12 Dividend Stocks to Own in This Market

With markets recovering from the lowest levels since 1996 and currently trading at the same levels as one decade ago, buy and hold investors’ portfolios are hurting. Dividend investors are also sharing the pain, as several prominent companies such as Pfizer (PFE), General Electric (GE) and JP Morgan (JPM) have cut their dividends. Despite the fact that most major sectors have not been left without damage to dividends, the majority of the cuts have been centered in the financials segment of the market. Furthermore, despite all the gloom surrounding the stability of payments, investors who are sticking to a sound strategy of diversification, dollar cost averaging and dividend reinvestment are still enjoying increases in their dividend income.

I believe that whether the bottom has been hit or not astute dividend investors should seize the opportunity that the current bear market offers. I ran a screen on the S&P Dividend Aristocrats index to identify attractively valued stocks using the following criteria: (source Yahoo Finance)

1. Dividend Payout Ratio is less than 50%
2. Price/Earnings Ratio is less than 20
3. Current Dividend Yield is at least 3%

There were 12 companies that made the cut. Check the list below:

(Alternative link to view the watchlist)

I believe that diversification is important as well. Below you could find a breakdown of the list by sector plus a link to my most recent stock analysis of each company.

Consumer Discretionary

(VFC) VF Corp (analysis)

(MHP) McGraw-Hill Companies (analysis)

Consumer Staples

(PG) Procter & Gamble (analysis)

Financials

(AFL) AFLAC Inc (analysis)

(CB) Chubb Corp. (analysis)

Health Care

(ABT) Abott Laboratories (analysis)

(JNJ) Johnson & Johnson (analysis)

Industrials

(MMM) 3M Co (analysis)

(DOV) Dover Corp. (analysis)

(EMR) Emerson Electric (analysis)

(SWK) Stanley Works (analysis)

Materials

(NUE) Nucor Corp. (analysis)

The thing that separates these companies from other dividend stock lists is that they have a tendency to increase their dividends consistently every year. With an average yield of 3.60% this list has generated an average dividend growth of 11% over the past decade. If history were to repeat itself over the next 6 –7 years, the average yield on cost should be double what you can get today. In the worst case I expect that the income stream growth from this list of stocks would at least match the rate of inflation over time.

Disclosure: I have positions in all stocks above except for VFC and SWK, which I plan on buy on dips

Comments

[Mark Bern:]

Good recommendation for the cautious, long-term minded investors. Unfortunately, it appears that there are fewer such investors today than ever before.

It may be hard to stick to a sound investment strategy over time because different strategies come into favor, then falter in a sort of rotating manner. The institutional investors, such as hedge funds and investment banks (while fewer today than just two years ago) continue to have undue influence over short-term undulations in the market.

As you have pointed out, sticking to a strategy that has worked over the long haul in the past and is based upon good fundamental analysis, diversification, consistent dividend growth, ample cash flow, dollar cost averaging, and selecting entry points that provide good value is more likely to provide consistent long-term positive results that following the "crowd" into whatever strategy seems to be working today.

The obvious reason for my preference is that most small investors tend to get on board the "hot" strategy too late and then get caught in the wrong strategy when the institutional investors have already moved on to the next one.

A well-devised, consistent strategy usually prevails over time. While I may not agree with your selection of a price earnings ration of 20 (because I am not only a dividend investor, but also a value investor) I commend you on a very well-defined conservative, consistent approach that should reward those who choose to use it.

Jul 07 11:29 AM

[poortorich:]

Warren Buffett laid the groundwork for making money in stocks. Its very simple and obvious, but few are able to persist in following his advice. Here are the keys:

1) buy businesses that have a unassailable economic moat ie KO, PEP. businesses that have a high certainty of being around for the next 30-40 years
2)good management
3)buy at reasonable prices. do not buy KO or PEP when the pe is greater than 25. Try to buy them when their PE is less than 20 preferably
4) its nice if the companies consistently pay out a dividend (not one of Buffett's philosophy but i'll add it anyway.)

Jul 07 01:19 PM

[Lightway:]

I backtested this portfolio going back 5 years using Folio's backtesting tool.

