8 Dividend Stocks with Wide Moats 33 comments
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What makes a good dividend stock? Every dividend growth investor is looking for a stock that will increase its dividend each and every year at a rate that makes the stock a better investment than fixed income alternatives. I have found that stocks that are able to do this share some common characteristics.
Brand Recognition/Low Price
During an economic downturn consumers may flee many popular brands if their cost is high and generic alternatives are substantially cheaper. Procter & Gamble Co. (PG) [Analysis] has seen this occur in some of their premium brands like Pampers and Tide. However, most people aren’t willing to save a few pennies on a generic soda of unknown quality when a Coca Cola Co. (KO) [Analysis] or Pepsico Inc. (PEP) [Analysis] is available.
Value-Priced Convenience
In addition to Brand Recognition/Low Price some companies also provide convenience. If you have been out shopping all day and are tired, you are likely to stop on the way home and pick up something that is quick and inexpensive. There seems to be a McDonald’s (MCD) [Analysis] on every corner. A stop there provides the guest with a known commodity – clean restrooms, quick service and an inexpensive meal.
A Superior Operating Model
How do you compete with a company like Wal-Mart (WMT) [Analysis]? As most of their competitors have learned, you can’t beat WMT at providing brand name, quality merchandise at rock bottom prices. During the good times, some people don’t mind paying premium prices at an upscale store, but there are plenty of us value conscious people that keeps WMT humming. Where WMT really shines is during an economic downturn. When losing your job is a real option, $120 sneakers just don’t quite seem as important as they once were.
A Pseudo Monopoly
If you are the only company in the world that is allowed to sell a product that people’s lives depend on, you will likely have a robust profit margin. This is the world that pharmaceutical companies operate in. Granted companies like Abbott Laboratories (ABT) [Analysis] and Eli Lilly and Co. (LLY) [Analysis] have to keep coming up with new products as old patents expire, and have to deal with government regulation, but the good ones not only survive, they thrive.
Sell What People Want and Need
Sounds simple, but so few companies have mastered it. Consumer staples seem to be the best at it. When you consider the longevity of Johnson & Johnson’s (JNJ) [Analysis] products such as Band-Aid, Johnson Baby Products, Listerine, Rolaids, Tylenol, Motrin, Benadryl and many others, it is easy to conclude that the company has identified what people want/need and are providing it at a reasonable cost. Although some of Procter & Gamble Co.’s premium products are struggling, management has taken action to focus on the company’s bargain-priced alternatives and those are seeing some success.
They Got a Name for the Winners in the World
Just as in life, companies that are winners separate themselves from the others. They won’t settle for second best, instead they continue to look for advantages that will them keep a few steps ahead of the competition. Warren Buffett would describe many of the above advantages as wide moats. If you want to buy and hold a stock forever, make sure it has a competitive advantage that is not easily duplicated.
Full Disclosure: Long ABT, JNJ, KO, LLY, MCD, PEP, PG, WMT. See a list of all my income holdings here.
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This article has 33 comments:
JNJ is another favorite of mine. JNJ took advantage of the downturn to make acquisitions that should payoff going forward and further expand the moat. In addition, the company is still sitting on a huge pile of cash. Finally, I feel that it absolutely robbed PFE when it bought out their consumer products division (notice how PFE realized they screwed up and used the economic downturn to acquire WYE to help make up for that void). I don't like Obama's push for socialism so one health care company is enough for me at this time.
I do own PG but I was certainly surprised somewhat by how bad PG did during the recession. Its moat doesn't appear to be as great as once thought. It appears that far too many of its products can be replaced with cheaper alternatives.
I own WMT, but I'm really considering selling my entire stake once it gets to a price level that I'm comfortable parting ways with it. Its dividend doesn't excite me, I disagree with management that it will retain its new customer share base after the recession is over, and it's having to destroy its own profit margin to stay competitive. Having to make such drastic moves against your own profit margins does not scream "protected moat" to me. Simply put, retail is just too tough. WMT is great now, but in retail that can easily change over time. Sears was considered great once and look at it now. WMT is the one stock I own (other than BRK.B) that I really question.
