This is the final part of four-part series about why I chose the 25 stocks listed here. The information contained in the brief summaries shown below was originally published in the article tagged above. For reference purposes, here are the previous parts of this four-part series: Part 1, Part 2 and Part 3.
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, growing 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 collect my dividends while waiting. I will wait for stocks to be more undervalued (e.g., recession, correction) before buying more stock, and will only seriously consider to sell any holding when it meets one or more of my selling guidelines, as shown below. Of course, every case is different, and more research is needed before a definite decision.
Here are some of my selling guidelines:
- Decrease/Elimination/Freezing Of Dividend
- Uncertainty With Future Dividend Payments - Payout Ratio skyrockets; Earnings prospects undesirable, etc.
- Underperforms peers for a few consecutive years
- Losing market share to competitors/ Not Competitive Enough/ Fundamental Problems/ Unsustainable or Uncertain future for business [e.g. Pitney Bowes (PBI) - pays a high dividend and is a dividend aristocrat, but due to its uncertain business future, I do not want to take a position in it]
- At least 20 stocks in the portfolio (I have 28 at the moment)
- Must be well-represented in all sectors. At the moment, the portfolio contains stocks in eight of the nine sectors; Basic Materials, Consumer Goods, Financials, Healthcare, Industrial Goods, Services, Technology and Utilities. Only Conglomerates are left out.
- I will not allow any one position to take up more than 7% of the portfolio. This will shield the portfolio from being hit too hard by a large drop due to a short term disappointment.
- Reinvest all dividends
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, 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-KFT).
- All stocks listed have outperformed the S&P 500 during the latest 2008 recession except Aflac (AFL)- (the reason why I still like it can be found here) and Textainer (TGH)- (the reason why I still accepted the company can be found here)
- All have payout ratios of below 90%. The exceptions, AT&T (T), Omega Healthcare (OHI) and Kinder Morgan Pt (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)
- Yield of 4.2% (My aim: A portfolio with an at least 3.5% yield, and around 4% at most times)
- P/E of 15 (Expectation: Portfolio P/E ratio cannot deviate far above 17)
- Beta of 0.68 (Requirement: At most 0.7)
- Five-Year dividend growth of 12% (My requirement: At least 8%)
Here are the six stocks I will be covering in this article:
|Compa||Consecutive Dividend Increases (Years)||Dividend Yield (%)||5-Year Dividend Increase (%)|
|Procter & Gamble (PG)||56||3.1||10.2|
|AT & T||29||5.3||4.4|
|Waste Management (WM)||9||3.9||8.1|
|Exxon Mobil (XOM)+||30||2.5||9.7|
1. Procter & Gamble
Procter & Gamble manufactures and sells of a range of consumer packaged goods. The company operates in five segments:
- Fabric Care and Home Care
- Baby Care and Family Care
I especially like the company as it has a diversified product range and a lot of these products are needed by consumers regularly. Examples of such products are antiperspirants (beauty), electronic hair removal devices (grooming), feminine care products, toothbrush, toothpaste, oral care (healthcare), detergent, diapers and toilet paper (baby & family care). Furthermore, the brands of P&G's products are well-known across the globe, for example, Gilette, Oral-B, SK-II, Febreeze, Duracell, just to name a few. Additionally, the company has 25 brands generating $1B or more in sales yearly, which further reiterates the popularity of the brands.
The company has a $201.70B market cap and pays a dividend of 3.05% as of the 01.29.2013 closing price of $73.77. The company has increased its dividend payments consecutively for a whooping 56 years straight, giving it Dividend Champion status. The company has a dividend payout ratio of 68.24%, which shows that the company still has a dividend that is sustainable going forward.
I also like the company in several other ways. Firstly, I like the fact that employees are very happy working in the company at the moment, with a rating of 3.9 (out of 5 stars) at glassdoor.com. I feel that employees play a big role in a company's success as they are the ones who actually make all managements' plans possible, and when they are happy, the company is bound to do better. Secondly, the company has seen a steady growth in EPS numbers over the past five years. EPS numbers increased from $1.85 in 2003 to $3.12 in 2012, representing a 5.4% increase in EPS annually over the past 10 years, which is acceptable for a mega-cap like Procter & Gamble. Thirdly, the company has been buying back shares at a respectable rate over the past five years, with shares outstanding decreasing by 1.9% annually.
Although this is the case, Procter & Gamble is trading at a slightly overvalued 16.7X trailing 12-month earnings (as compared to its nominal five-year P/E ratio of 16.6), and I do not recommend buying the company at today's prices, especially after the company's share price has popped 3%-4% because of its recent earnings report. I would like to consider a position when the stock price nears the mid to late-$60s, which is a more comfortable range for me.
