Dividend Diplomats September Watch List

About a month ago we published our first formal Watch List.  A lot has changed over the last month.  We have received a ton of dividends, the S&P 500 has increased another .5%, Alibaba began trading, and McDonalds announced a 5% dividend increase!  With September nearly in the rear-view mirror, it is time to update our watch list for the end of September and first half of October.

Stock Watch List

Bert’s Watch List

I have been saving like crazy and I am getting close to purchasing a stock for my Roth IRA.  When I developed my portfolio goals for the year, I set a goal to only invest in stocks in my Roth IRA that have a dividend yield greater than my current portfolio yield. Why?  Because I want to fully take advantage of the tax-free benefits that are given to me.   Instead of paying capital gain taxes, I will receive the full dividend.  In my head, it just makes sense to put the highest yielding stocks in this account.  That’s why I have ARCP (8% current yield), GSK (5.6%), HCP (5.45%), BP (5%), and so on in this account (Note: these are my current yield calculations, not the calculations on various financial websites).  My current overall portfolio yield is 3.93%, so all stocks included in this watch list will have a yield greater than that.  With that being said, let’s take a look at which stocks I will have my eye on!

  1.  Verizon Wireless (VZ)- This will be the only holdover from my August Watch List.   I have been watching this stock closely for the last few months and would love to initiate a position.   My current telecommunication portfolio weight is only 4.93%, so investing in another telecom company would not put my portfolio out of balance.
    1. Performance YTD: 5.87%, up from 2.27% last month.  So Verizon had a pretty decent month, outperforming the market by 3%.
    2. Dividend News: Current Yield: 4.4%.  Since my article last month, the VZ announced a $.02/share dividend increase from $.53 to $.55.  The increase of 3.8% only slightly outpaces inflation; but that is a sacrifice you make when you invest in a higher yielding stock.  High yield, less growth.  While the increase is not as high as others, the important thing is they continued to increase their dividend.  That’s what I’m focused on.
    3. Price to Earnings Ratio:  The P/E Ratio is 10.69, which is slightly above AT&T’s P/E of 10.47.  In general, telecommunication companies have lower valuations compared to the S&P 500, so seeing a low P/E multiple is typical.
  2. Philip Morris International (PM)- When I started this watch list, I had the intention of monitoring British Tobacco (BTI), not Philip Morris. My portfolio only has a 2.32% weight to it, so I would love to increase my allocation to the high-dividend paying industry! However, as I researched BTI and viewed all the major players in the tobacco industry, PM appears to be the lowest valued of the group.  So now I have set my sights on possibly increasing my position in PM as opposed to diversifying my tobacco companies.  Both are international tobacco companies, so they tackle the tobacco market I like.  I am very, very short on the US tobacco market!  Let’s run through some metrics for PM.
    1. Performance YTD:  The stock has increased .39% YTD, aka it hasn’t moved.  It is quite remarkable considering how other tobacco companies have performed this year.  BTI has increased 15.6%, LO has increase 21.2% (in part due to the acquisition),  MO has increased 21.5%, and RAI has increased 19.2%.  With great long-term prospects, this could be a potential value opportunity.
    2. Dividend Metrics:  Current Yield of 4.4% and a payout ratio of 74.8%!  Oh no, it is higher than the 60% the Diplomats use as apart of our screening process.   It is definitely higher than I would typically like to see.  However, this is in part due to the company announcing an increase of $.06/share from $.94/share to $1/share.  The main concern is that the company cannot maintain the current dividend level, so management announcing the increase despite the high payout ratio indicates that they aren’t as concerned about the high payout as we are.  Before purchasing the stock, I want to see the next quarter earnings to see if earnings will grow and reduce the payout ratio. Without evidence that the payout ratio will decrease I cannot initiate a position in the company; there are just too many other stocks that I can invest in.  However, until that time, I still think PM deserves to be on my watch list since I am not making the purchase immediately.
    3. Price to Earnings Ratio: PM’s P/E Ratio is 17.01, which is lower than the current S&P P/E and the broader tobacco market.  The next lowest tobacco P/E ratio is BTI with a ratio of 19.08.  It is by far the lowest valued of all the major tobacco companies.
  3. Consolidated Edison (ED)– Lanny made a pretty strong case for Consolidated Edison when he performed his analysis earlier in the month.  It is a strong company and a Dividend Aristocrat, so warrants a spot on my Roth IRA watch list.  My concern with ED is that an investment of $2,000 would throw my portfolio out of weight and result in too large of an allocation to utilities.  My portfolio currently has a 7.88% weight in utilities.  A quick calculation showed that a $2,000 investment would increase the weight to 11.81%.  Not as bad as I thought.  It is still lower than my weight in oil, so it wouldn’t be the heaviest weight in my portfolio.  Plus, who am I kidding, I am building a dividend portfolio. Shouldn’t I have a higher weight in utilities?  With that being said, ED has officially earned a spot on my watch list.  Let’s briefly look at the metrics and provide an update from Lanny’s analysis.
    1. Performance YTD:  The company has increase 4.56% YTD. The price has decreased from the price used in Lanny’s valuation, $58.12, by nearly a dollar to $57.13.  The month has not treated ED well, which is great news for a dividend growth investor looking to initiate a position!
    2. Dividend Metrics: No significant changes here.  The current yield is 4.41% and the payout ratio is 57.40%.  No issues here
    3. P/E Ratio: 13.22  As Lanny mentioned, the company is trading at a discount compared to its peers and the S&P 500.  No major changes since his analysis.