Rules:

1) 10,000 starting capital
2) Stocks holdings equally weighted at 8.3-8.4% of portfolio holdings
3) Dividends reinvested

Results:

1) S & P 500 (including dividends) : -12.73% total return
2) S & P 500 (no dividends): -21.22% total return
3) Portfolio listed above: 15.14% total return

Of course, past performance is no indication of future results, however, the results are pretty staggering.

Jul 07 09:18 PM

[Marbani:]

On Jul 07 09:18 PM Lightway wrote:

> I backtested this portfolio going back 5 years using Folio's backtesting
> tool.
>
> Rules:
>
> 1) 10,000 starting capital
> 2) Stocks holdings equally weighted at 8.3-8.4% of portfolio holdings
>
> 3) Dividends reinvested
>
Can you provide the web address for the Folio's backtesting tool?
Thanks

> Results:
>
> 1) S & P 500 (including dividends) : -12.73% total return
> 2) S & P 500 (no dividends): -21.22% total return
> 3) Portfolio listed above: 15.14% total return
>
> Of course, past performance is no indication of future results, however,
> the results are pretty staggering.

Jul 08 09:04 AM

[David Van K...:]

Nice list and nice, simple set of rules to get it. Isn't it amazing how three simple screens reduced the 10,000-or-so publicly traded stocks to just 12? And Lightway's back-testing is instructive.

For a dedicated dividend investor, it's OK for total return to fluctuate over time, but the ball to keep your eye on is the dividend portion of the return--you want it to be safe and rising. While your screens did not test for rising dividends, I am personally familiar with many of these stocks (I own 6 of them), and their dividends have been rising consistently for years.

Jul 08 09:09 AM

[robert.b.fe...:]

Thanks for the great tools and philisophical insights. Personally I employ a dual strategie buying some dividend paying stocks as core assets and holding them long term. I also do research on stocks with an eye to holding them for at least one year and selling them as they reach terget prices and then start to pull back. Using this strategy has returned 14% over the last three years since I bagan seriously investing. Great article.

Jul 08 12:24 PM

[Lightway:]

Sure:

https://folioinvesting.com/

To use the backtesting tool, you'd need to create an account, but I believe you can create a free trial account for 60 days before deciding if you want to start paying or not. With the trial account, they let you create some "Watch Folios," where you can put all these securities in and then run the backtesting.

Disclosure: I am a customer of Folio, but have no other affiliation with the site. I like it alot for dividend investment because it saves a ton of fees.

On Jul 08 09:04 AM Marbani wrote:

>

Jul 08 12:36 PM

[Lightway:]

Forgot to mention, the Watch Folios are not real money, they are just simulated trades, so you don't have to actually buy the real securities. I like them alot because you can test out strategies or track the performance of some equities you are interested in.

Jul 08 12:37 PM

[poortorich:]

if you look at the market return from 1857 to present time, 97% of the gains were from dividends. The 3% was from capital appreciaton.

JNJ's return from 1944 to 2009 was 17.1%/year. $10,000 invested in 1944 with dividend reinvested would be a staggering $240,000,000 right now. Without reinvesting the dividend, it would be ONLY around $30,000,000 (a very good return, but nowhere near what you could of gotten with the dividends reinvested).

Jul 08 02:11 PM

[BigOlDave:]

Mark Bern's opening comment is spot on. Particularly in a market that is moving sideways, parking cash in some dividend generators makes more sense than staying in cash ...if (I really mean IFF) there are some fundamentals supporting expectations that the share price will hold or advance.

MB's a wise man. Here are some of my own thoughts, mixed with those of one wiser than both of us:

(1) Be flexible in your investment strategy. Day traders get killed; buy-and-holders die more slowly. Being attuned to different strategies, international economy, and emerging sectors or champions will up your odds of success.
(2) Always shop value, even if it means staying in cash until the watched stock’s price comes back down. Momentum's fine, but can turn on you and leave you with a loss if you find a better opportunity. Did I say “always”? What I meant was ALWAYS SHOP VALUE.
(3) Perhaps this is just item (2) above said better, but picking a good entry point is the key to winning this game. And if you don’t have time to play, leave it to the mutual fund managers.
(4) Cull your herd. You should always have a sense of which of your stocks provide the weakest total return. If the weak one will stay weak or get even weaker, go to cash, pick the best candidate on your watch list and put your money there. King Solomon (see his investment advise in Ecclesiastes 11) told us “If a tree falls … there will it lie.” Zombie stocks rarely come back to life.

