Anchor Stocks For An Income Portfolio

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 |  Includes: CVX, IBM, INTC, WM, WMT
by: Invest Yourself

In every income portfolio you as an investor must identify and invest in anchor stocks. These are stocks, that no matter what the cyclical economy does, you will not sell. These are stocks, that when there stock prices falls, you look to buy more. Every income portfolio needs anchor stocks. In a previous article of mine I outlined five simple questions to ask about a stock to determine its worth. These are simple questions for those who do not know where to begin. There are many more factors that you should consider before investing in any stock.

  1. Does the company pay a dividend?
  2. Has it shown a history for increasing its dividend over time?
  3. Does the company have a reasonable P/E(18 or less) value?
  4. Is the current dividend yield larger than 2 percent?
  5. Does the company have a history of buying back stock?

Note: The answer to Question 1 must always be a yes. If the answer is no, do not bother asking the remaining questions.

We will now look at five stocks that we have identified as anchor stocks contained in our income portfolio.

  • IBM (NYSE:IBM)

IBM by its own definition is an information technology company, which provides integrated solutions that leverage information technology and knowledge of business processes. IBM provides a very integrated suite of services and products. This makes IBM exactly the type of IT company that will thrive in the next generation of technology offerings. Let's look at IBM based upon the above criteria

1) Does the company pay a dividend?

IBM currently pays a quarterly dividend of $0.85.

2) Has it shown a history for increasing its dividend over time?

IBM has increased its dividend payment from $0.40 in 2008 to its current rate of $0.85. CVX also boasts an impressive 17.18% annual dividend growth rate over the last five years. If this average is maintained that would put the dividend pay over the $1.50 mark within the next five years. IBM has also increased its dividend payouts for 17 consecutive years.

3) Does the company have a reasonable P/E value?

IBM has a P/E of between 13-14. That puts it well within our criteria for an anchor stock.

4) Is the current dividend yield larger than 2 percent?

IBM's current dividend yield is 1.8%. We do not meet this requirement. IBM's consistency with which it has grown their dividend over time allows us to look past this number.

5) Does the company have a history of buying back stock

IBM has reduced the number of diluted outstanding shares from 1.45 Billion in 2007 to 1.14 Billion as of the last report in September of 2012. This is a 21% reduction in the number of outstanding shares in a five-year period.

(IBM's Rating = 4 out of 5)

Click to enlarge

(IBM's projected dividend growth)

  • Wal-mart (NYSE:WMT)

Wal-Mart Stores, Inc. operates retail stores in various formats around the world. It is by far one of the world's largest retailers. Wal-Mart's margins are tighter than a lot of its competitors. It makes up for its tight margins however by sheer volume of customers.

1) Does the company pay a dividend?

WMT currently pays a quarterly dividend of $0.3975.

2) Has it shown a history for increasing its dividend over time?

WMT has increased its dividend payment from $0.22 in 2008 to its current rate of $0.3975. WMT also boasts an impressive 12.65% annual dividend growth rate over the last five years. If this average is maintained that would put the dividend pay over the $0.65 mark within the next five years. WMT has also increased its dividend payouts for 37 consecutive years.

3) Does the company have a reasonable P/E value?

WMT has a P/E of 14. That puts it well within our criteria for an anchor stock.

4) Is the current dividend yield larger than 2 percent?

WMT's current dividend yield is 2.3%.

5) Does the company have a history of buying back stock

WMT has reduced the number of diluted outstanding shares from 4.07 Billion in 2007 to 3.38 Billion as of its last report in October of 2012. This is a 17% reduction in the number of outstanding shares in a five-year period.

(WMT's Rating = 5 out of 5)

Click to enlarge

(WMT's projected dividend growth)

  • Chevron (NYSE:CVX)

Chevron Corp. is an integrated energy company. It operates through its subsidiaries, which are engaged in petroleum operations, chemicals operations, mining operations, power generation and energy services.

