October Shopping List: Looking For Dividend Growth Bargains

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Includes: VZ
by: The Dividend Bro

Summary

We've added 11 dividend growth companies since the start of the year.

Should we add to our current positions or buy our portfolio's first utility company?

Curent stocks up for consideration this month are Verizon and Starbucks.

Utility companies on the watch list are Southern Company, American Electric Power and Dominion Resources.

Since the start of 2016, my wife and I have added 11 new companies to our portfolio. We've add dividend royalty such as Pepsi (NYSE:PEP) and V.F. Corp (NYSE:VFC) as well as companies that are relatively new to the dividend game, such as Visa (NYSE:V) and Disney (NYSE:DIS). We've made a concentrated effort to grow our number of holdings and we currently have 35 positions. Because of this, many of our positions are on the smaller side and I would like to add to them if they are at a reasonable value. For October's shopping list, I am targeting stocks that make up some of the smaller portions of our portfolio. The only caveat here is, our portfolio doesn't contain any utility companies. Therefore, the only possible new position I would select for purchase for this month would be a company in this sector. You can see my possible selections of utility picks by clicking here. For this month, I would consider Southern Company (NYSE:SO), Dominion Resources (NYSE:D) or American Electric Power Company (NYSE:AEP) from this sector. Other possible picks for this month's purchase are as follows:

Verizon (NYSE:VZ)

Current Yield

# Years div growth

5 Year Div Growth Rate

4.60%

11

3%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$56

$48.77

$50

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5 Year Avg PE

Price Target

12.8

15.5

Under $60

Click to enlarge

Verizon has made the list for September, but I instead picked Disney, CVS Health (NYSE:CVS) and V.F. Corp, because I found them all to offer more potential upside based on how I find fair value of stocks. Since then the price has actually dropped from $53.51 to the 10/10/2016 close of $50.19. At this price, the company is yielding 4.60%.

FAST Graphs says Verizon's price to earnings ratio is currently 12.8, but for the last 5 years it is 15.5. By this measurement, the stock is more than 21% undervalued. S&P Capital gives a 12-month price target of $56, which would result in an 11.58% gain. Their current fair value is $48.77, just 2.83% lower from Monday's close. Morningstar says fair value is $50, almost exactly the same as the closing price. All totaled, I find Verizon to be a little more than 7% undervalued. With more than 10 years of dividend raises, I am willing to pay 5% over fair value. That would mean that any price under $60 would qualify for purchase. Verizon makes up just 2.41% of our portfolio, less than half of a 5% full position.

Starbucks (NASDAQ:SBUX)

Current Yield

# Years div growth

5 Year Div Growth Rate

1.50%

6

30.50%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$68

$45.90

$63

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5 Year Avg PE

Price Target

28.2

31.9

Under $66

Click to enlarge

Starbucks also made the list for September and since then the stock has dropped an additional $3 or so. While the stock yield is just 1.5%, the dividend growth over that time is more than 30%. By the company's standards, same store sales struggled in the previous quarter, but grew same store sales 4% in the U.S. and 7% in China. Pretty solid.

FAST Graphs gives a current PE ratio of 28.1, 13.52% lower than the 5-year average of 31.9. S&P Capital has a 12-month price target of $68, or 27.58% higher than the 10/10/2016 close of $53.30. Their fair value is $45.90 or 13.88% below this price. Morningstar sees fair value at $63. This would result in an 18.20% gain. Averaged out and I find that Starbucks is currently more than 11% undervalued. Because the company has more than 5 years of dividend growth, I would find it acceptable to pay a 5% premium to fair value. Any price under $66 would qualify Starbucks for purchase. The company is 2.54% of our total portfolio. Like Verizon, Starbucks only makes up a half position in our portfolio, so adding shares here would increase the size of this potential dividend growth giant.

Conclusion

Because we've spent much of the last year increasing the size of our portfolio, some of our positions are on the small side. I would like to make as many of these as possible into full positions. The only new company I am considering for this month's purchase are three utility companies. We don't yet own a single one and I think it is important for any dividend growth portfolio to contain several of these reliable dividend payers. The real question I have is whether to add to an existing position that is considerably undervalued or to add to the diversity of our portfolio with a utility company. When new money is available for investing, I will update what we are purchasing. What is on your watch list for this month?

Disclosure: I am/we are long VZ, SBUX BUT MAY INITIATE A LONG POSITION IN SO, AEP, D OVER 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.

Additional disclosure: I am not an investment professional. Please do your own research prior to making an investment decision