There are four dividend champions inside my portfolio. This article highlights four of them. As of the middle of October, the S&P 500 was up about 6.2% or so (including dividends) on the year. My portfolio was up 14.2% over the same time span.
How Do I Pick Long-Term Positions?
I focused on finding companies that would be worthy of buying and holding for decades. To be fair, I did also take some great opportunities for investing in mortgage REITs and preferred shares. When investors are seeking high quality companies with strong dividend yields, it is a tailwind for prices on these companies. On the other hand, when the 10 year yield is trending higher, as it has the last couple months, it puts pressure on the prices of these champions.
Why do investors seek dividend champions when bond yields are falling? They want to replace the income they would've acquired from bonds in a higher interest rate environment. These solid dividend champions become a natural fit for an investor focused on generating increasing levels of income over a long retirement.
My Final Four Dividend Champions
Here are the companies I bought for the long haul:
Philip Morris International (NYSE:PM)
Altria Group (NYSE:MO)
Buying Philip Morris
Philip Morris is the 4.2% yield the market keeps overlooking. The company is punished by investment screens for the way fluctuations in the exchange rate hit their financial statements. While the GAAP statements are a very accurate and fair way to measure earnings, screens that look at trends may overestimate the volatility in the performance of Philip Morris. It appears that sales and earnings are much more volatile because of the sudden spikes in the exchange ratio. I believe Philip Morris would be trading around $105 to $110 right now, rather than around $96, if it wasn't for the rapid climb in the value of the US dollar since 2014 began.
This is a huge dividend yield from a company punished for fluctuations in exchange rates. They also have the new iQOS product line they are rolling out. The company's results have been limited because they couldn't manufacture enough of the product to meet demand. Theoretically they could jack up prices so supply and demand would equalize, but that would give customers a very negative experience. Remember that Philip Morris wants to establish brand loyalty with their new product line, so they won't be ruining it in pursuit of some short-term profits. Philip Morris is thinking far enough ahead that they are tackling the health issues from smoking. If they can extend the average life of smokers, they'll be doing something morally good as well as profitable.
Buying Altria Group
I'm bullish on Altria Group for a few reasons. Near the top of the list is the potential positive impact if we see more widespread legalization of marijuana use. I live in Colorado; I've witnessed the drastic destruction caused by legal recreational use. Abandoned cars are everywhere. No one shows up for jobs. There are stoners getting high at all hours of the day in the elementary school…
None of those things are real. None of the doomsday scenario came to pass. We also don't have waves of zombies running around cities, unless you count the annual zombie crawl.
Why do I think Altria Group wants legalization? Read the piece on legalization and you'll understand.
It isn't just that. Even without legalization Altria Group has been very resilient in their earnings. They run the company with great discipline. Of course, that 3.91% yield doesn't hurt either.
Altria Group hasn't been focusing on iQOS the same way as Philip Morris, but the two companies are still quite close. Remember they were part of the same company and only split for the benefit of shareholders. Since many investors still own both and the two deliberately operate in different markets, they have no reason to compete. Instead, they can share technology and help each other.
Wal-Mart is one of the old and faithful dividend champions that most investors know about. Remarkably, some scorn the retailer because they believe that all retail must be dead. While I agree Amazon (NASDAQ:AMZN) is a material threat to parts of the business, Wal-Mart is fighting back and developing their own online presence. Their enormous footprint (stores everywhere) serves as an exceptional distribution network. Recently, I found Wal-Mart back in the bargain bin.
Many investors are concerned about the trend towards pressure on margins for retailers over the last year or two. I disagree. Following the pressure and the share price declines the major retailers committed to extremely aggressive share buyback programs. In a nutshell, those programs should prevent them from opening up new stores aggressive and reduce intense competition.
My average price is in the $65 range. It was up quite substantially prior to the recent weakness and these are the price levels that bring to a firmly bullish stance. The yield is running about 2.9%. By 3%, I think the stock starts showing up on more screening tools and a stronger floor should form. I like it at $68 and I like it more whenever it gets cheaper.
Target Goes Nicely With Wal-Mart
Like Wal-Mart, Target carries a strong dividend yield and has a very aggressive buyback program. Some investors argue that they won't shop there or buy shares until the company changes their policies. Think about that for a bit. Investors refusing to own the shares (reducing demand, pushing prices down) so long as a certain policy is maintained? That means a lack of the policy could create additional demand. On the other hand, if Target simply trades at cheap ratios for a couple years the combination of dividend reinvestment and share buybacks should materially improve just about every metric based on the position the shareholder maintains.
After 3 years if the investor has gone from 1,000 shares to 1,090 shares and the company has retired a good chunk of its stock, the position may have the same ownership claim that would've previously taken over 1,200 shares. When a dividend champion gets cheap, buybacks become effective.
These four companies are all excellent. Each has a solid track record and offers a strong dividend yield. Target and Wal-Mart trade at exceptionally low valuations as investors fear the death of retail. Philip Morris appears more expensive because of the impact of exchange rates, but investors seem hesitant to price in the potential benefits from iQOS. Altria Group is the domestic tobacco king and has potential growth from legalization or from developing the iQOS product line domestically after Philip Morris proves it internationally.
Buy ratings go out on all 4. Each currently trades at what I consider reasonable valuations.
Other Dividend Ideas
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Disclosure: I am/we are long WMT, TGT, PM, MO.
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: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. Tipranks: Assign buy ratings to TGT, WMT, MO, and PM.