It's pretty easy to buy and sell stocks. For a couple hundred bucks you can set up a brokerage account and start trading. However, it's much more difficult to buy a stock that you're willing to hold on to 2-3 years, or maybe even 20-30 years.
Furthermore, if you've heard the siren song of dividend growth investing, you know that you ought to diversify for safety and protection of income. You know you should set investing goals to stay on course through calm waters and hurricanes. You know that you need to start paying close attention to yields, payout ratios and other metrics and ratios.
Now, here's a dirty little secret. There is no perfect investment that works for everyone. Yet, at the same time, there are many stocks that show up again and again, like Coca-COla (KO), Johnson & Johnson (JNJ) and Colgate-Palmolive (CL). The problem is that they rarely go on sale. So, what other stocks are as good as these long-term dividend winners?
Here's where I'll introduce you to Target (TGT). It was founded in 1902, it has over 1,900 stores in the U.S. and Canada, it sells general merchandise like household essentials, electronics, jewelry, groceries and much, much more. It's commonly brought up as a key competitor when talking about Wal-Mart (WMT).
In addition, Target has paid growing dividends for 46 years. Very importantly, Target is facing some headwinds right now so the price of this stock is very attractive in relation to more than 470 companies who have been paying growing dividends for 5-plus years. In short, Target is a great candidate for new dividend growth investors but also for investors looking to add a great stock their portfolios at a good price.
Let's get started.
I've read again and again that if you're a dividend growth investor that it's important to diversify. I've seen that you need to have 15, 30, 50 or even 100 stocks in your portfolio.
The key reason for diversity is that if one company kills or reduces its dividend, the rest of the portfolio can cover your butt. So, losing 2-3% of your cash flow won't crush you because one business stops paying.
I've got a knee jerk reaction to this. If losing 2-3% of your income will ruin your life, portfolio diversity isn't going to help much. There are bigger fish to fry.
In any event, many people simply cannot start up a portfolio of 20-30 stocks. I mean, it can be done, but then you're paying significant sums in transaction costs. Friction kills returns.
So, let's pretend that you're getting started with your portfolio. Maybe you're young and setting yourself up for the long term. Maybe you're older but you're moving into dividend growth investing.
I've seen many times that setting goals is crucial. I think this is a fabulous idea. If you don't know where you want to go, how will you get there? Life's going to happen and decisions will be made. So, why not guide yourself with your own mind versus letting the world control your outcomes?
So, you have a big decision. Are you going to focus more on building wealth or building your income stream? Or, are you going to try to get both?
For several years, I relentlessly focused on growing my net worth. This caused me to focus on very strong but undervalued stocks. I always focused on low P/E, low P/B, buying near 52-week lows, growing owner earnings, and the like. I didn't focus nearly as much on dividends, yield or cash literally flowing out of my companies.
I love stock buybacks when the stock is undervalued. I also love it when insiders are buying a lot of stock. In other words, I focus on capital allocation, shareholder friendliness, leadership, growth potential, and so on.
This growth orientation - specifically, growth in my own personal net worth - meant that dividend growth investing was nice and interesting, but it was not really in focus.
Net Worth or Cash Flow?
But, my goals are shifting now. I continue to hit my net worth milestones. However, the cash flowing out of my stocks and into my pocket is lower than I would like at this point. Plus, I discovered a few things that I'd like to share very quickly with you.
- Many of the best dividend companies will grow your net worth just as quickly as growth stocks and glamour stocks, e.g., (MO) grows wealth and your cash flow
- Many of the best dividend companies also do massive and smart buybacks over time, e.g., Exxon Mobil (XOM) is relentless
- Many of the best dividend companies beat inflation with their dividends alone, without much capital appreciation, e.g., ConocoPhillips (COP)
And, there's much more. That's a taste of what I keep learning over time. In short, I can focus on dividends while still getting plenty of the growth that I want in net worth. It's not an "either / or" situation.
I've also realized that by using lists like David Fish's Dividend Champions I can focus on a smaller universe of businesses. I can mostly trust these businesses. I can reasonably predict what they are going to do. That provides security and clarity, without a sacrifice in net worth or cash flow. Old companies with fat dividends can provide stellar capital appreciation opportunities.
Again, I've learned that with dividend growth investing, I get to have my cake and eat it too. Growing dividends have the remarkable ability to magnetically attract new investors, new capital and reinvestment. This means the tail often wags the dog. In general, this is good for folks who own those businesses.
Dividend Growth Investor or Owner Earnings Growth Investor?
But, please hold on. This next part is really important.
The catch here is that the underlying business must be growing owner earnings over time. In fact, to be perfectly clear, I do my best to be an Owner Earnings Growth Investor more than a Dividend Growth Investor.
This reason for this is insanely simple. If your company is not growing owner earnings - i.e., the actual cash that it makes for owners - then the dividend is not safe. You can raise and raise the dividend all you want but if the business is not sound, and if the actual, bottom line earnings are not growing (or at least stable) you are screwed.
So, I realize that I cannot be a slave to growing dividends. If I focus on the dividend alone, or the yield, or yield on cost, or even the literal cash that's flowing into my accounts, I can get kicked in the teeth.
For example, here are two risks:
- Too much debt to satisfy the dividend can put the company at risk of default... like a frog being boiled to death slowly
- A dividend that is too high while sacrificing growth projects will ultimately kill the dividend, like a death spiral
Now that we're grounded, let's talk about specific dividend growth companies, and what that really means.
What's the Best Dividend Champion to Own?
I'm sorry, but I cannot give you an exact answer to that question. Well, what I mean is that I cannot give you an answer that will always, eternally be true.
