- Investors should look beyond dividend yields to analyze dividend stocks.
- An investor's core portfolio should be spread out across a variety of different industries.
- Core holdings should perform well in any market and economic environment.
Having completed a dividend stock analysis across 5 industries, I've put together 6 stocks that would make great cornerstones to any dividend income portfolio. These stocks were chosen based on beta, dividend track record, dividend yield and payout ratio. The most important metric when choosing these 6 cornerstone stocks is to see how stable dividend payments are and how often dividends are increased. Too often dividend yield is given too much attention when investors choose a stock. Cornerstone stocks should be given a higher weight in a portfolio and should be the bedrocks of a portfolio that the investor doesn't have to worry about. All 6 of these stocks are large, well-established companies that perform well regardless of market conditions and have a long track record of steadily increasing dividends.
Market Cap ($billions)
Procter & Gamble (NYSE:PG)
Johnson & Johnson (NYSE:JNJ)
Consolidated Edison (NYSE:ED)
Procter & Gamble (PG)
Procter & Gamble is the epitome of a consumer staple stock. The company produces everyday products found in 180 countries around the world. Many products dominate the space and have established large market share. Their products include Pampers, Tide, Dawn, Charmin, Duracell, Tampax, Bounty, Crest and Gillette, just to name a few.
What really sets Procter & Gamble apart from other dividend stocks is its track record. The company has been paying a dividend for 122 years and has increased its dividend for 56 consecutive years. It's hard to find any stock that can come close to that kind of record. Procter & Gamble is one of the safest dividend stocks you can add to your portfolio, because its core business works well in any economic environment. It doesn't have the best dividend yield, but its ability to raise dividends during bear markets more than offsets any yield concerns.
Johnson & Johnson (JNJ)
Johnson & Johnson is another stock with a remarkable dividend track record. It has increased dividends for 51 consecutive years. While this alone is reason to add J&J to your portfolio, I particularly like the stock because of its heavy exposure to the healthcare industry. The company has everyday consumer staple healthcare products like Band-Aid, Neutrogena, Clean & Clear, Rogaine, Neosporin, Bengay, Listerine, Tylenol, Sudafed, Pepcid, Benadryl, Nicorette and Immodium. Johnson & Johnson also produces a wide variety of medical devices used by health professionals in orthopedics, neurological disease, vision care, diabetes care, infection prevention, diagnostics, cardiovascular disease and aesthetics. In addition to healthcare staples and medical devices, Johnson & Johnson has a vast list of prescription pharmaceuticals. In 2013, sales in prescription pharmaceuticals increased over 10% to $28.1 billion. With sales steadily increasing, Johnson & Johnson isn't standing still. They have a vast prescription pipeline, which include drugs to treat Hepatitis C, psoriasis, arthritis, and depression.
Johnson & Johnson was added to my dividend cornerstone list mainly because of its rock solid dividend, but also because of its exposure to the healthcare industry and its ability to provide capital appreciation for investors. Like Procter & Gamble, it doesn't have the highest dividend yield, but it's hard to ignore a stock with 51 consecutive years of dividend increases.
Microsoft is one of the largest companies in the world and is probably the safest of the technology dividend stocks. The company has a great balance sheet with $83 billion in cash compared to $23 billion in total debt. What stands out for Microsoft is its extremely low payout ratio of just 35%. This means only 35% of the company's earnings is dedicated to paying its dividend, which gives the company tremendous flexibility to either increase dividend or reinvest in its products.
Microsoft's products are firmly established in the tech sector, and it has as wide of a moat as any company on this list. From the Windows operating system to search engines to video game consoles, Microsoft dominates its industry. Just last week, Microsoft announced they would develop Microsoft Office for iPad products. Investors rewarded the company for this jump to Apple mobile devices by pushing the stock to new 52 week highs. Microsoft may be a multi-billion dollar company, but it is far from being a limping giant as it continues to enter new fields such as mobile devices and the cloud.
Consolidated Edison (ED)
Consolidated Edison is one of the largest investor-owned utility companies with $12 billion in annual revenue and $40 billion in assets. For 180 years, the company has been supplying the New York Metropolitan area with energy. It is a regulated utility that supplies electricity to NYC and natural gas in Manhattan, the Bronx, part of Queens and Westchester. The company provides power to roughly 3.3 million customers and gas service to 1.1 million customers. A subsidiary, Orange and Rockland Utilities, provides power to 301,000 customers in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service to 130,000 customers in southeastern New York and adjacent areas of eastern Pennsylvania.
Con Ed has a tremendous dividend track record. The company has increased dividend payments for 40 consecutive years. The stock has an impressive 4.6% yield and a beta of just 0.17. This gives the stock very little market risk and is great for a conservative investor. Consolidated Edison is a great dividend stock that can be added as a core holding in any portfolio.
While I'd feel fine about adding any of the oil stocks from my previous big oil article, ConocoPhillips is my favorite for a number of reasons. It ranked near the top in all the metrics I used in my analysis and is expected to have decent growth over the next few years. Being one of the relatively smaller oil companies, it has the ability to grow at a faster pace than its peers by investing heavily in the North American shale boom. ConocoPhillips has been working over the last couple of years to divest its assets in the North Sea and other parts of the world and focus its production in North America. The company currently produces roughly 63% of its oil in North America. By not focusing production in the Middle East and other volatile areas, the company doesn't have to worry as much about turmoil and political shuffling.
The stock pays a healthy 4.1% dividend yield and only uses 36% of its earnings to do so. While the company has the highest beta of my 6 dividend cornerstone picks, it has the lowest P/E and also offers the potential for healthy capital appreciation. By adding a safe oil stock to their portfolios, investors can get a healthy yield and better diversification.
At first I was on the fence about adding a tobacco company to my cornerstone picks, but Altria's high dividend yield and low beta convinced me. Altria has become very popular with dividend investors over the years because it offers the highest yield among the big tobacco companies. The company was created from a spin-off of Philip Morris in 2008 and has increased dividends every year since. Altria is best known for its Marlboro brand and other cigarette brands, but it also has a 28% stake in SABMiller (OTCPK:SBMRF). SABMiller is one of the largest brewers in the world, which provides further diversification for Altria.
While I'm not a fan of the business of big tobacco, I am a fan of Altria's consistency, high dividend yield and low beta. This stock is perfect for anyone looking to increase yield without adding tons of risk. The tobacco industry is already heavily regulated by the government, and the company has shown this will not interfere with its core business, profits, or ability to reward shareholders.
Every dividend income investor should have cornerstones in their portfolio that they can rely on for steady dividend payments while having downside protection. Any one of these stocks would make an excellent addition as a core holding. Core holdings shouldn't be based in one or two sectors, but rather a wide variety of industries as I've shown in this article. After an investor's core holdings are established, then you should look to other sectors to provide further diversification and yield. REITs and MLPs can provide excellent yields, but they also come with added risk. Investors should look beyond the current dividend yield when researching stocks and focus on its dividend history. If dividend payments vary significantly or are paused for any amount of time, this should be an immediate red flag. Remember to build your dividend portfolio from the ground up with solid cornerstone stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.