This is Part 2 of four-part series about why I chose the 26 stocks listed here (I added Novartis AG). The information contained in the brief summaries were originally published in the article tagged above. (Check out Part 1 of this series here.)
A Brief Summary Of My Strategy
This portfolio will be maintained for about 45 years, into my retirement, and maybe even further into it. I plan to invest an initial amount of $30,000 into some dividend stocks, and add $400 monthly over 45 years, and grow the money by 8.3% yearly. (I think this should be achievable as a 10-year backtest showed a return of 10.7% yearly. I know past performance is not a representation of future performance, but I think 8.3% is a fair estimate).
To manage my portfolio, I plan to check the news for the stocks in my portfolio every weekend, and read articles on great sites like Seeking Alpha, Yahoo Finance, MSN Money and The Motley Fool. Besides this, when stocks are more overvalued (most stocks are still fairly priced at the moment), I plan to get loaded up on cash (I will add $400 monthly) and just collect my dividends while waiting. I will then wait for stocks to be more undervalued (e.g., recession, correction) before buying more stock, and will only sell when the dividend stocks decrease their dividend or announce news that is unfavorable to investors.
Here are some of my selling guidelines:
- Decrease/Elimination Of Dividend
- Uncertainty With Future Dividend Payments
- Losing Market Share Rapidly/Not Competitive Enough/Fundamental Problems
The Mission Of The Portfolio
The mission of this portfolio is to provide myself with steady capital appreciation and a growing stream of dividends to be reinvested into the respective companies. Besides this, I also aim for a portfolio that will yield around 4%, and this dividend, along with the returns in the stock price itself, should be able to beat both inflation and the major indexes over the years. Later in life during retirement, I also aim to live solely off these dividends and have a good retirement (along with my family).
Here are some general qualities of the stocks in my portfolio:
- All of these stocks have at least five years of consecutive dividend increases (except KRFT, a spinoff from the former Kraft Foods)
- All stocks listed have outperformed the S&P 500 during the latest 2008 recession except Aflac (NYSE:AFL). (The reason is in the article I tagged above.)
- All have payout ratios of below 90%. The exceptions, AT&T (NYSE:T), Omega Healthcare (NYSE:OHI) and Kinder Morgan Pt (NYSE:KMP) are capital intensive businesses and have safe payout ratios when the formula is tweaked from Dividends Paid/EPS to Dividends Paid/FFO.
Here are some general statistics about my portfolio:
- Outperformed the S&P 500 by 6.88% annually over the past 10 years (My portfolio 10.70% vs S&P 500 3.82%, including dividends)
Note: Subject to survivorship bias
- Yield of 4.2%
- P/E of 15
- Beta of 0.67
- 5-Year dividend growth of 12.2%
Here are the six stocks I am going to cover in this article:
|Company||Consecutive Dividend Increases (Years)||Dividend Yield (%)||5-Year Dividend Growth|
|Johnson & Johnson (NYSE:JNJ) +||50||3.5||9.1|
|Kimberly Clark (NYSE:KMB)||40||3.5||7.8|
|Kinder Morgan Energy Pt. +||16||6.3||7.2|
|Kraft Foods Grp. (KRFT)||0 (Spinoff from Kraft Foods- KFT)||4.5||Spinoff|
Intel designs, manufactures and sells integrated digital technology platforms. The company also offers microprocessors, chipsets, system-on-chip products, wired network connectivity products and wireless connectivity products. Intel is the biggest semiconductor company in the world and owns almost 80% in the microprocessor market, but share prices have been depressed due to worries about the decline of the PC industry and the rise in the mobile industry - that Intel is not really successful in. Even so, I believe that Intel will not be going anywhere anytime soon, especially with the funds it has at the moment, and how much is allocated to research and development yearly. But investing in Intel involves taking a considerable amount of risk, given all the uncertainty surrounding Intel at the moment and the competitive industry Intel is operating in.
The company has a $102.06B market cap and a 4.39% dividend, as of 12/27/2012's closing price of $20.51. The company has increased its dividends yearly over the past nine years, which gives Intel Dividend Challenger status on its way to Dividend Contender status. Intel has a payout ratio of 35.93%, which shows that the dividend is safe and has the potential to increase at a fast rate over the next few years.
I also like the company in several ways fundamentally. Firstly, it has a low amount of debt compared with equity. It has $7.08B in debt and has a debt/equity ratio of 0.15. I like this as it proves that the company is earning enough to not consistently rely on debt to perform its internal operations. Secondly, it has a high ROE of 24.9%. A high ROE indicates that a company's management is using shareholders' money more effectively, which is good both for the company and its shareholders. The definition of ROE is the amount of net income returned as a percentage of shareholders' investments.