First, your goals will be different than my goals. You might require or even demand a higher starting yield than me. You might want your company to be growing its dividend by 5% or more every year. You might dislike certain industries like tech, or communications, or tobacco. Very quickly our paths take us in different directions.
Second, my interpretation of data will be different than yours. Perhaps you think that P/B is more important than P/E, or yield, or something else. And, your focus on certain trends will be different, such as growth rates, insider buying, or something else.
Third, I don't know if you'd rather reinvest your cash into a company you already understand or if you'd rather seek new opportunities. Will you simply stick with what you know or invest time and energy to learn?
That said, I'll provide a quick window into some companies that are maybe worth investigating right now, if:
- You are interested in dividend champions, dividend challengers and dividend contenders
- You are looking for companies that are trading at, or below intrinsic value roughly estimated
Who Are the Dividend Super Champions?
I'm going to dive in shortly. However, if you want to do a little research first, read some of these articles:
- Super Dividend Champions (October 2013)
- Super Dividend Champions: November 2013 Edition
- Super Dividend Contenders: November 2013 Edition
I've written a few other articles like that too. Any of them will give you a gist of what I've done previously to sift and sort through piles of data.
In short, I've decided to combine all of the dividend champions, dividend challengers and dividend contenders together in this article. I've included the "No. Yrs" in this view so you can tell how long these companies have been paying growing dividends.
(IMPORTANT: David Fish makes all this possible. I wouldn't be able to easily create this view without the work he does. Thank you, David!)
Choosing the Data for Super Dividend Champions
I'm using these 9 columns of data from David Fish's spreadsheet and the 10th column ("S") is an equal-weighted sum of the data. I'm assuming that no column is more important than any other column.
I'm also providing the shorthand for the column labels. For example, "C" is for Chowder, "T" is for Tweed, and so on. This will make cross referencing easier for you.
- Chowder ("C")
- Tweed ("T")
- Div Yield ("Y")
- EPS % Payout ("E%")
- Past 5 Years Div Growth ("G")
- A/D Ratio ("AD")
- Payback Years ("PB")
- Price Above Low ("L")
- Confidence Factor ("CF")
- Summarized Data ("S")
Here's what we get:
I'm going to emphasize right now that this system isn't perfect. This isn't a list of companies to go out and buy immediately, without thinking. Instead, this is a starting point.
Please also remember that your goals will determine how to look at this list. Above, I emphasized the importance of understanding what you want and why you want it. If you don't understand your motivations and your experience, how will it be possible to be rational about your due diligence? Emotional intelligence can ruin or seriously enhance your returns.
What Super Dividend Champions Do I Own Right Now?
If I needed to reinvest more money in one of my Super Dividend Champion holdings, without doing more research or looking for new businesses, I would say that Target would likely be a winner for three big reasons.
First, it's near the top of the list! And, it's been there now for at least three months. In other words, it's revealing itself to be a great opportunity to me exactly because it's been undervalued for several months. It's like the market is writing off Target, left for dead.
I'm also tuning out the noise that (WMT) or (AMZN) or some other company will kill it. I focus on the strength over a long period of time while simultaneously looking at the fair value in front of me.
Second, as the FASTgraph indicates, TGT isn't crazy overvalued, earnings are growing over 3-year, 5-year and 10-year periods. It's below its Normal P/E by a fair amount. So, I'm very likely not going to overpay, even if I'm not exactly getting the deal of the century.
Third, I love the bad news I'm seeing on Target right now. Yes, I said it. As a buyer, I'm thrilled with the punishment Target is taking.
This is short term pain. It drives down the price I would need to pay. As a long-term investor I see a buying opportunity as the "hate" piles onto Target. So, the price goes down, yield goes up, and I get more value for every dollar invested. What's not to like about that?
To stress this last point, I firmly believe that when Warren Buffett talks about buying when there's blood in the streets, or buying when others are fearful, this situation is exactly what he's talking about.
And, is Wal-Mart a threat? Sure, but they've been a threat for more than 25 years. A bigger threat is maybe Amazon, but I believe that a large chunk of the human race will want to continue to walk into a store in the real world to buy stuff. And, who's to say that Target can't get more savvy online?
What New Super Dividend Champions Catch My Eye?
If I was looking at adding a brand new position, and I was shopping on the Super Dividend Champion list from above, I'd probably first poke at (BAX), (PETM) and (CHE), simply because as I do a quick review of the Top 40 Super Dividend Champions that I don't already own, those look like they are the most undervalued.
NOTE: See how value is still on my brain more than dividends? My gut says, pay less but get more. Start by shopping on the discount rack.
I'm not saying I'd buy those stocks. Instead, I'd look at them and investigate more. I don't know much about them and I'm curious. I love to learn. Plus I don't have much in my portfolio in drugs, specialty retail or home healthcare.
Again, see how my goals drive my investigation? See how I look at the powerful list of Super Dividend Champions and review my goals, my desires, my weaknesses, etc.?
What Will I Do Next, For Real?
At the end of the day, as funds flow in, I'm more likely to just plop money into TGT, PM, DE or IBM versus those three "new" stocks I mentioned a few paragraphs ago. In fact, the "new" companies I just mentioned above (BAX, PETM, CHE) will only maintain my attention if they appear they'll be stronger in the long term than what I've already got in my portfolio. It's survival of the fittest in a sense. That's often how I think about it.
Maybe Target is the best super dividend champion to buy. And, maybe it's not. Out of the list of Super Dividend Champions, what do you think is the best to own, or the best to buy right now? What catches your eye? What would be the very first that you would buy if you were just getting started, or if you just jumped onto the dividend growth investing train?