Here is a chart showing Procter & Gamble's past dividend payments:
2. Southern Co.
The Southern Company operates as an electric utility company, which generates, transmits, and distributes electricity through coal, nuclear, oil and gas, and hydro resources. (As of December 31, 2011, it operated 33 hydroelectric generating stations, 34 fossil fuel generating stations, 3 nuclear generating stations, 13 combined co-generation stations, 2 solar facilities and 1 landfill gas facility; and had a total generating capacity of approximately 12,222 megaWatts). In addition, the company offers various wireless communication services under the Southern Telecom name. I like the company, firstly, as it is the largest electric utility company in the U.S by 2011 income. In addition, it mainly serves the southeast market, which is beneficial for utility companies like Southern, mainly because of the favorable demographics in the area.
The company has a $38.77B market cap and pays a 4.42% dividend as of 01.29.2013's closing price of $44.35. It has increased its dividend for a streak of 11 straight years, therefore earning Dividend Contender status. The company has a relatively high 75.23% dividend payout ratio, which may be a sign that the company's dividend growth may remain this slow going forward, although I must stress the fact that I like this company mainly because of the stability of both the company itself and the industry (utilities) as a whole.
I like this company in several ways. Firstly, similar to Procter & Gamble, I like the fact that employees are very happy working in the company at the moment, with a rating of 3.8 (out of 5 stars) on glassdoor.com. Employees play a huge role in a company's success, as they are the ones who actually toil hard to make all of the company's plans possible. Secondly, its EPS number has been growing very modestly over the past 10 years, growing 2% annually since 2002. It is a matured company, and the EPS numbers were somewhat made uglier by a considerable amount of share dilution, so these results are already not bad in my opinion.
Trading at 17.5X trailing 12-month earnings and 15.9X forward earnings, the company seems slightly overvalued at today's prices. Fair price should be near the $41 area, and a price I'm comfortable buying at is in the $41-$42 range, which is not far from its recent closing price.
Here is a chart showing the Southern Company's past dividend payments:
AT&T provides telecom services to consumers, businesses, and other providers worldwide. The company's operates in three segments:
- Wireless Segment
- This segment offers services like local wireless communications services, long-distance services, roaming services and also several devices like handsets or computers.
- Wireline Segment
- This segment offers local wireless communications services, data services like Internet access and network integration, Wi-Fi services. This segment also offers local and long-distance, calling card, 1-800, conference calling, wholesale switched access services.
- Advertising Solutions
- This segment publishes yellow and white pages directories; and sells directory advertising and Internet-based advertising and local search.
I like AT&T not only because it is the largest wireless network provider in the USA, but also because of the fact that its 4G connections has the fastest speed (9.12mbps) among its competitors so far. In addition, it is the only telecom provider of both Long Term Evolution (LTE) and (High Speed Packet Access Plus) HSPA+ connections, which will give it a competitive advantage over competitors.
The company has a $190.48B market cap and pays a dividend of 5.27% as of the 01.29.2013 closing price of $34.13. The company has increased its dividend payments for 29 years straight, attaining Dividend Champion status. The company has a 70.87% dividend payout ratio after excluding the company's charges, that will be mentioned later, which shows that the dividend is still relatively well-covered and sustainable.
The company's fundamentals still look favorable. Firstly, the company has also been buying back shares over the past five years. The company had 6.04B shares outstanding in 2007 and has 5.68B shares outstanding. This represents a respectable buyback rate of 1.2% yearly over the past five years. Secondly, the company has a higher profit margin than the company's other competitors. With a profit margin of 11.6% as of the latest quarter, this is considerably higher than competitor Verizon (VZ)'s 5.5% profit margin and Equinix (EQIX)'s 5.9% profit margin.
Here is an excerpt AT&T conference call for Q4 2012:
Looking at the fourth quarter, we have reported earnings per share of a negative $0.68 but excluding $1.12 adjustments, earnings per share was $0.44, a 10% year over year increase.
If one accounts for this one-time loss, AT&T's trailing 12-months EPS will increase from $1.21 to $2.33. As a result, valuation will fall from 28.2X earnings to a mere 14.6X earnings. Therefore, AT&T is fairly valued and looks like a good buy at today's prices.
Here is a chart showing AT&T's past dividend payments:
4. Waste Management
Here is an article that I had written about Waste Management previously.
Waste Management provides collection, transfer, recycling, and disposal services to residential, commercial, industrial, and municipal customers. The company also owns, develops, and operates waste-to-energy and landfill gas-to-energy facilities to provide energy to people across many cities. Founded in 1987 and based in Texas, the company is the largest waste management company in North America. I especially like what the company is doing and its future prospects.
The company benefits when there is heavy waste creation. The large U.S. population already creates a lot of waste from its heavy consumption at the moment. With future population numbers still expected to increase, this company's business does not look like it will run out of business anytime soon. In addition, WM is the leader in the waste management industry, which gives it a considerable amount of pricing power, mainly because its difficult-to-replicate size. Furthermore, the company has taken actions to cut costs. For example, it is in the process in converting its entire fleet of trucks into CNG fuelled trucks, which will save them $3 every gallon of diesel's equivalent of CNG. It also has started projects involving bioreactor landfills. To read more about these kind of landfills, click here.