1) Does the company pay a dividend?

CVX currently pays a quarterly dividend of $0.90.

2) Has it shown a history for increasing its dividend over time?

CVX has increased its dividend payment from $0.58 in 2008 to its current rate of $0.90. CVX also boasts an impressive 9.25% annual dividend growth rate over the last five years. If this average is maintained that would put the dividend pay over the $1.30 mark within the next five years. CVX has also increased its dividend payouts for 20 consecutive years.

3) Does the company have a reasonable P/E value?

CVX has a P/E of 9. That puts it well within our criteria for an anchor stock.

4) Is the current dividend yield larger than 2 percent?

CVX's current dividend yield is 3.19%.

5) Does the company have a history of buying back stock

CVX has reduced the number of diluted outstanding shares from 2.13 Billion in 2007 to 1.96 Billion as of the last report in September of 2012. This is an 8% reduction in the number of outstanding shares in a five-year period.

(CVX's Rating = 5 out of 5)

Click to enlarge

(CVX's projected dividend growth)

  • Waste Management (NYSE:WM)

Waste Management, Inc., through its subsidiaries, provides waste management services to residential, commercial, industrial, and municipal customers in North America. It offers collection, transfer, recycling and disposal services.

1) Does the company pay a dividend?

WM currently pays a quarterly dividend of $0.355.

2) Has it shown a history for increasing its dividend over time?

WM has increased its dividend payment from $0.27 in 2008 to its current rate of $0.355. WM also boasts an impressive 8.18% annual dividend growth rate over the last five years. If this average is maintained that would put its dividend pay over the $0.50 mark within the next five years. WM has also increased its dividend payouts for nine consecutive years.

3) Does the company have a reasonable P/E value?

WM has a current P/E of 18.7. That puts it slightly above the level we like for an anchor stock, but we bought WM at $32.31 a share. At that price the estimated P/E rate is 17.3. That fact keeps our investment purchase below the 18 P/E target we look for.

4) Is the current dividend yield larger than 2 percent?

WM's current dividend yield is 4.07%.

5) Does the company have a history of buying back stock

WM has reduced the number of diluted outstanding shares from 521.8 Million in 2007 to 464.9 Million as of the last report in September of 2012. This is an 11% reduction in the number of outstanding shares in a five-year period.

(WM's Rating = 5 out of 5)

Click to enlarge

(WM's projected dividend growth)

  • Intel (NASDAQ:INTC)

Intel Corp. designs, manufactures and sells computer components and related products. It designs and manufactures computing and communication components, such as microprocessors, chipsets, motherboards, and wireless and wired connectivity products.

1) Does the company pay a dividend?

INTC currently pays a quarterly dividend of $0.225.

2) Has it shown a history for increasing its dividend over time?

INTC has increased its dividend payment from $0.1275 in 2008 to its current rate of $0.225. INTC also boasts an impressive 14.37% annual dividend growth rate over the last five years. If this average is maintained that would put its dividend pay over the $0.40 mark within the next five years. INTC has also increased its dividend payouts for nine consecutive years.

3) Does the company have a reasonable P/E value?

INTC has a P/E of 9. That puts it well within our criteria for an anchor stock.

4) Is the current dividend yield larger than 2 percent?

INTC's current dividend yield is 4.09%.

5) Does the company have a history of buying back stock

INTC has reduced the number of diluted outstanding shares from 5.94 Billion in 2007 to 5.15 Billion as of the last report in September of 2012. This is a 13% reduction in the number of outstanding shares in a five-year period.

(INTC's Rating = 5 out of 5)

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(INTC's projected dividend growth)

Above we have detailed five stocks that our portfolio considers anchor stocks. These are stocks that we hold a long position on. To see what other stocks we currently own in our income portfolio please see my other articles.

Disclosure: I am long CVX, IBM, INTC, WM, WMT. 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.