To me, MCD falls in the same camp as WMT. Best house in a bad neighborhood. However, if I were to buy a company in that sector it would be MCD.
Two other companies to consider in terms of a moat would be EXC and SYY (for now). EXC is just a really boring utility company but the dividend is strong and it's relatively tough for new entrants to compete against it. Dividend income from it helps fund purchases in other companies.
SYY has a decent moat in the fact that it's easier for its customers to keep buying from it, and rely on its distribution system, than to look elsewhere. It's distribution system is tough to compete with and customers have come to rely on them for convenience. Whether those relationships will last for 10+ years or more is anyone's guess (you just need to keep on top of the reports).
Fewer and fewer stocks are fitting my entry criteria these days... The market is overextended, which doesn't mean however that it can't get much more overextended easily..
I do like the picks and the article however. You can't go wrong by selecting the best dividend growth stocks from different industries and hold on for the long run.
See link
seekingalpha.com/artic...
If you annualize current quarter sales of Orencia, you get about 650 million/year. Pretty good considering crowded market for RA drugs! This drug has totally different mechanism than Humira, Remicade, and Enbrel which are TNF-alpha antagonits. About 60% of patients do not respond to TNF-alpha drugs.
Also, between Bristol's increase in the dividend since 1970, yes, that's almost 40 years increase, and it's continued downsizing (believe me, I know), and recent acquisition of Mederax, it is definitely positioning itself to be leaner, more profitable, with additional cutting edge technologies.
While some companies like Merck and PFE think bigger is better, the larger an organization gets, you have to feed that thing with new product launches, on top of the additional product launches needed to replace off patent drugs.
On Oct 22 06:19 AM richjoy403 wrote:
> Good article, and thanks to U338339 for the thoughtful comments and
> additions of EXC and SYY (I'm warming to EXC).
I like that the demand for their products is inelastic...
You buy band aids and Coke when you are swimming in cash or when you are in a recession. If a can of coke costs .30 cents in the store or 1 dollar in the vending machine it's OK to overpay for the vending machine coke sometimes because it's such an inexpensive item... If you overpayed 100% for a TV set or a car, that's not ok, but I've read that simple pleasures ( like chocolate bars sales) go UP in recessions. Everybody in America can afford a can of coke... You are serving the masses...
The other thing I like about these specific companies are the cash on the balance sheet and very manageable debt. I do believe in deflation, and am very careful to be against leveraged companies.
Moat - Check
Inelastic demand - check ( they are called staples for a reason)
Cash/strong balance sheet - check
Dividends - Check
In a prolonged recession/depression these companies will be fine
One of my favorite stocks along these lines is Lorillard, LO.
Lorillard
Moat - Check
Inelastic demand - Customers are literally addicion to the product
Cash/Strong balance Sheet - Check
Dividends - Check
History - The company has been around for nearly 250 years.
Domestic consumer staples are my favorite sector right now and when trying to decide which one to invest my dividends into, I just decided that buying LO was the best investment choice of all.
Obviously, those that follow Buffett realize that's not a new mindset when it comes to KO. I heard Buffett say it in a conversation at the University of Florida many years ago (and he's brought it since then as well) and it has stuck. That's why I have/am/will always buy KO/PEP when the valuation is worth it.
On Oct 22 02:40 PM Talib Kweli wrote:
> If you want a name when you lose, invest in these bellwethers whose
> earnings growth is reduced to foreign expansion. Personally, I would
> go with the second or third place firms offering a comparable yield
> in these mature industries. For example, Kimberly Clark instead of
> Proctor; Darden in the place of McDonalds; and Kroger rather than
> Wal-Mart.
