large positions.  Wrong.  CM is my only bank stock and it only controls 4.32% of my individual portfolio.  To me that is weak. I would love to see that over 5% and closer to 7.5% if I could, now could be a better time to scoop up some of them, “eh”?
    2. Dividend Metrics: Current yield is very nice at $1/quarter, which at close of $86.50 on 10/17 = 4.62% yield.  This passes my 3% yield test, as well as my over individual income portfolio yield.  Funny enough, they have increased the dividend, not once, but TWICE this year – from $0.96 to $0.98 and then ultimately to $1.00.  They’ve always paid a relatively high/strong dividend, therefore, the dividend growth isn’t entirely there, but they do have a habit of increasing the dividend.  Just another reason it is on the October watch list.  Further, based on EPS projections of $8.08 per share, the payout is merely at ~50%.  Not too shabby and much/ample room for growth.  One has to love this and how it fits in each of the dividend stock screening metrics.
    3. Valuation & Historical: Historically, the stock usually has a 4.5-4.6% yield, so it is further above that at the given moment.  Additionally, based on projected EPS of $8.08, the P/E ratio is a touch over 10 or 10.71 to be exact.  Further, year-to-date the performance of the stock has stayed relatively the same, up about 1.28%.  No real movement and it appears to be undervalued comparison the history and to the market as a whole.  Further, this is a stock at one point in the last 52 weeks that was trading at roughly $98/share.  Therefore, an approximately $12 decline is why it’s back on my October watch list.  I’ve enjoyed receiving the alerts on my phone regarding its decline over the last week, as the drop has been 2.6% in the last 5 days.

Thoughts on these 3 listed above?  3 different industries and all stocks that I own a position in.  I have found it increasingly difficult to add new positions, given the amount of SEC reading I now have to do with earnings releases, 10Qs, 10Ks and the sort.  That is why I am keeping an eye on stocks in my portfolio already for my October watch list to find if there is value to be had within my own house, for lack of better words.  I am pushing myself to have more capital and am aiming to save 60% of my money each month, which I am finding it increasingly difficult to try to achieve that goal.  I may end up purchasing a 1, 2 or even all 3 in the upcoming weeks, depending on how I am feeling… joking.. depending on what Mr. Market shows.  I think if they all drop a smidge, my pockets will be getting hungrier.  Time will tell!  Now let’s see what Bert has in store next.

 

Bert’s October Watch List

I like the list Lanny.  Two new faces to the October watch list?  You can’t ever go wrong increasing your holding in a large Canadian bank.  You also forget to mention that CM is down 10.53% this month, just like every stock these days.  Your time to purchase may be sooner than you think!  So my situation is a little different this month than it has been the last few months.  I know my Roth IRA still needs a new investment in 2014, so my watch list over the last few months was focused on adding one major high-yielding investment to my Roth IRA.  If I am going to lock away a stock in a tax-free account, I might as well purchase a high yielder!  However, I just received notification from Sharebuilder that my free trade credit is going to expire within the next 14 days.  At the moment I have available $450 to put into the market, and that is below my minimum Roth IRA purchase of $2,000.  So for this next purchase, I want to focus on using the $450 to increase a position I currently own in my portfolio.  When I began investing, my initial purchases were smaller than they are currently ($750-$1000 then versus $1,500-$2,500 now).  The recent downturn in the market presents a great opportunity to “re-up” my position in my initial stocks.   I have three investments with a cost basis of around $1,000, so they will be the focus of my Watch List this month.  Lets see which stocks I have my eye on.

