There have been a lot of major news stories over the last week covering topics ranging from social to financial issues. It seems like every day there was some new development that had major implication, which is a great fit for our 24 hour news cycles. The one story that has a substantial impact on us dividend growth investors is the continuing saga in Greece. Once again, we find ourselves staring a default, departure from the European Union, etc., in the face and worst of all at any second a decision could be made that could send shock waves through the financial markets. It finally hit me, I didn’t have a plan to capitalize on a potential downturn in the market. But that all changes now.
My Plan & Rationale
First of all, we must remember that I am a buy and hold investor of dividend growth companies. So I want to squash the sell option right here, because a pullback in the market is not one of the reasons I would consider selling a stock. If anything, a pullback is a great opportunity because it allows me to 1. Purchase undervalued dividend stocks that fit my stock screener and 2. Re-invest dividends at a lower price so I can receive more shares (albeit, the increase typically results in a tenth of a share more). So in my eyes, a downturn in the market just presents one giant buying opportunity.
That’s what I find unique and fascinating about what is currently going on in Greece. I can’t imagine what it must be like to be in the middle of the situation as it has to be stressful for all parties involved. There is just so much on the line for everyone and it is hard to find a scenario where everyone can win. And when a major country could potentially default on their debt payments at any moment and the news regarding the default is constantly changing, the markets are rightfully volatile. Although, I must say this time around the markets seem much more calm than in the past. As I mentioned before, I want to craft a plan for how to capitalize on a sudden downturn in the market that would result from sudden bad news. The last thing I want is to see the market drop over 2-3% within an hour and have to commit time trying find the best investment. Since time is precious, I thought developing a list of a few companies would be a constructive exercise.
When developing my list, I didn’t want to just put together a watch list of all companies. Heck, we do that all the time. No, for this I wanted to develop a specific list of stocks that will allow me to best capitalize on this unique situation. It’s not just enough to aim for stocks that meet our stock screener and are potentially undervalued. Since the European Union and companies that conduct business in the EU will be the most impacted by a negative development in the Greece situation, I am looking for dividend paying companies that conduct business predominately in the Americas or Asia. What I am trying to take advantage of are companies that have been dragged down by the broader market even though their future cash flows, which drive their dividend, will not be impacted since their consumer base is not located in Europe. To me, that is how an individual investor can truly capitalize on the a sudden shock in the market place driven by a negative development from Greece.
Now that I have identified that I am looking for dividend growth companies that are not European centric, it is time to list some stocks that are now on my watch list. This list is not all-inclusive and I am sure there are many other great dividend growth stocks out there. Please, if there is a great stock I am missing, please make sure to let us know in he comments section.
1). Altria Group (MO) – I already own the international spin-off of the old company and added to my stake a few months ago, so why not add shares in the domestic portion as well? MO is one of those rock solid dividend companies in an industry notorious for dividends. MO’s current PE ratio is ~19, a dividend yield of 4.2%, and a 3-year average dividend growth rate of just over 4%. While the payout ratio is high, I am not overly concerned since a high payout ratio is common in the tobacco industry.
2). Consolidated Edison (ED) – There are some great utility stocks out there, and I own three of the largest electric utility companies right now. Kind of funny when you think about it even though I may potentially sell my stake in First Energy for a variety of reasons. Out of the three I own, I would love to take the opportunity to add to my position Consolidated Edison, which I added to my portfolio last month. While the dividend growth rate has been less than stellar, I love the longevity of the dividend increases, the solid dividend yield, and the companies current valuation compared to others in the industry. Wouldn’t mind adding some extra shares for this foundation stock!
3). Kinder Morgan (KMI) – Lanny and I already have nice stakes in Kinder Morgan, but man would I love to own more. This is just a great dividend paying company. KMI has the largest market cap in the oil and gas pipeline industry, by far, and has an insane network in North America. Even better, as a part of the consolidation that cause the jump in the share price last year, management has committed to increasing their dividend 10% annually through 2020. A pullback in the market and KMI may provide too great of an opportunity to pass up here.
4). Norfolk Southern Corporation (NSC) – The rationale behind purchasing NSC is similar to KMI. NSC is one of the large railroad companies in the United States with a large network of railroads that have allowed the company to establish one heck of an economic moat. I recently initiated a position in NSC a few months ago based on the stock analysis Lanny performed, which showed a sub 40% payout ratio, a 3-year average dividend growth rate of 10%, and a current PE ratio below the S&P 500. Since my last purchase, the price has only decreased, so why not re-up my position if the stock continues to slide.
5). Realty Income (O) – Last but not least, I wanted to add a stock that I have been watching for quite some time, Realty Income. This stock is a darling in the dividend investing community, as their monthly dividend increase that increase nearly every other month really accelerates the power of dividend re-investing. The company is well diversified through the United States, owning property in 49 states and Puerto Rico. On top of it, the company diversities their tenants to avoid over exposure to one industry, which can cause headaches for some REITs. With a yield over 5%, initiating a position in O would add a nice punch to my dividend income, which has to cross $2,750 at some point before 12/31/15 so I can achieve my goal!
Again, I would like to emphasize, this list is not all-inclusive and there are many of other great dividend paying companies out there, whether they are domestically focused or not. However, based on the current environment, the five stocks listed above would allow me to potentially capitalize in a sudden pullback in the market. Honestly, I would be happy to purchase any of the five stocks listed above. While my strategy may not be perfect and we may disagree, I am happy that I took the time to formulate a strategy that will allow me to act fast if needed. Hopefully, for everyone’s and most importantly the citizens of Greece’s sake, the situation will be resolved and I can toss this plan and watch list out the window. If not, at least I have a plan and I am ready to pounce.
What are your thoughts about the plan? Are there any other stocks you think I should consider? Am I too narrowly focused by only considering stocks that operate outside of Europe? Would you consider any company in a market pullback as a result of negative news in Greece? Please everyone share your thoughts, I am looking forward to hearing what you have to say!