Caterpillar (CAT) recently increased its quarterly dividend from $.52 to $.60. The 5-yr dividend growth rate is 8.9%. At the current price of $83.87, the 12 months trailing P/E is 11.3. The current yield is 2.9%. Thus the Tweed Factor ((yield + 5yr dividend growth rate)-P/E)= +.5. (Data from David Fish's CCC charts & Yahoo Finance) I bought my first tranche of this stock last year in anticipation of the bottoming of the industrial and mining cycle. I believe it is time to build this position at the slightly lower current price.
In Eric Parnell's recent article The Cost of Winning Every Day, he graphically demonstrates the volatility of the current market. During the current topping of the major stock indexes, many stocks are being placed on sale on triple digit down days, including some of my favorites; American Capital Agency (AGNC), American Capital Mortgage (MTGE), and Linn Energy (LNCO). I have already provided my strategy for these stocks in this article. Being a retired dividend growth stock investor, I can't afford to bet on which way the market will jump next. So I ease in to a position in a stock when I have the funds and it is on sale (meets the Tweed Factor criteria). Once I have a position, I drip the stock to increase its size.
Caterpillar is a cyclical stock which can be demonstrated by both its 5-yr chart and long-term chart:
Since the Great Recession of 2009, the bounce back to $115 and subsequent drop to $80 shows the fragility of global resource demand.
As can be seen from the long-term chart, business cycles of approximately 5 years each have been the norm with major cyclical growth starting 1993 and continuing to the present. I believe this has to do with expansion of the global economy, especially in China and other Asian nations. I like to buy a long-term dividend growth stock like Caterpillar near the bottom of its business cycle. I have updated my last 5-yr dividend growth spreadsheet to the present to show the yield variation, as well as total investment.
|Stock||Date of reinvest||Div Rate||# Shares||Dividend||Drip price||# Shares pur||Total Value||Current Yield|
As can be seen from this table, the total investment of $10,000 has grown to $12,826.70 or 28% in the past 5 years. This includes dividend reinvestment for a yearly gain of 5%. The best time to buy was at a yield of 5.14% in 2009 at the bottom of the Great Recession. However, how many people could do that? The stock is once again in bargain territory with the current yield of 2.9%. I have graphed the chart below:
Caterpillar is a good stock to drip and strategically buy at yields 3%-5%, however it averages around 2%. It is a long-term investment which will rise and fall cyclically. It is best to sell it when the yield is below 2%. It will take me several more years to fill out my position (based on the industrial sector of the S&P500 (SPY) ETF). However, as demonstrated in the first two quarters of last year, it can rise rapidly and many will trade it near the peak.
Conclusion: Caterpillar is a good long-term dividend growth stock which I believe to be on sale right now. I will add to my position and continue dripping it. A cyclical investment is not a great income producer and my portfolio has high yield stocks, such as mREITs and MLPs to provide current income. In times of volatility like today, one must increase their allocation to cash. I started the year at 30% cash and am now down to 13%. However, this is also the time to look for bargains and CAT is on sale.