I recently reloaded my Sharebuilder (now Capital One Investing…I know, it will take some time getting used to) with some extra capital and was ready to make a purchase. We recently built a small watch list that had me focused on buying two stocks I already own. But man, what a difference a week can make and after some time, a new stock entered the picture for me. This is a stock Lanny and I have been watching for a while and are huge fans of the stock. Not only is it a Dividend Aristocrat, but it is one of the five stocks we consider a foundation stock for any dividend portfolio. Unfortunately my title gave the purchase away, so let’s see why I initiated a position in Consolidated Edison this week.
So why Consolidated Edison (“ED”) and why now? Let me start with the first question. ED is a Dividend Aristocrat that has increased their dividend for 41 consecutive years. A big check for me. I don’t own all Dividend Aristocrats, I don’t think any dividend investor does. But since our min goal is to focus on building a growing income stream, why wouldn’t being an Aristocrat be a huge plus? ED also performed well in several of the metrics in our stock screener and a few of the extra metrics Lanny and I typically look at while researching a stock.
- ED’s current and forward PE ratios are ~16 and 15, respectively, depending on the source of the information and earnings estimate. Both of which are lower than the broader market’s PE ratio. Since I own two other utility stocks, AEP and FE, I wanted to compare ED’s metrics to my other holdings to determine ED’s place in the industry. ED was in line with AEP (~15.5 current PE and ~14.75 forward PE) and has a much better current PE ratio than FE (~47 current PE and ~13 forward). So what did I gather from these comparisons? ED is trading at a discount to the broader market and is in line with others in the industry.
- As I mentioned before, ED has a history of increasing its dividend. 41+ years is more than enough to pass this metric on our stock screener.
- We typically look for stocks with a payout ratio below 60%. This is one of the few dark spots for ED in our analysis, as their current payout ratio is ~70% and their forward payout ratio (using estimated earnings of $3.96 from TheStreet.com) is ~65%. While ED’s payout ratio is above the threshold, I am not as concerned about this metric considering management’s long history of paying and increasing their dividend, the fact the company has maintained a higher payout ratio for an extended period of time, and that the payout ratio just barely sits above our threshold. I am willing to make an exception if ED performs well in other metrics.
- Share buybacks? Not so much. While comparing the March 31 10-Qs from the last year, their shares have decreased by .006%, which makes sense considering the company’s high payout ratio and history of increasing dividends. While we love to see company’s buyback their shares, as it provides a great benefit to dividend investors, it is not the end of the world if they do not. The dividend is the most important factor to me.
- Lastly, let’s take a look at the dividend growth rate for ED, and this is probably the most controversial metric for the company. ED’s three and five year dividend growth rate’s are a dismal 2.04% and 1.56%, respectively. Wait a second, with such a low dividend growth rate (one that is below inflation), why did I still consider purchasing ED. When I reviewed my portfolio at the end of last year, I set a rule for all future investments. While both are ideal, all my future investments had to have either a current dividend yield or dividend growth rate that is greater than my portfolio’s current metrics. At the time, my average dividend growth rate was about 7.5% and my current portfolio’s yield is 3.67%. ED’s current dividend growth rate is obviously below my portfolio’s average; however, ED’s 4.3% yield is greater than my current yield, so I was willing to overlook this low dividend growth rate. Some of you will probably disagree with me on this point, so if so, please let me know how you assess the high dividend yield, low dividend growth rate stocks!
Hopefully that answers the first question as to why I purchased ED. It is a solid dividend stock for a long-term portfolio, music to my ears! The second question I asked myself was why now? It has been a tough 2015 for ED and the broader utilities industry, as ED is down 7.5% YTD. And this week in particular ED has fallen nearly 3%. So with some extra capital to spare, I finally decided to initiate a position in ED, purchasing 16 shares, adding $41.60 in projected annual dividend income to my portfolio. Barring a dramatic increase in price, I will be adding to this position in the near future and would be satisfied with holding anywhere between 30-40 shares in the company going forward, so get ready for that future purchase article!
Let me provide a post-purchase update on some of my 2015 goals. I set a goal of investing $15,000 of new capital into my portfolio (not including DRIP of 401(k) contributions). After this purchase, my year to date total increased to $6,485, or 43% of my goal. It looks like I am right on track considering we are about 42% through 2015. Adding the 16 shares increase my projected forward dividend income to $2,099. Come on, why couldn’t it have pushed me over $2,100! Regardless, I am taking steps towards reaching my goal of $2,750. I still have room to go, but adding a stock yielding 4.3% definitely helps. Finally, I purchased ED in my Roth, bringing my 2015 contribution total to %1,092, which is well under the limit. But I will make sure to max out my Roth before the end of the year.
So there we have it, another purchase in the books. Man do I love adding Dividend Aristocrats to my portfolio! What do you think of my purchase? Would you have purchased Consolidated Edison? Or would you have gone Lanny’s route and purchased a different Aristocrat?
Bert