Intel is currently attractively valued at 9X trailing 12-month earnings in my opinion. Although this is the case, I recommend that those considering initiating a position in Intel buy the company in installments (eg. 100 shares at $19, 100 shares at $18.50, 100 shares at $18), as the stock is in a pretty strong downtrend.
Here is a chart of Intel's past dividend payments:
2. Johnson & Johnson
Johnson & Johnson engages in the research and development, manufacture, and sale of various products in the healthcare field worldwide. It has three segments - the consumer segment, the pharmaceutical segment and a medical devices and diagnostics segment. Many of its products, especially in the consumer segment, is used frequently by consumers. A list of the products here include shampoo, plasters, mouthwashes, and many others. Its pharmaceutical segment provides a variety of drugs and other products, from vaccines to anti-infective drugs. On the other hand, its medical devices segment provides products meant to cure a variety of diseases. I like the fact that it has a diversified product list and that many of these items are needed by consumers in everyday use, or are needed when one falls ill, as illnesses are inevitable.
The company has a $194.24B market cap and pays a 3.48% dividend as of 12/24/2012's closing price of $70.09. The company has increased its dividends for 50 consecutive years, attaining the status of Dividend Champion. The company has a payout ratio of 76.21% at the moment, which seems bad. But after taking into account the 4th-quarter 2011 write-down of $2.9B and another $2.2B write-down in Q2 2012, the payout ratio decreases to 51.03%, which shows that the dividend is well covered and safe.
I like the company in several ways fundamentally. Firstly, the company has bought back shares at a modest rate over the past 10 years, with shares outstanding falling 0.9% annually since 2002. Secondly, the company has enjoyed rising EPS numbers over the past 10 years. EPS for 2011, after accounting for the various charges totaling $5.1B as mentioned previously, comes out at $4.54, an increase of 7.7% annually over the past 10 years. This is acceptable, after you take into account that the company is a mega cap.
The company is trading at 23X trailing 12-month earnings, which seems seriously overvalued at first sight. But if you take into account the aforementioned charges, the P/E ratio comes down to 14.3X trailing 12-month earnings. Therefore, Johnson & Johnson is trading at a fair price at the moment, although a conservative investor could wait for a lower price to present itself.
Here is a chart showing Johnson & Johnson's past dividend payments:
3. Kimberly Clark
Kimberly-Clark Corporation engages in manufacturing and marketing healthcare products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional and Other and Healthcare. The company manufactures necessities like tissues, towels, infection-prevention products and a variety of other personal products, which are needed by consumers.
The company has a market cap of $32.84B and pays a dividend of 3.53% as of 12/26/2012's share price of $83.93. The company has increased its dividends for 40 years straight, attaining the Dividend Champion status as well. The company has a dividend payout ratio of 61.15%, which shows the dividend is well covered and safe.
I also like the company in a few ways in the fundamental aspect. Firstly, it has a high ROE number of 35.17%, which is within the top 5% ROE values of the entire universe of stocks. A high ROE indicates that a company's management is using shareholders' money more effectively, which is good both for the company and its shareholders. The definition of ROE is the amount of net income returned as a percentage of shareholders' investments. Secondly, the company has bought back shares over the past 10 years, with shares outstanding decreasing 2.5% annually since 2002.
The company is trading at a slightly overvalued 17.7X trailing 12-month earnings at the moment. Therefore, I would be more comfortable picking up shares around the $80-$81 range.
Here is a dividend chart showing the company's past dividend payments:
4. Kinder Morgan Energy Pt.
Kinder Morgan Energy Partners operates as a pipeline transportation and energy storage company in North America. It owns around 75,000 miles of pipeline and 180 terminals, and is the largest in its "Oil & Gas Pipelines" industry. I especially like Kinder Morgan's business structure as the company's underground pipelines can be thought of as a "toll road" for crude oil, natural gas, and a variety of other energy-related products. Therefore, its profits are not affected by the fluctuations of the prices of these energy-related commodities - its job is just to transport it. In addition, being the leader in its industry, it also has a considerable amount of pricing power.
The MLP has a market cap of $28.49B and pays a high distribution yield of 6.32% as of 12/24/2012's share price of $78.06. The company has increased its distributions for 16 years straight, attaining the status of Dividend Contender. The MLP's dividend payout ratio against FFO (Formula: Dividend/FFO, For REITs and MLPs, FFO is a more accurate calculation of earnings than EPS.) is only 38.70%, which shows that the dividend is well covered, safe and has the potential to grow further in the future.
I also like the company's fundamentals for several reasons. Firstly, its FFO (Funds From Operations) have been increasing steadily. Over the past 10 years, FFO values have increased from $4.08 in 2002 to $8.52 in 2011, which represents a 7.6% increase annually over the past 10 years. This is great performance coming from a considerably large MLP, with a total market value of about $100B. Secondly, gross margin has increased from 39% in 2002 to 48% currently, which is quite a respectable increase.
