5 Dividend Paying Stocks We Don't Own... Yet

|
Includes: CMI, CSCO, LMT, PEP, V
by: The Dividend Bro

Summary

We'll examine 5 dividend paying stocks we don't currently own.

What are the current fair values of each these companies?

What are our price targets for each of these companies?

My wife and I are always on the hunt to add companies to our portfolio that pay and raise their dividends. We especially like companies that can pay and raise their dividends in both good and bad economic times, as is this a sign that they dominate their sector of the economy. These dividends will be used to cover our expenses in retirement.

Current Portfolio

Twenty-four of these companies are held in our Roth Individual Retirement Accounts (IRAs). Currently, our IRAs consists of the following companies:

AbbVie (NYSE:ABBV), Aflac (NYSE:AFL), Altria (NYSE:MO), Apple (OTC:APPL), AT&T (NYSE:T), Baxalta (BXLT), Boeing (NYSE:BA), Chevron (NYSE:CVX), Coca-Cola (NYSE:KO), ConocoPhillips (NYSE:COP), CVS Health (NYSE:CVS), General Electric (NYSE:GE), Gilead (NASDAQ:GILD), Johnson & Johnson (NYSE:JNJ), JPMorgan (NYSE:JPM), MasterCard (NYSE:MA), Microsoft (NASDAQ:MSFT), Philip Morris (NYSE:PM), Realty Income (NYSE:O), Southwest Airlines (NYSE:LUV), Starbucks (NASDAQ:SBUX), Target (NYSE:TGT), Ventas (NYSE:VTR) and Verizon (NYSE:VZ).

We hold four companies in two share builder accounts: 3M (NYSE:MMM), Procter & Gamble (NYSE:PG), Exxon Mobil (NYSE:XOM) and General Mills (NYSE:GIS). These companies make up our Early Retirement Fund.

Our goal is to have 30 or so stocks in our combined IRAs. Since we've started investing, there have always been some companies who have dividends and dividend growth that look very attractive, but their share price has been overvalued. Whenever the market is in a broad sell-off like what we are currently experiencing, we like to have a shopping list of potential purchases ready. In volatile times, good stocks are sold right along with the bad ones. When a stock meets our criteria, we want to be ready to make a purchase before the market realizes they have thrown the baby out with the bathwater.

Criteria for Stock Purchase

Our portfolio is broken down into three groups of holdings: Core Holdings, Supporting Holdings and Speculative Holdings. The buying criteria for each group of holdings are as follows:

For core holdings, we want companies that:

  1. Have at least 10 consecutive years of dividend growth.
  2. Are considered by S&P Capital/Morningstar to be at least fair value.
  3. Have a dividend yield above 2.0%.
  4. Dominate their sector of the economy.

For supporting holdings, we want companies that:

  1. Have 5 years of dividend growth or 10 years of paying uninterrupted dividends.
  2. Are considered by S&P Capital/Morningstar to be at least 5% undervalued.
  3. Have a dividend yield above 1.0%.

For speculative holdings, we want companies that:

  1. Have recently initiated a dividend.
  2. Or have an average dividend growth rate of at least 10% or higher for the life of the dividend.
  3. Are considered by S&P Capital/Morningstar to be at least 10% undervalued.

Watch List

Now, on to the stocks that we want to purchase but haven't had a chance to yet. All yields and fair values are as of 1/8/2016.

Lockheed Martin (NYSE:LMT)

Sector

Current Yield

# yrs

div growth

5 yrs div

growth rate

Industrials

3.10%

13

18.40%

S&P Capital 12 month price target

S&P Capital Fair Value

Morningstar Fair Value

Our Price Target

$210

$203

$177

$196

Click to enlarge

The world is a dangerous place. Recent worldwide headlines include: Terrorists attacks in France, diplomatic disputes between Saudi Arabia, civil war in Syria and Yemen, North Korea claims detonation of a hydrogen bomb. These are but a few examples of wars and disputes found around the globe. While a lot of these headlines involve tragic events, they demonstrate the need for countries to maintain a quality defense. Lockheed Martin is the world's largest defense contractor. Products include F-35 and F-16 fighter planes, missile defense systems and ground vehicles as well as the recently purchased Sikorsky helicopter division. Almost 80% of sales come from the U.S. government and 20% from the international markets. While some might be fearful that such a large percentage of sales comes from one costumer (the U.S. government), given worldwide current events, there is a potential for further international growth.

The stock closed on Friday at $212.91. This is close (about 1.30%) to above S&P Capital's twelve-month price target and almost 5% above their fair value estimate. Morningstar seems to think that Lockheed Martin is currently overvalued. Due to their 13-year streak of dividend increases, we rate LMT as a core position. There, we would be looking for just at average fair value of these numbers, just over $196.

PepsiCo (NYSE:PEP)

Sector

Current Yield

# yrs div growth

5 yrs div growth rate

Consumer Staples

2.89%

43

8.20%

S&P Capital 12 month price target

S&P Capital Fair Value

Morningstar Fair Value

Our Price Target

$103

$87.8

$99

$98

Click to enlarge

While most people associate PepsiCo with Pepsi, the Frito-Lay and Quaker foods divisions are responsible for almost 60% of the company's profits. Coke is already in the IRA, but they are almost exclusively a beverage company. In our view, Pepsi is more of a snack foods company with a soda kicker.

