Dividend Investors Should Get Ready To Load Up

Includes: BDX, BP, JNJ
by: Tim McAleenan Jr.

Because high-quality stocks might decline in the week ahead if we are unable to avert the fiscal cliff tax hikes, I think it can be useful to keep in mind this classic quote from Warren Buffett's 1990 Letter to Shareholders of Berkshire Hathaway (NYSE:BRK.B):

We will be buying businesses - or small parts of businesses, called stocks - year in, year out as long as I live…Given these intentions, declining prices for businesses benefit us, and rising prices hurt us. The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.

There's a lot of wisdom in trying to follow the approach explained by Buffett above. Do I want tax increases? Heck no. Do I enjoy the catastrophes? Absolutely not. But my success as an investor is not measured by getting what I want to happen, but rather, by reacting intelligently to the things that do happen. If a deal is not reached soon and the stock market continues to tumble, almost every article that you read here on Seeking Alpha or elsewhere in the financial media will be talking about falling equity values and the destruction of paper wealth. Anytime I see a news article talking about the woe of prices in the stock market, I mentally translate the headline to this: "Stocks Are Going On Sale! Same Companies! Higher Earnings Yields! Higher Dividend Yields!"

This does not mean that every stock is automatically a value. Rather, it means that if I was enthusiastically buying shares of a company for my long-term holdings a month or two ago at high prices, then I should be more happy to do so now at a lower price. Over the past couple of months, I've been buying shares of Becton Dickinson (NYSE:BDX), BP (NYSE:BP), and Johnson & Johnson (NYSE:JNJ). Nothing about my long-term investment thesis for any of these companies is contingent upon a fiscal cliff resolution. Johnson & Johnson currently offers investors a 3.50% starting dividend yield. If the fiscal cliff causes it to creep closer to the generational high of around the 4% water mark, then I'm going to be ecstatic about adding more shares. I'll be doing everything in my power to find ways to increase the amount of Johnson & Johnson I'm buying.

A similar story plays out with Becton Dickinson. It's one of those underrated dividend growth stocks that doesn't quite get the attention of something like Coca-Cola (NYSE:KO) or Colgate-Palmolive (NYSE:CL), but nevertheless, the company has been raising its dividend every year since the 1960s, often by a high single-digit clip. If that 2.5% starting yield inches closer to the 3% mark, I could own a high-quality asset that offers a reasonable probability of achieving 9-10% earnings and dividend growth over the next five to ten years.

BP is certainly the most speculative security I've been actively purchasing recently (I'd recommend putting on a cowboy hat to those considering purchasing shares, because it's going to be a bumpy ride), but the current dividend yield over 5% is quite enticing if you think it's stable (and although it's difficult to gauge BP's earnings power, it seems reasonable to believe that the current $2.16 annual dividend is safe given that analysts are projecting $6 in earnings for 2013). If the fiscal cliff causes the dividend yield to get closer to 6%, then BP will eclipse GlaxoSmithKline (NYSE:GSK) as my highest-yielding investment. Personally, I'll welcome the additional income that each dollar of investment would represent.

The purpose of this post was not for me to sell you on Johnson & Johnson, Becton Dickinson, or BP, although I do believe all three are attractively valued and I intend to accelerate more purchases of all three companies if the fiscal cliff causes the stock price to fall lower. Rather, I am trying to point out that if there is a long-term investment opportunity that seemed reasonable to you a couple months ago at a higher price, then you should enjoy the opportunity to buy the same companies at a lower price now that the dividend yields and earnings yield may be inching higher. For dividend investors looking to hold stocks for 5+ years, these are the kinds of moments that we might look back upon as great opportunities to buy high-quality assets at a reasonable price or better.

Disclosure: I am long JNJ, BP, GSK, BDX. 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.