Jul 08 05:40 PM

[User 422955:]

As a senior citizen with lots of health problems, I'm interested in high dividends -- NOW, not at some distant future time. I own WWE (12.1%), HUN (7.8%), and a number of other high dividend stocks. The dividends of the stocks recommended range from 3.1 (DOV & MHP) to 4.4 (VFC).

Yes, my stocks aren't "blue chips." However, some blue chips have done poorly. Yes, in the long run, a list such as the above may have superior overall performance. However, in the long run for most investors, I'll probably be dead. My personal "long run" is one (1) year.

Jul 09 07:48 PM

[Alan Young:]

Even better, I found another list from 13 months ago, which can provide an even better test:
www.dividendgrowthinve...

Jul 09 08:24 PM

[Lightway:]

Any good strategy evolves and improves over time. I think that's the whole point.


On Jul 09 08:17 PM Alan Young wrote:

> Lightway's so-called backtest is not a backtest of the strategy;
> it's loaded with hindsight bias. If I generated a list of 12 stocks
> that meet my favorite criteria today, and looked at how much I could
> have made by investing in them 5 years ago, I'm sure I could beat
> those returns.
>
> A "backtest" takes the same selection criteria you are advocating
> today, generates the list that such a strategy would have selected
> for buying at some point in the past, and then tracks how well those
> selections would perform.
>
> I'm not going to attempt that. However, here is the list this same
> author published last September, using similar criteria, at seekingalpha.com/artic...:
>
>
> NUE,
> LOW,
> MCD,
> MTB ,
> AFL ,
> WMT,
> PFE ,
> FITB,
> ADP ,
> WWY,
> STT ,
> BDX ,
> SIAL,
> JNJ ,
> BAC ,
> PGR,
> USB ,.
> VFC
> SHW
> GE
> TGT
>
> Unfortunately, the current price of each stock was not listed in
> that article, so it would take some work to run the "backtest" based
> on this recommendation. But even a casual glance shows that the method
> is far from ideal.

Jul 10 03:44 AM

[Lightway:]

I ran the same test and he actually did even better, at 20.52% gain.

WWY was excluded since it was bought out and is no longer listed.


On Jul 09 08:17 PM Alan Young wrote:

> Lightway's so-called backtest is not a backtest of the strategy;
> it's loaded with hindsight bias. If I generated a list of 12 stocks
> that meet my favorite criteria today, and looked at how much I could
> have made by investing in them 5 years ago, I'm sure I could beat
> those returns.
>
> A "backtest" takes the same selection criteria you are advocating
> today, generates the list that such a strategy would have selected
> for buying at some point in the past, and then tracks how well those
> selections would perform.
>
> I'm not going to attempt that. However, here is the list this same
> author published last September, using similar criteria, at seekingalpha.com/artic...:
>
>
> NUE,
> LOW,
> MCD,
> MTB ,
> AFL ,
> WMT,
> PFE ,
> FITB,
> ADP ,
> WWY,
> STT ,
> BDX ,
> SIAL,
> JNJ ,
> BAC ,
> PGR,
> USB ,.
> VFC
> SHW
> GE
> TGT
>
> Unfortunately, the current price of each stock was not listed in
> that article, so it would take some work to run the "backtest" based
> on this recommendation. But even a casual glance shows that the method
> is far from ideal.

Jul 10 03:58 AM

[Lightway:]

That list simply listed the top 20 Dividend Aristocrats by highest yield, and is "just for illustrative purposes only." None of the dividend authors here would ever recommend just blindly going to the Dividend Aristocrats lists and selecting the highest yielding stocks without further due diligence.

In fact, there are numerous articles published here on the dangers of using broad dividend indexes or funds based on them. David Van Kapp explains why to read more into broad S&P Dividend reports.

seekingalpha.com/artic...

In addition, the article we are currently commented on, started with the Dividend Aristocrat list, but was further screened using several filters.

Here's what DGI had to say about the list he presented:

"The portfolio consisting of the 20 highest yielding stocks in the Dividend Aristocrats index currently yields 5.31% ( As of May 23, 2008). This is far better than most bonds and most stocks. This portfolio is just for illustrative purposes only, however. Its performance could be better or worse than the S&P 500 benchmark."