Very few companies can match Pepsi's dividend growth streak of 43 straight years and that is the type of stability we want in our portfolio. S&P Capital says the current price is above their fair value estimates, but the other numbers tell us Pepsi is undervalued. After Friday's close of $97.21, the company is within a percent of our price target. If money was available, Pepsi would qualify for a purchase.

Cisco (NASDAQ:CSCO)

Sector

Current Yield

# yrs div growth

3 yrs div growth rate

Technology

3.39%

5

31.60%

S&P Capital 12 month price target

S&P Capital Fair Value

Morningstar Fair Value

Our Price Target

$34

$30

$27

$25

Click to enlarge

According to S&P Capital, Cisco is the world's largest producer of higher-performance computer networking systems. Their ethernet switchers and routers move information between networks around the globe. Cisco controls between 55%-60% of the Ethernet switch market and their share of the of the router market is roughly 50%. In a world where we are all connected through the internet, Cisco produces the products that we rely on to be connected. Simply put, Cisco stands poised to continue to dominate their sector. This kind of market domination is exactly what we are looking for our portfolio.

The company has only been paying a dividend since 2011, but since then Cisco has increased the dividend from $0.06 to $0.21 per quarter. This kind of dividend growth is rare for a technology company.

S&P Capital sees Cisco trading at $34 12 months from now, while they currently have a fair value of $30. Morningstar says the company is worth a little less at $27 a share. After closing on Friday at $24.78, the company is an average of almost 9% undervalued, according to these numbers. This checks all the boxes for a supporting position for us.

Cummins (NYSE:CMI)

Sector

Current Yield

# yrs div growth

5 yrs div growth rate

Industrials

4.53%

10

32.00%

S&P Capital 12 month price target

S&P Capital Fair Value

Morningstar Fair Value

Our Price Target

$150

$110

$120

$86

Click to enlarge

Cummins manufactures and distributes diesel and natural gas engines and power systems. The company sells its products to countries around the world. A lot of their truck engines are sold to emerging markets, such as China and Brazil. When the economies of these emerging markets are going well, the company has the potential to greatly increase their revenues. When the economies of these countries slow down, Cummins is at risk for declines in profits. Even though Cummins is much more of a cyclical company then say Pepsi or Coke, they have raised their dividend an average of 32% each of the past five years.

I actually first owned shares in my IRA in 2012 and sold for a 15% gain. I can't recall why I decided to exit the position, but the dividend growth today is very enticing. Shares currently change hands at $86.02. Morningstar says the company has a fair value of $120 and S&P says $110. S&P Capital does have a 12-month price target of $150. Altogether, this ranks the company as almost 50% undervalued. This may seem high, but if markets can find their footing and growth returns to emerging markets, Cummins could be a steal at this price.

Visa (NYSE:V)

Sector

Current Yield

# yrs div growth

5 yrs div growth rate

Financials

0.77%

8

30.70%

S&P Capital 12 month price target

S&P Capital Fair Value

Morningstar Fair Value

Our Price Target

$80

$70

$104

$72

Click to enlarge

While we are primarily interested in increasing our dividend income, there is a place for companies that are more growth orientated in our portfolio. The dividend is less than 1.0%, but Visa's average five-year dividend growth is almost 31%. While that is probably not sustainable forever, that is an incredible number. The company has also raised their dividend each year for the past eight years.

Visa is the largest credit card company in the world and they are growing market share. First, Costco (NASDAQ:COST) dropped American Express (NYSE:AXP) as their preferred card partner and in April, Visa fills their spot. At the end of October, USAA, one the largest issuers of debit and credit cards in the U.S., decided to end their 30-year partnership with MasterCard in favor of Visa. Then in November, Visa purchased Visa Europe, giving the company access to European credit card market. On Monday, January 4th, Fidelity announced that they too will drop American Express and instead begin issuing Visa credit cards to their 24 million customers later this summer. At this point, Visa is simply running up the score on their competition. Morningstar recently raised their fair value estimate from $71 to $104. This is a massive 46% increase on what they feel the company is currently worth. S&P Capital thinks the 12-month price target is $80, but their current fair value is just over $70. At Friday's closing price of $72.88, the company is slightly over S&P Capital's fair value, but significantly under the other measurements. Visa's share price has declined slightly more than the S&P 500. We feel Visa is much better than the average company in the index. Though the company doesn't have the 1% yield minimum we look for in supporting positions, the rare combination of market and dividend growth is very appealing to us. Therefore, Visa has a place in our portfolio as something between a speculative and supporting position. Once funds are accumulated, Visa goes to the top of our watch list.

Conclusion

There is a lot of uncertainty in the market to start 2016. While dividends can be cut, investing in companies that have a long history of paying and raising their distributions can help protect your portfolio in a market downturn. While we don't currently own shares of Lockheed Martin, Pepsi, Cisco, Cummins or Visa, they are on the short list for purchase. They all have a history of increasing their dividends to shareholders. If the market sells off further from here, then we will have even better entry points into these companies.

Disclosure: I am/we are long MMM, ABBV,AFL, MO, AAPL, T, BXLT, BA, CVX, KO, COP, CVS, XOM, GE, GIS, GILD, JNJ, JPM, MA, MSFT, PM, PG, O, LUV, SBUX, TGT, VTR, VZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We are not investment professionals. Please do your own research before making any investment decision