2020 is flying by! We have crossed the 50 yard line and are marching towards the endzone. Each month presents exciting new twists and opportunities in the stock market. June was no different! My wife and I found 4 companies to purchase during the month. This article summarizes our dividend stock purchases for June. See what companies we purchased that allowed us to add $58 in forward dividend income.
Dividend Stock Purchases: June 2020
The market continues to amaze me, and confuse me, along with plenty of other investors. The second quarter saw the stock market continue to soar after reaching its pandemic bottom. June was different that April and May, though. The stock market actually ended lower for the month. That’s right, the stock market DECREASED for an extended period. It is sad that it’s such a surprising statement during these difficult times. The chart below shows the overall performance of the S&P 500 for the month. As you can see, the stock market’s decline wasn’t significant in June.
My strategy for purchasing stocks has evolved during 2020. The pandemic and free trades are two of the main reasons for this change. A typical stock trade is for 5 shares or less. This is only made possible due to free trades. If I was still charged a trading fee, I would definitely have a different strategy.
Despite the volume of purchases, the type of stocks I invest in remain the same. I invest in high quality, dividend growth stocks. Stocks that are similar to those that Warren Buffett, the Oracle of Omaha, invest in! The small purchases allow me to continue buying in the market and putting my capital to work. Rather than trying to time the market (we would never advocate this strategy) and wait for the next decrease, I will continue buying and dollar cost averaging my position.
Dividend Diplomats Dividend Stock Screener
How do we find these great, undervalued dividend growth stocks to purchase? Come on, we have been blogging for 6+ years now. You should know this answer by now! Just kidding of course. We use the famous Dividend Diplomats Dividend Stock Screener. We love our stock screener because we try to keep things SIMPLE! The metric consists of 3 metrics:
- Price to Earnings Ratio – We look for a price to earnings ratio less than the overall Stock Market. Historically, the stock market’s P/E Ratio is between 18X – 20X.
- Payout Ratio – We aim for a payout ratio less than 60%.
- Dividend Growth – We look for companies with a history of increasing their dividend. This includes Dividend Aristocrats (25+ years of consecutive dividend increases) and Dividend Kings (50+ years of consecutive dividend increases).
See the video below, for further details and explanation. We also have created an “Investing for Beginners” playlist on our Youtube channel. The playlist includes videos breaking down each of the three metrics in detail (and much, much more). If you don’t like to watch videos, visit our Dividend Diplomat Stock Screener page instead!
Dividend Stock #1: AT&T (T)
Let’s start this list off the right way. AT&T, the telecom and entertainment giant, is considered one of our Top 5 Foundation Dividend Stocks for a reason. AT&T pays a strong dividend yield (close to 7%) and is a Dividend Aristocrat. Over the years, my wife and I have built a large position in the telecom giant. In June, as the company’s stock price floated between $29 and $31 per share, I just couldn’t resist adding to my position and increasing the massive dividend we receive from them.
What’s fun here is that AT&T is my internet provider. Thus, each share and dividend received puts me that much closer to being able to cover my internet bill with our dividend income. I still have a long way to go before I hit that mark though!
The one knock against AT&T is their debt balance. Last year, AT&T completed the debt-financed acquisition of DirectTV. This added even more debt to the company’s already leveraged balance sheet. At 6/30/20, the company had over $169 billion in debt outstanding. You read that right. That is billion with a B. Despite the large debt balance, the company is committed to accelerating debt payments to right-size their balance sheet through strategic asset sales and other mechanisms. This focus on paying down their debt is a nice sign to see for shareholders.
I am also comfortable with the debt balance due to the fact that AT&T is a cash cow. The company generates a lot of cash from operations. Their net cash from operating activities for the first six months of the year was $20.9 billion. This is more than enough cash to cover their large dividend and debt payments, per the cash flow statement.
The chart below details all of my AT&T stock purchases in June. I purchased the company on 6 occassions, adding 16 total shares. My average purchase price was $29.68 per share. Let’s quickly run AT&T through our stock screener. Hopefully you will see why I was so eager to add shares and over $33 in dividend income from the purchases! For this analysis, I will use the average purchase price of $29.68 per share, an annual dividend of $2.08 per share, and the company’s estimated forward earnings of $3.26 per share.
- P/E Ratio < S&P 500 – 9.1X – AT&T easily passes this metric.
- Payout Ratio < 60% – 64% – AT&T’s dividend payout ratio is just above our 60% threshold. However, I am not concerned about this due to the reasons I mentioned earlier when discussing the company’s debt.
- Dividend Growth History – I already mentioned that AT&T is a Dividend Aristocrat, right? The company has increased their dividend for over 35+ consecutive years. Talk about consistency!
Dividend Stock #2: Consolidated Edison (ED)
What’s that? Company #2 on my June dividend stock purchase list is also one of our Top 5 Foundation Dividend Stocks? You must be kidding, right? Us Dividend Diplomats DO NOT mess around here. In addition to AT&T, I also increased my stake in Consolidated Edison when the company’s stock price dropped into the low $70 per share range. The purchases were small, as you can see in the chart below. However, each extra share and additional dollar of dividend income has a huge impact on your journey towards financial freedom.
Read: Every Dollar Counts
Consolidated Edison is one of my favorite utility stocks. The company has been around FOREVER. Their roots started with Thomas Edison in the 19th century. The company is a major player in the electric utility sector. Utilities are in a unique position during the pandemic. Regardless of an individual’s employment situation, unemployment benefits, etc., you still have to pay utility bills. So their cash flow stream is not as impaired as other sectors that rely on consumer discretionary spending.