The company has a $16.91B market cap and pays a dividend of 4.19% as of the 01.29.2013 closing price of $36.46. The company has increased its dividend payments for nine straight years, therefore attaining Dividend Challenger status. The company has a dividend payout ratio of 75.55%, which is high but still acceptable to me, with its favorable business prospects.
The company also has favorable fundamentals. Firstly, the company has been buying back shares at a fast rate over the past 10 years. Shares outstanding has decreased from 594.6M in 2002 to 460.53M in 2011. This equates to a 2.5% decrease in shares outstanding annually over the past 10 years. Secondly, the company has kept its ROE number above 10% over the past 10 years, with the lowest figure at 11.3% and the highest figure at 20.1%. Its current ROE value is at 14.0%. A high ROE means that a company's management has put shareholders' investments to good use instead of wasting these funds away. Thirdly, the company's book value has been growing steadily over the past five years, growing from $8.72 per share in 2002 to $14.26 per share today. This equates to an acceptable 5.1% growth annually over the past 10 years.
Although this is the case, it is trading at a slightly overvalued 19.7X trailing 12-month earnings as compared with the company's five-year nominal P/E of 16.5X 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 $32-$33, which is a more comfortable range for me.
Here is a chart showing Waste Management's past dividend payments:
Wal-Mart operates retail stores in various formats worldwide. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam's Clubs and neighborhood markets, as well as the websites walmart.com; and samsclub.com. As most of you already know how Wal-Mart works, I shall not elaborate further. As of September 13, 2012, the company operated approximately 10,130 retail units under 69 banners in 27 countries. I like Wal-Mart mainly because of its brand, which is famous worldwide, and the fact that many, especially the lower/middle-income citizens rely on the store to buy daily needs at cheaper or discounted prices. Even so, these people are not the only ones who shop there - it is a store suited for everybody! We all love discounts, don't we?
The company has a $231.99B market cap and pays a dividend of 2.30% as of the 01.29.2013 closing price of $69.35. The company has increased its dividend payments for 38 years straight, attaining Dividend Champion status.
I also like this company in several ways fundamentally. Firstly, it has a steadily increasing EPS number, with an EPS increase of 9.9% annually since 2002, from $1.76 then to $4.54 in 2011. Furthermore, this EPS number has weathered the past two recessions of this decades and had increased continually throughout the past 10 years, which is a great feat that only a handful of companies can achieve. Secondly, the company has been buying back a considerable amount of shares over the past 10 years. Shares outstanding has decreased from 4.40B in 2002 to 3.35B today, which equates to a 2.7% decrease in shares outstanding annually since 2002, which is quite remarkable. Thirdly, the company's ROE number has been maintained above the 18% mark over the past 10 years, with the lowest reading at 18.3% (2007) and the highest reading at 23.5% (2012). It has a ROE of 23.5% at the moment. This is good news for shareholders as it proves that company management is making good use of shareholders' investments and not wasting them away.
I like Wal-Mart's valuations at the moment. It is trading at 14.3X trailing 12-month earnings at the moment, which means that the company's stock is slightly undervalued as compared with the company's nominal five-year P/E of 14.5X earnings. I am comfortable buying the shares at today's price.
Here is a chart of Wal-Mart's past dividend payments:
6. Exxon Mobil
Exxon Mobil explores and produces crude oil and natural gas, and the manufacture of petroleum products, as well as transportation and sale of a variety of energy-related commodities. It also has interests in electric power generation facilities. As of December 31, 2011, the company operated 37,692 gross and 31,683 net operated wells. The company is the second-largest company in the world and the largest oil company in the world. I especially like the company not only because of the reason aforementioned, but also because it is one of the only companies with an AAA credit rating, proving that the company's financial health is excellent.
The company has a $415.40B market cap and pays a dividend of 2.50% as of the 11.21.2012 closing price of $91.11. The company has increased its dividend payments for 30 years straight, achieving Dividend Champion status.
I also like the company's fundamentals. Firstly, the company has been buying back shares at a fast rate over the past 10 years. Shares outstanding has decreased considerably from 6.70B in 2002 to 4.56B now. This equates to a 3.8% decrease in shares outstanding annually over the past 10 years. Secondly, the company has seen a steady increase in EPS over the past 10 years.
Thirdly, the company has kept its ROE number above 10% over the past 10 years, with the lowest figure at 11.3% and the highest figure at 20.1%. Its current ROE value is at 14.0%. A high ROE means that a company's management has put shareholders' investments to good use instead of wasting these funds away.
I like Exxon Mobil's valuations at the moment. It is only trading at 9.6X trailing 12-month earnings at the moment.
Here is a chart of Exxon Mobil's past dividend payments:
In conclusion, I like to choose companies with steady earnings growth, steady dividend growth, that have a business that sells a product/offers a service that people need, to make up my portfolio. These companies, however boring their businesses are, will reward shareholders over time. Additionally, if you are considering to buy 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.