  1.  McDonalds (MCD).  Lanny stole my thunder on this one, and for good reason.  The stock has not had the best year both in terms of performance and publicity.  But for long-term dividend growth stocks, bad publicity and performance can create a great buy-in opportunity as the price continues to fall.  To save us all time, I won’t go in to too much more detail since Lanny summarized MCD’s metrics above.  A $450 investment in McDonalds would increase my cost basis to $1,597.31 and add $16.79.  To be honest, it’ll be tough to find a better stock to invest my available funds in; but lets see if I can find one with the two remaining stocks on my October Watch List.  October Watch List
  2. Philip Morris International (PM)- This one is the only  hold-over from my September Watch List.  As I mentioned last month, my portfolio’s tobacco weight is oddly low for a dividend growth investor (2.32%).   PM is the 2014 laggard in the tobacco industry, so this might be a great time to re-up my position in the company.  If I invested $450 into PM, my cost basis would add $20.92 to my dividend income.  It is the highest yield of the stocks on my watch list and therefore, investing in PM would put me closer to my 2014 dividend income goal of $2,000.  However, as Lanny and I have already discussed, MCD is pretty attractive at its current price.  So lets take a look at some of PM’s updated metrics to see if it can persuade me otherwise.
    1. Performance.  I had to look at this twice to believe it.  While all other stocks have taken a bath recently, PM has actually increased!   This week the stock increased 2.04%.  I should just stop here, because I don’t want to use my precious resources buying a stock that has increased recently.  However, I would like to note that even though PM’s price increase this week, the stock has performed the worst in the broader tobacco industry  and is trailing the other major tobacco companies in terms of YTD and MTD performance.
    2. Dividend Yield.  Last month PM increased its dividend from $.94/share to $1.00/share, a 6.4% increase.  This increase brings the current forward yield to 4.65%.  This total is the highest among its peers: Altria (MO = 4.56%), Reynolds American (RAI = 4.58%), Lorillard (LO = 4.20%), and British Tobacco (BTI = 2.71%).  While the payout ratio is high, 74%, it is no at a level that screams “this dividend is about to be cut.”
    3. P/E Ratio.  Lastly, the P/E ratio is currently 17.10 which again puts it at the most attractive of the industry.  Even after the crazy couple of weeks, PM’s P/E Ratio is still lower than the S&P 500’s P/E ratio of ~18.3.
  3. Aflac (AFL)- Doesn’t it seem that AFL is always being talked about on our website?   Over the last few months Lanny and I have either purchased the stock or kept a close eye on the stock by performing a stock analysis or including it on our watch list.  Why?  Because it is a great dividend growth stock!  We both hold positions in the company and so do many other members of the dividend growth investing community.   If I invested $450 into AFL this week, my cost basis would increase to $1,689.63 and I would add $11.70 to my annual dividend income.   Let’s take a quick look at some metrics to see if I can be persuaded from investing in MCD!
    1. Performance.  When I first bought AFL on 9/2/14 the price was $61.23.  Since then, the stock price has fallen $4.22 to $57.01!  Best of all, AFL has not had any major news stories or developments since then that would have caused the stock to decline 6.9%.  Anyways, AFL has declined 2.86% in October, has declined 10.35% this quarter, and has declined 13.62% YTD.  All this talk about declining makes me think this would be a great time to re-up my position at a lower price.
    2. Dividend Yield.  With the recent performance of the stock, AFL’s current yield sits at 2.60%.  While the yield is the lowest of my watch list, it is still greater than the S&P 500’s yield.   This is a perfect transition into my next item.
    3. Dividend increase.  As Lanny pointed out a couple of weeks ago, AFL is expected to announce a dividend increase at the end of the month.  Over the last three years, the dividend has increased 7.26% on average.  In addition,  Aflac has announced a dividend increase for the last 31+ years and while the company’s stock has lagged in the year, there is no indication the dividend increase streak is in jeopardy.

So there we have it.  Three great dividend stocks to pick from.  Man I wish I had more than $450 at the moment to invest in!  But we will see how the week goes and I am sure I will update you all on which stock I decide to invest in.  At the moment, it seems like this is too good of an opportunity for me to re-up my position in MCD.  I really like AFL and I love investing in companies’ right before the announce a dividend increase.  So if MCD’s price suddenly increases and AFL’s price decreases, I may just have to alter my investing strategy to “re-up” my AFL position.  Lastly, while PM has lagged the industry, the company has just performed too well compared to the broader market for me to justify investing in the company this week.  I am still watching PM because I really would like to increase my tobacco holdings; however, the timing of this round of investing is just not right.

What are your thoughts on the Dividend Diplomats October Watch List.  Are there any other stocks that you think we should consider.  If you were Bert, which one of the three stocks would you invest in?  Will Lanny every pick a utility stock to invest in or will he just keep changing his ming (Take a guess at which diplomat wrote this conclusion!)?  What stocks have you purchased during the recent downturn?

As always, thanks for stopping by.  Happy investing!

-The Dividend Diplomats

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13 thoughts on “Dividend Diplomats October Watch List

  1. Nice picks, guys!

    AFL is also on my watchlist. I believe it is one of the most consistent dividend players out there. I wish I could also stock up on some more MCD, but I first have to diversify my portfolio some more.

    Cheers,
    NMW

    • NMW,

      Thanks. AFL has a great dividend track record. They are focused on rewarding their shareholders through a consistent, growing dividend. Does AFL address a major need in your portfolio? What industries are you focused on right now?

      Bert

    • Tawcan,

      MCD is looking really solid right now. The good ol Canadian Imperial bank also is fairly attractive – all depends on which weight you are going, you know? Monday should be a fun day to see what happens!

      -Lanny

    • Thanks Special Agent (That is really fun to write by the way). I am with you, I will contrinue to try and add shares to MCD as much as possible while the price continues to decline. The price may fall in the short-term, but in the long run we will be very pleased.

      Bert

  2. Lanny and Bert,

    Nice list guys!

    I’m not sure what I’ll be going after in November yet, but I’m unlikely going to be making any more purchases in October. I’m looking at adding to my new Unilever position. I also wouldn’t mind adding to Johnson & Johnson for the first time in a long time. GE continues to have value here, as does UTX. I’m also looking at quite a few energy plays after the big drop in Brent. IBM seems cheap as well.

    We’ll see. More opportunities than cash, as always! You could give me $50k to invest and it wouldn’t be enough. 🙂

    Best regards.

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