The chart below will corroborate the following statement. I made two very small purchases of Consolidated Edison this month. Each purchase was for a single share. Similar to AT&T, I’ll run Consolidated Edison through our stock screener. For this analysis, I will use my average purchase price of $72.475 per share, an annual dividend of $3.06 per share, and the company’s estimated forward earnings of $4.53 per share (per Yahoo! Finance).
- P/E Ratio < S&P 500 – 16.6X – Consolidated Edison is trading at a small discount compared to the broader market.
- Payout Ratio < 60% – 67.5% – Consolidated Edison’s dividend payout ratio is higher than our targeted 60% threshold. However, the utility sector typically maintains a high payout ratio. Compared to other electric utilities, Con Ed actually has a relatively low dividend payout ratio. I’m not too concerned about this level and threshold for the company.
- Dividend Growth History – Consolidated Edison is a Dividend Aristocrat and has increased their dividend for 45 consecutive years. Watch out, because Con Ed is closing in on the coveted Dividend King title.
Dividend Stock #3: Aflac (AFL)
I’ll be honest with all of you. I could not be happier that I am building my position in Aflac. The insurance sector has offered some fantastic value for investors lately. In particular, companies like Aflac, Cincinatti Financial, Travelers, and other great dividend paying insurance companies have been trading at low stock prices. With low claims and a climbing investment portfolio (due to 3 months of consecutive market gains), Lanny rightly identified the insurance sector as an industry to watch in a “Post Pandemic World.”
My first purchase of Aflac was years ago. After the purchase, the company’s stock price soared. I was left kicking myself for not adding to this Dividend Aristocrat. Now, as a result of the pandemic, I have been fortunate enough to buy once again. What jumps out to me about Aflac is their leading position in the health insurance sector and their strong capital position. The company is a leading provider in health insurance, which sets them apart from many of the other insurance companies that I mentioned in the proceeding paragraph. Being one of the largest players in the industry has its benefits, as it allows you to spread risk among a larger pool. Second, the company’s balance sheet is very strong. They have a great capital position and a large, strong performing investment portfolio. The details can be found in a presentation on their Investor Relations website.
The chart below shows the two Aflac purchases I made during the month. So let’s run Aflac through the Dividend Diplomats Dividend Stock Screener to show YOU why I decided to add to my current position. For this analysis, I will use my average purchase price of $36.22 per share, an annual dividend of $1.12 per share, and the company’s estimated forward earnings of $4.46 per share (per Yahoo! Finance).
- P/E Ratio < S&P 500 – 8.1X – Aflac has a P/E Ratio that is significantly lower than the market. The insurance sector as a whole typically has a low P/E ratio.
- Payout Ratio < 60% – 25.1% – Aflac’s P/E Ratio is WAY below our 60% threshold. This is an easy pass for the duck.
- Dividend Growth History – Like the previous two companies, Aflac is a Dividend Aristocrat. AFL has increased their dividend for 37 consecutive years!.
Dividend Stock #4: Pfizer (PFE)
The last company purchased is a company that has been in the news a lot in July. Pfizer is racing the other major pharmaceutical companies to develop a vaccine for COVID-19. In fact, Pfizer was just awarded a massive, joint $2 billion contract to produce the vaccine below (Headline image per New York Times).
Clearly, I liked the company before they were awarded the massive contract. Pfizer is one of the best in the industry and has some very strong brands in their pharmeceutical portfolio. That is the reason why I built a large position in my Roth IRA. However, my wife did not own a position in the company, or even the sector for that reason. Therefore, I thought this was a great time to begin building her position and purchase a great company, at a fair price, with a strong dividend yield.
The chart below shows the four individual purchases we made for my wife in June. In total, she now owns 9 shares of Pfizer. The position produces $13.68 in annual dividends. Let’s run Pfizer through the Dividend Diplomats Dividend Stock Screener to see why we purchased the company. For this analysis, I will use our average purchase price of $32.23 per share, an annual dividend of $1.52 per share, and the company’s estimated forward earnings of $3.19 per share (per Yahoo! Finance).
- P/E Ratio < S&P 500 – 10.1X – Pfizer’s P/E Ratio is significantly below the broader market.
- Payout Ratio < 60% – 47.6% – Pfizer’s Payout Ratio is in our Sweet Spot, between 40% – 60%. That, in our minds, is the Perfect Dividend Payout Ratio.
- Dividend Growth History – Pfizer is the only company that is not a Dividend Aristocrat. Pfizer snapped their previous streak during the financial crisis. However, the company has increased their dividend annually ever since.
In total, we purchased $1,052.04 of stock during the month of June. Our dividend stock purchases added a combined $57.56 in annual dividend income. That is an average dividend yield of 5.5%! That makes perfect sense given the fact that AT&T was my largest purchase during the month. Pfizer and Consolidated Edison also pay strong dividend yields themselves.
Overall, I am a little disappointed that we didn’t purchase a lot of stock during the month. However, we have been much more active in July. Going forward, I am committing to myself to be more aggressive and continue moving cash from the sidelines and into the market. This is more important than ever given the fact that your cash is losing value in your savings account.
What stocks have you been purchasing lately? Are you purchasing shares in small quantities like I am? What has your investment strategy been in this insane, rising stock market? Would you not have purchased any of the companies I did?