I don't know if you will see this, but if you do, taking PM as an example - it crossed above it's 200 moving average a while back - looking at a 1 year chart and has been staying above the 20 & 50 day averages. So, I'm not exactly sure what a next good point of entry might be. Would you just wait until the 20 dips below the 200 and back up again before purchasing?
Thank again.
On Oct 22 10:33 AM mbkelly75 wrote:
> Points of entry and exit can be pretty easy to see and take advantage
> of by using Moving Averages. I use 3 of them to help me judge the
> timing: 1) 20 day, 2) 50 day and 3) 200 day. When the 20 day crosses
> the 200 day - either up or down (Golden Cross or Death Cross) the
> time to buy or sell is obvious. The 50 day is used to let me know
> when something is happening that I need to pay attention to. I also
> make use of a 25% Trailing Stop in case of sudden drops.
On Oct 21 07:10 PM U338129 wrote:
> I highly agree with KO and PEP (as long as you buy them at proper
> valuations -- like those we saw earlier this year). In fact, they
> make up the bulk of my portfolio. Because of their products, and
> the loyalty people have towards them around the world, I would be
> perfectly content if these were my only two holdings. I will continue
> to buy them every chance I get as long as they are reasonably priced
> or better.
>
> JNJ is another favorite of mine. JNJ took advantage of the downturn
> to make acquisitions that should payoff going forward and further
> expand the moat. In addition, the company is still sitting on a huge
> pile of cash. Finally, I feel that it absolutely robbed PFE when
> it bought out their consumer products division (notice how PFE realized
> they screwed up and used the economic downturn to acquire WYE to
> help make up for that void). I don't like Obama's push for socialism
> so one health care company is enough for me at this time.
>
> I do own PG but I was certainly surprised somewhat by how bad PG
> did during the recession. Its moat doesn't appear to be as great
> as once thought. It appears that far too many of its products can
> be replaced with cheaper alternatives.
>
> I own WMT, but I'm really considering selling my entire stake once
> it gets to a price level that I'm comfortable parting ways with it.
> Its dividend doesn't excite me, I disagree with management that it
> will retain its new customer share base after the recession is over,
> and it's having to destroy its own profit margin to stay competitive.
> Having to make such drastic moves against your own profit margins
> does not scream "protected moat" to me. Simply put, retail is just
> too tough. WMT is great now, but in retail that can easily change
> over time. Sears was considered great once and look at it now. WMT
> is the one stock I own (other than BRK.B) that I really question.
>
>
> To me, MCD falls in the same camp as WMT. Best house in a bad neighborhood.
> However, if I were to buy a company in that sector it would be MCD.
>
>
> Two other companies to consider in terms of a moat would be EXC and
> SYY (for now). EXC is just a really boring utility company but the
> dividend is strong and it's relatively tough for new entrants to
> compete against it. Dividend income from it helps fund purchases
> in other companies.
>
> SYY has a decent moat in the fact that it's easier for its customers
> to keep buying from it, and rely on its distribution system, than
> to look elsewhere. It's distribution system is tough to compete with
> and customers have come to rely on them for convenience. Whether
> those relationships will last for 10+ years or more is anyone's guess
> (you just need to keep on top of the reports).
On Oct 23 01:23 AM realold wrote:
> I also own and am worried about WMT. The falling dollar will cause
> a rise in prices for them and they will find themselves competing
> in the same marketplace with Nordstroms. However, they have quite
> a record of success and I can find just about anything in there.
> I would not bet against them, especially since they are taking on
> Amazon in the on-line business.
Losses don't count until you cash out and dividend investors definitely take a much more long view on things. In the meantime if the dividend remains the same and stock price decreases than your yield has gone up, and if the fundamentals remain strong it is a good time to buy more.
On Oct 22 09:43 PM JSW wrote:
> What unadulterated crap some of this is. "the good ones not only
> survive, they thrive." Well if you had been stupid enough to buy
> Eli Lilly 10 years ago and hold it, you would have had a 63% decline
> in price and if you only held it for the last 5 years, you would
> only have lost 50% of your investment. Good dividends don't make
> up for losing most of your capital.
