Large cap dividend stocks offering both income and growth can provide investors the best of both worlds, especially in a turbulent market. In this exercise, we will look for solid large companies that offer a high current dividend yield, have reasonably high growth rates, and are currently selling at fair or low valuations. The specific screening criteria are as follows:
Market Cap at least 10 Billion: This serves as a useful proxy for large and prominent companies. In favorable economic conditions, large companies tend to have best resources and assets for acquisitions and growth opportunities, such as expansion into emerging markets. In unfavorable economic conditions, large companies with more assets and revenues can withstand setbacks better than small companies can, and thus dividends from large companies tend to be more sustainable.
Dividend Yield at least 3%: This screens for stocks that pay a generous dividend yield compared to the general market or bonds. A 3% yield is 50% greater than the 2% yield offered by the S&P 500 or by 10-year treasury bonds. A 3% or greater dividend should provide sufficient income for retirees.
10-Year EPS Growth at least 5%: This screens for companies that are growing at a satisfactory rate. One of the pitfalls of dividend stock investing is that dividend paid out is no longer available for reinvestment into the company's operations to provide for future growth and expansion. To balance income and growth, long term investors should look for at least 5% EPS growth for any dividend stock. I use 10-year average to be conservative, thereby limiting the search to only good companies that can sustain EPS growth for the long term. The past 10 years included two recessions, making this a stringent test. Also note that EPS growth, not revenue growth or earnings growth, is used, because EPS is what provides shareholder value. A stock with impressive revenue and earnings growth may have zero or even decreasing EPS growth, if the total number of shares outstanding has been massively diluted.
5-Year Average Return on Equity at least 15%: Good companies with strong moats can maintain a high return on equity at least 15%.
P/E Below 12: This screens for companies selling at reasonable valuations. A P/E less than 12 is lower than the historic average P/E of 15 for the S&P 500. Due to the reversion to the mean phenomenon, out of favor value stocks tend to outperform glamour stocks that sell at lofty valuations. Screening for P/E less than 12 will keep us from paying too much for growth.
|Company name||Symbol||Market cap||P/E ratio||Div yield (%)||Return on equity (5 yr avg) (%)||10y EPS growth rate|
|Telefonica Brasil SA (ADR)||(VIV)||30.40B||10.14||13.13||23.30||8.47|
|Telefonica S.A. (ADR)||(TEF)||75.67B||4.81||12.83||41.20||13.09|
|YPF SA (ADR)||(YPF)||14.49B||10.92||9.21||16.06||11.72|
|Southern Copper Corporation||(SCCO)||26.20B||11.53||7.89||44.31||25.18|
|Westpac Banking Corporation (ADR)||(WBK)||62.38B||8.93||7.80||17.92||8.58|
|TOTAL S.A. (ADR)||(TOT)||114.40B||7.45||5.85||23.00||8.69|
|AstraZeneca plc (ADR)||(AZN)||62.02B||6.45||5.75||39.16||26.94|
|Petroleo Brasileiro SA (ADR)||(PBR)||167.56B||7.31||4.95||26.44||12.20|
|Eli Lilly & Co.||(LLY)||46.17B||9.52||4.91||24.80||5.11|
|Yanzhou Coal Mining Co. (ADR)||(YZC)||10.31B||5.53||4.29||20.60||23.93|
|China Mobile Ltd. (ADR)||(CHL)||195.15B||10.10||4.20||24.43||16.27|
|Royal Bank of Canada (USA)||(RY)||72.87B||11.60||4.19||17.83||9.32|
|The Bank of Nova Scotia (USA)||(BNS)||54.50B||11.06||4.07||18.31||8.19|
|PetroChina Company Limited (ADR)||(PTR)||251.31B||11.11||3.90||17.56||8.10|
|Banco Bradesco SA (ADR)||(BBD)||65.48B||6.48||3.47||31.71||14.50|
|BHP Billiton plc (ADR)||(BBL)||164.82B||7.05||3.35||36.07||34.11|
|CNOOC Limited (ADR)||(CEO)||86.99B||8.12||3.13||26.44||14.07|
|China Petroleum & Chemical Corp. (ADR)||(SNP)||98.39B||8.15||3.12||17.10||10.37|
Note that of the 21 stocks that meet our screening criteria, 16 of them (76%) are international stocks, reflecting better valuations abroad. This is primarily due to uncertainty over the outcome of the European debt crisis. When the European crisis resolves and economic conditions continue to improve, these stocks should do quite well. For the short term investor and those nearing retirement, however, the small but not negligible risk of an esculating European crisis prompting widespread selling must be considered.
For the long term investor (holding for at least 5-10 years), I suspect the total returns from this portfolio should be quite satisfactory. Use this information as the starting point for your own due diligence. I recommend reading the recent annual and quarterly reports of the stocks that interest you to ensure that you understand the risks involved and that the fundamentals remain strong.
Conclusion For the long term investor, high quality stocks that offer the best combination of dividend yield and growth are the best investment. Long term investors are well advised to look for stocks that provide both yield and growth, have high return on equity, and currently selling at good valuations.
Disclosure: I am long TOT, CHL, LLY