Alright everyone, that concludes my Watch List.  Thoughts?  Can you think of any high yielding stocks that I may be missing from my list?  Please let me know if you think I should be considering other high yielding companies!  Now let’s see what companies Lanny has on his Watch List!

Lanny’s Watch List

Well played Bert and I like your focus you had on your watch list.  You are targeting you retirement account and thus you have decided your retirement account should have a higher yield in general, so your focus is strong.  Further I like how you deployed any stock below X% yield, thus not to destroy the focus of your goal with the account.  My question is – what if one of your stocks on that account appreciates faster than the dividend growth and you are left with a 2% yield?  What would you do then?  A thought I think myself and other readers would love to hear about.  You have a great watch list and I personally love your #2 and #3.  Let’s see what 3 stocks I can muster up.  My target is a yield above 3%, strong fundamentals going forward with dividend growth rates of 5% or more.

  1. McDonald’s (MCD): I own over 31 shares of this company who has paid and increased dividends for close to 40 years.  I know us investors were slightly disappointed with the dividend increase last week of only 5%, but that still beats inflation and they still increased it.  I know they are struggling with their branding internationally in areas, as well as the strict competition among coffee/breakfast – but I have found it more than 60-70% of the time my traveling co workers are grabbing aMcCafe on the way to their clients, it’s actually quite amusing.  However, here are my 3 official highlights on why it is on my watch list
    • Dividend Yield: With the recent increase, the yield now currently stands at Friday’s close price of 3.60%, higher than my 3% target for a stock at this point.  Additionally, the 5 year average yield is 3.20% so 40 basis points higher?  I’ll take it.
    • Dividend Growth: Increased for 38 years and they are categorized as a dividend aristocrat.  This past week raise = 5%, last year was approximately 5% and 2 years ago it was 10%.  I can confidently say, the average growth rate is at least 5% then.
    • Price/Earnings & Payout Ratio: I have the P/E Ratio roughly at 16-16.50x earnings at the moment.  This is less than the S&P and according to morningstar.com, is less than the industry as a whole.  With earnings expected at approximately $5.76 for the year, the payout ratio is 59%, so just on the money under 60%.
  2. Consolidated Edison (ED) – See Bert’s above.  I won’t go into the metrics as he already did, but our objectives are a little different, as I explained in my Edison Analysis, the reason why it is on my watch list is to swap out my FirstEnergy (FE) stock since I may be seeing fundamental issues with the Akron-Ohio based company.  Doing so would: Add more dividend income at this moment in time (even with fees), place an aristocrat into my portfolio, and they are much better valued on an earnings multiple.  They are on my watch list because of that and it hits all of the dividend stock screen metrics.  However, it does not fulfill my 5% dividend growth rate target, however, I am going to give this a pass, since positive growth is better than no/negative growth like FirstEnergy.
  3. Sonoco Products (SON) – It’s okay, I’ll go grab the toilet paper to help clean the reaction and shock from this, as similar to a few stocks on the past, this one probably comes out of no-where.  Big competitors are Bemis (BMS) and 3M (MMM). Based in South Carolina, they are providers of consumer package services.  Really this can be from any packaging such as Food, shampoo bottles, cardboard boxes, coffee containers – you name it and they are in it.  They have international business across 34+ countries and employ over 19K people.  Let’s bring in some highlights
    • Dividend Yield: 3.18% currently on 32 cents per quarter, which is over the 3% target rate.  However, the 5 year average yield is roughly 3.4%, therefore, there is still room to give around this area.
    • Dividend Growth: With increasing their dividend at 19+ years, that is very strong.  However, for growth rate, it lags.  They typically increase the dividend 1 cent per year.  The average therefore is roughly 3.33% per year.  Not too low, but something with that low of a yield to be a smidge higher – such as 6-8%.
    • Price/earnings & Payout Ratio: P/E current is around 18, thus less than the S&P, roughly at the average for the industry, below 3M but is around the same calc as Bemis.  Adequately valued I would say.  Payout ratio at $2.22 EPS, is around 57%, so below the 60% threshold.

I will more than likely keep Sonoco on the Watch List for a longer-time period to see if dividend growth picks up, and this area of “materials” I currently am not in.  With McDonalds – I would like to see where they trade at closer to the ex-dividend date, given the market as a whole is still setting new records.  I do like Edison, as it definitely differentiates where my utilities are and provides more of a peace of my mind with what I currently have.  I am not going to initiate a move on any of these as of today, but will continue to monitor all of them on the watch list.  What am I missing here?  What are your initial thoughts? Gripes? Please let us know, as us diplomats appreciate all mindsets.  One Goal everyone!  Thanks again for checking out our watch list, talk soon.

-Lanny

Facebooktwitterredditpinterestlinkedinmail

3 thoughts on “Dividend Diplomats September Watch List

    • You can’t go wrong with either of the telecom giants. AT&T is great because of its higher yield, so if I didn’t have such a large position in the company already I would probably initiate a position. It is not to say that VZ is bad, just AT&T has a better yield for a very similar company. Right now, if I had to pick, I would probably invest in VZ. But we shall see what the market is giving me when I am finally ready to make a purchase.

      Bert

Leave a Reply

Your email address will not be published. Required fields are marked *