Hey everyone! I was sitting at my kitchen table doing an intense round of push-ups, reading articles and had a thought. I would love to share my point of view on the top 5 foundation dividend stocks that every beginning investor should own. Also, this could work for anyone that is also transitioning from more of the “sexy” (i.e. complex) type of investing into something that we, dividend investors, feel – just makes more sense.
In order to bring the excitement up a notch, we have drilled down to FIVE dividend stocks to be the foundation to YOUR dividend portfolio. The five dividend stocks represent different industries and hold the mighty, “Dividend Aristocrat”, crown, as well.
Finding the top 5 foundation dividend stocks
Stage 1 – Dividend Aristocrat
I feel that to make the top 5 foundation dividend stocks – one should be a dividend aristocrat, or one who has raised dividends for 25+ years. To see the active list, go here. That link to BuyUpside is actually a very useful page that I used when I first began investing back in the day. From reading that list, there are over 50 dividend paying stocks that have paid and increased dividends 25+ years! Quite a list if you ask me. Therefore – we have just wittled down the entire market into 50-53 stocks, what a screener, huh? Let’s see what Stage 2 has.
Stage 2 – 2.50% Yield
Not only do I think the top 5 foundation dividend stocks should be an aristocrat, but I think they should first have a yield higher than the market as a whole (over 1.8/1.9%), but I also think they should be over 2.50%, a little more greedy, huh? This literally cuts the list in half, I believe, to 26 stocks. I think that makes it easy for us. We literally have taken thousands of companies that are trading, took the nonsense out and said Hey – here are 26 stocks to look at.
Stage 3 – 5 Industries
Now that we are down to 26 stocks, we need to pick 5 different industries. Think of being a consumer. What do we need and rely upon? First, energy & utilities are one. Secondly, food products would be another. Thirdly, we can all agree healthcare should be included. What about communication, such as – to call, text, cell call, use the internet to e-mail? I believe that is highly needed in this day and age, with the trend to continue the usage.
Step 4 – The Stocks
The moment we have all been wanting to come see. We wanted to make sure we were in different areas/industries. This helps diversify and spread the risk – if one industry is poorly performing, the other may not be. In other words, it’s always nice owning more and being able to spread more eggs in one basket. For instance, if you owned stocks within the same industry, here may be better players than others. As a rule, completely different industries would be your best first bet.
As very unintelligent, as this sounds, we wanted to pick companies that we have all heard of, that we see ourselves, family members and friends all use and enjoy. This makes it easier, as the company tends to never go out of style or, for a fun little pun, goes out of stock, hehe, we crack ourselves up let me tell ya (joking!). Therefore, the top 5 foundation dividend stocks selected are below!
1. McDonalds (MCD) – Food. Stock metrics –> 40+ year dividend growth rate = 13.21% on an annual basis. Current P/E Ratio = 17.57, based on 2020 earnings per share projection. MCD has a Current Dividend Yield = 3.36% with a Current Payout Ratio = ($5.00/8.45) 59%. Everyone loves the golden arches! Selling billions of hamburgers worldwide – it’s an internationally recognized company who continues to put smiles on individuals faces at every meal. Whoa, yield has sprung above the 2.5% threshold. They still do have a solid payout ratio and a growth rate for more than 40 years.
2. Procter Gamble (PG) – Consumers goods. Stock metrics –> 40+ year growth rate = 6.96% on an annual basis. Current P/E Ratio = 20.61, based on 2020 earnings per share projection. PG has a Current Dividend Yield = 2.91% with a Current Payout Ratio = ($2.984/$4.97) 60%. We see the name everywhere, we see them on the back of our packages – does Pampers, Bounty, Tide, Dawn, Crest, Gillette – all ring a bell? For example, I shave, use soap, brush my teeth, and wash clothes. Now, I don’t change diapers yet.. but if I did, PG is all over it.
3. Johnson N Johnson (JNJ) – Healthcare Products. Stock metrics –> 40+ year growth rate = 9.37% on an annual basis. Current P/E Ratio = 13.33, based on 2020 earnings per share projection. JNJ has a Current dividend Yield = 3.17% with a Current Payout Ratio = ($3.80/$8.99) 42%. Ever cut yourself and needed a band-aid? How about Neutrogena for your high school induced acne or pimples? Losing some hair – throw on some Rogaine. Splenda, Tylenol, Listerine, Visine, Benadryl, Acuvue, Neosporin – all JNJ brands. Given their better valuation, this could be on your list of stocks to buy starting out. You better believe it.
4. Consolidated Edison (ED) – Utilities. Stock metrics –> 44+ year growth rate = 2.00-2.50% on an annual basis. Current P/E Ratio = 16.35, based on 2020 earnings projection. ED has a Current dividend Yield = 4.22% with a Current Payout Ratio = ($3.06/$4.45) 69%. Thomas Edison, need I say more? Also, we performed a stock analysis back a month ago on this utility giant. Always need to have light, plug things in, etc..
5. AT&T (T) – Telecommunications. Their growth rate has recently been around the 2% mark to their dividend. Current P/E Ratio = 7.88, based on 2020 earnings per share projection. AT&T (T) also has a Current dividend Yield = 7.31% with a Current Payout Ratio = ($2.08/$3.61) 57%. I have purchased AT&T a few times and they have a low growth, but sweet yield model – great to add a bang to anyone’s dividend income portfolio starting out! From Cell phones, to U-Verse, Direct TV, Movies (Time Warner), House lines, Internet – AT&T can provide it.
*Updated through 3/20/2020
top 5 foundation dividend stocks summary
Isn’t it easy to see why the 5 dividend stocks above should be a strong foundation for a portfolio? Can you disagree these are 5 bad names to start with? Are there others that you would consider before purchasing these to begin your financial journey with dividend investing? Taking this information in consideration, you can have a rock-solid dividend portfolio out of the gate!
Obviously, this is all based on what valuation you give the stock at the time of purchase but I feel these are strong staples for anyone’s portfolio. As always, I would review our dividend stock screener to filter out different metrics to use. I would appreciate the feedback to see your viewpoints, feedback and what you think should fall into this category! Thanks all for stopping by – have a great weekend!