1) key is PRICE paid ALL these companies are bad investments at the wrong price
2) investing is 50% art and 50% science
In my monthly newsletter that has averaged well over double digit returns its about getting the right stock at the right price
Just takes time to leran guys be patient it will happen if you study from the right person or persons I know its posible because it happened to me.peace
Count me. I am like you.
My favourite dividend stocks: T, NYX, MO and DVY (ETF)
On Oct 22 06:37 PM sethmcs wrote:
> As for KO and PEP I don't drink the stuff. I like my teeth. Cola
> sales actually fell. MCD is gross and WMT is a real pain to shop
> in. PG products are overated verse generic. I guess all these companies
> would have serious problems if more people think like me.
Count me. I am like you.
My favourite dividend stocks: T, NYX, MO and DVY (ETF)
On Oct 22 06:37 PM sethmcs wrote:
> As for KO and PEP I don't drink the stuff. I like my teeth. Cola
> sales actually fell. MCD is gross and WMT is a real pain to shop
> in. PG products are overated verse generic. I guess all these companies
> would have serious problems if more people think like me.
On 23 Dec 2008, they went X-Div and on 9 Jan 2009 paid 0.54/share ($54 for 100 Shares and reduced
your cost of the 100 shares by that amount - your investment is now (4110 - 54 ) = $4056.
On 30 Jan 2009, they crossed again - heading down this time at 41.39. You sell and now have $4139 in cash.
On 5 Mar 2009, the stock hit a low of 31.02 (rounded up) and you avoided this by being out of the stock.
On 23 Mar 2009, you have missed the dividend by being out of the stock - no effect on cash balance.
On 18 May 2009, they crossed again - heading up at 39.095. Your cash buys 105 shares (rounded down).
On 22 June 2009, they go X-Div and on 10 July, they pay 0.54/Share (56.70 for 105 Shares and reduced
your cost of the 105 shares by that amount - your investment is now (4139 - 56.70) = $4082.30.
On 24 Sep 2009, they go X-Div and on 9 Oct, they paid 0.58/Share (60.90 for 105 shares and reduced
your cost of the 105 shares again by that amount - your investment is now (4082.30 - 60.90) = $4021.40.
On 23 Oct 2009, (last Friday) they were still headed up and closed at 49.07. So your 105 shares is now
Worth $5152.35 and so far you are way ahead as 5152.35 - 4021.40 = $1130.95 or 21.95% in less than a year
on one stock that pays a reliable, rising dividend. It only gets better from here. You would do better than this if you had re-invested the dividends as they came in - but you get the point. This works and is not at all hard to do. I did not include the cost of commissions, (on my account - it is $4 a trade) but I do not think it is needed to make the point.
You can buy at any time, just as long as you sell when it shows a Death Cross and is headed down. Save your cash and buy when it shows a Golden Cross and is headed up. You will do fine over time by avoiding the downturns and only being in for the upturns. You will end up with more shares every time you complete a cycle, even if you pocket the dividends without re-investing them. My broker re-invests the dividends automatically with no commission, so I usually take advantage of the acceleration in my holdings from the re-investment process.
On Oct 22 08:09 PM Dotcom wrote:
> I just wanted to say thanks for this.
>
> I don't know if you will see this, but if you do, taking PM as an
> example - it crossed above it's 200 moving average a while back -
> looking at a 1 year chart and has been staying above the 20 &
> 50 day averages. So, I'm not exactly sure what a next good point
> of entry might be. Would you just wait until the 20 dips below the
> 200 and back up again before purchasing?
>
> Thank again.
Keep focused in the stocks you feel the best about at the appropriate prices and keep reinvesting
Your machine will help you achieve financial independence
I know its possible because it happened to me.peace