Kinder Morgan is only trading at 9.2X 2011 FFO and 7.6X 2012 estimated FFO. At today's prices, I find the FFO values quite reasonable.
Here is a chart of Kinder Morgan's past dividend payments:
The Coca-Cola Company offers a variety of beverages - sparkling and non-sparkling. These beverages include drinks like Fanta, Minuite Maid, Sprite, vitaminwater and (not forgetting) the company's original Coca-Cola. We all love these brands, and many people around the world consume them very often. They can already be thought of as an irreplaceable beverage in our lives. But, the beverage is not the only one appealing. Like the stock has appealed to famous billionaire Warren Buffett and many other investors, it also looks appealing to me. I mainly like it for its famous brand that it has built over the past few decades, and that it will most likely thrive in the decades to come, with an exceptionally strong rooting in the soft drink industry and with only a few competitors to compete with it for market share.
The company has a market cap of $164.74B, and pays a dividend of 2.80%, as of 12/26/2012's price of $36.42. Like Johnson & Johnson, this dividend aristocrat has increased its dividends for 50 years straight, and has attained Dividend Champion status. The company has a payout ratio of 51.17%, which shows that the dividend is safe.
Besides its dividends, I also like the company's fundamentals. Firstly, its EPS has increased steadily over the past 10 years, growing 8.8% annually since 2002. Information for the company's EPS numbers can be found here. Secondly, the company has a high ROE number of 26.52% at the moment. Additionally, it has maintained this number over 25% for the past 10 years, which is remarkable. A high ROE indicates that a company's management is using shareholders' money more effectively, which is good both for the company and its shareholders. The definition of ROE is the amount of net income returned as a percentage of shareholders' investments. Thirdly, Coca-Cola has an exceptionally high net profit margin of 18.63%. This number is higher than all the stocks in its industry, with competitors Monster Beverage (NASDAQ:MNST) with a profit margin of 16.84%, Dr. Pepper Snapple (NYSE:DPS) with a profit margin of 10.47% and PepsiCo (NYSE:PEP) with a profit margin of merely 9.06%. This shows that Coca-Cola's brand is much stronger compared with its competitors; and that it controls its costs better.
Although this is the case, it is trading at an overvalued 19.1X trailing 12-month earnings and 16.8X forward earnings, therefore I do not recommend buying the company at today's prices. I would like to consider a position when the stock price nears the range of $34-$35, which is a more comfortable range for me.
Here is a chart showing Coca-Cola's past dividend payments:
6. Kraft Foods Group
Kraft Foods Group is a spinoff from the former Kraft Foods (formerly KFT) and operates as a food and beverage company. It manufactures and markets refreshment beverages, processed cheese products, meat-based products, vegetable-based products peanut butter and a variety of other snacks and desserts. I especially like Kraft's wide and diversified portfolio of food brands. In addition, many of these brands are very famous brands that people should continue to buy going forward.
The newly spun off company has a market cap of $26.30B and pays a dividend of $2 per share, or a 4.51% yield as of 12/21/2012's closing price of $44.39. As it is a newly spun off company, it has no dividend history. I bought Kraft as the dividend is expected to increase over time. Here is what CEO Tony Vernon said when it announced its first quarterly dividend of $0.50:
We are pleased to declare our first dividend as a newly independent Kraft. This dividend reflects our intention to deliver a significant return of cash to shareholders through a superior dividend payout that's targeted to grow consistently, year after year.
The company has a payout ratio of 60.79%, which shows that the dividend is well accounted for and safe.
On the fundamental aspect, there is not much to elaborate about as Kraft does not have history of metrics such as ROE, ROA, and does not have history of share buybacks yet. But, it has some earnings history (from the times when it was a segment of KFT). Earnings have increased 6% per annum over the past four years (since 2008), according to MSN Money.
Looking at valuations now, Kraft looks like it is slightly overvalued 13.5X trailing 12-month earnings. I say this because of two reasons. Firstly, earnings is expected to decrease next year, as shown here (forward P/E > trailing P/E). Secondly, it is expected to grow at a slow 6% over the next five years, which can also be observed through the above link. Therefore, I would be more comfortable buying around the $42 range.
In conclusion, I like to choose companies with stellar earnings growth, steady dividend growth, that have a business that sells a product/offers a service that people need, to make up my portfolio. Of course, their payout ratios should also not be too high. These companies, however boring their businesses are, will reward shareholders over time. Additionally, if you are considering buying any of the stocks listed here, please also do your own due diligence before buying as I have only covered a few of the companies' qualities briefly.
Disclosure: I am long JNJ, KMP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.