On Jul 09 08:24 PM Alan Young wrote:

> Even better, I found another list from 13 months ago, which can provide
> an even better test:
> www.dividendgrowthinve...

Jul 10 04:14 AM

[YoYoMama:]

I can certainly understand your sentiment, and I'm a young'n. I don't consider a stock unless the divy is 5%+.

Just keep in mind that the higher yielders can be more subject to dividend cuts. I hope you are subscribing to news bulletins on your stocks to track any dividend cuts or suspensions.

Fixed income CEF's are generally overlooked, but are a great source of high-yield dividend players. The purpose is to generate income, so the yield can be a little more safe than company stock. Right now I'm owing (and loving) BFD, BWC, IGD, JGG, PCF, PNNT, HTGC and SNF. I have also owned IGR and IAF until the charts went a little south. All of these are generating at least 8% dividends, most of them monthly. There are many other great CEF choices out there

Best wishes on not just another year, but many more years.


On Jul 09 07:48 PM User 422955 wrote:

> As a senior citizen with lots of health problems, I'm interested
> in high dividends -- NOW, not at some distant future time. I own
> WWE (12.1%), HUN (7.8%), and a number of other high dividend stocks.
> The dividends of the stocks recommended range from 3.1 (DOV &
> MHP) to 4.4 (seekingalpha.com/symbo...).
>
> Yes, my stocks aren't "blue chips." However, some blue chips have
> done poorly. Yes, in the long run, a list such as the above may
> have superior overall performance. However, in the long run for
> most investors, I'll probably be dead. My personal "long run" is
> one (1) year.

Jul 10 09:52 AM

[jjp:]

Hi!

I agree with User 422955 that there are much higher dividends I consider better choices. The phone companies ATT, Verizon, and Celcom with dividends of 7.2%, 6.43% and 12.83% are examples of safe companies with great returns.

High dividend companies do have two shortcomings - the stock value has a tendency to go up. Currently Celcom is 17% higher than when I bought it a few months ago. When stocks rise over 20% I start thinking about taking my profit.

The other is the already mentioned disappearing dividend. Every CEO would love to get the monkey of dividends off their backs so they could use the money for salary increases, etc. :) I had one shipping stock drop 16 % in value when they did away with the dividend. Great idea. I sold it and took the hit which was correct since the price has stayed in the basement ever since.

Jul 10 02:43 PM

[whidbey:]

Interesting. You certainly point at a workable (in some degree) strategy. Thanks.

Jul 10 03:12 PM

[poortorich:]

as a follow up to my first post on JNJ

In 1944 $10,000 invested in JNJ becomes 240,000,000 in 2009
In 1944 $10,000 invested in KO becomes 82,000,000 in 2009
In 1944 $10,000 invested in S and P 500 becomes 4,800,000
In 1944 $10,000 in a bank becomes 230,000
In 1944 $10,000 in cash is still $10,000

The price of a typicall house in 1944 was about 10,000. Depending on where you live, the value of a house is around 200,000 to 500,000.

The main takeaway points are:
a) putting your money in great companies long term will yield stunning results
b)putting money in index funds will yield good results (not great)
c) I would rather invest in stocks than real estate. Thats why when someone asked Buffett why he did not invest in real estate, he said making money in stocks is so much easier
d)holding onto cash in the short term may seem more secure, but in the LONG RUN is always a losers bet



On Jul 08 02:11 PM poortorich wrote:

> if you look at the market return from 1857 to present time, 97% of
> the gains were from dividends. The 3% was from capital appreciaton.
>
>
> JNJ's return from 1944 to 2009 was 17.1%/year. $10,000 invested in
> 1944 with dividend reinvested would be a staggering $240,000,000
> right now. Without reinvesting the dividend, it would be ONLY around
> $30,000,000 (a very good return, but nowhere near what you could
> of gotten with the dividends reinvested).

Jul 10 08:25 PM

[kztd:]

> if you look at the market return from 1857 to present time, 97% of
> the gains were from dividends. The 3% was from capital appreciaton.

Poortorich, what is your source for this startling tidbit?

Jul 10 08:47 PM

[poortorich:]

you can find it in Jeremy Siegels book The Future for Investors p. 126


On Jul 10 08:47 PM kztd wrote:

> > if you look at the market return from 1857 to present time, 97%
> of

Jul 11 09:01 PM