It is not uncommon to hear claims from investors that stocks are either over- or under- valued, and this is not accurate. While individual stocks, and the broader stock market, may be over valued opportunities for investors to take up positions in undervalued dividend growth stocks nearly always exist across the various market sectors.
This article identifies dividend growth investment opportunities across market sectors that could represent sound entry points for DGI investors. In this series I identify one potential opportunity in the following sectors: Healthcare, Financials, Consumer Goods, Technology, Oil and Gas, Industrials, Telecom and Consumer Services. Part one will focus on Healthcare, Financials, Consumer Goods and Technology
This list is not intended to serve as a recommendation for investment, but rather a listing of stocks investors can analyze and evaluate for their portfolios.
In the world of healthcare there are a number of great dividend stocks. Many of the favorite stocks of DGI investors, Johnson and Johnson (JNJ), Abbot Laboratories (ABT), and Novo Nordisk (NVO), operate in the healthcare market.
The identified healthcare stock is TEVA Pharmaceuticals (TEVA)
TEVA is a pharmaceutical company based out of Israel that specializes in generic pharmaceuticals and happens to be the largest generic drug manufacturer in the world. With patents for many of the pharmaceutical giants' blockbuster drugs expiring, opportunities for TEVA to grow appear prevalent. While EPS are estimated to grow over the next 5 years at 7.8% growth may exceed expectations as TEVA takes share from the pharmaceutical giants. TEVA has grown its dividend by an average of 20%/year over the past 5 years, and with debt/equity well below industry average and low payout ratio of 27% it appears the dividend has room to continue growing.
Financial stocks were once the stalwarts of the dividend growth world bringing shareholders great dividends while rapidly growing share price. Although things have changed quite a bit over the year, the big banks are not the place to turn for great dividends and continued growth.
In this industry, I am eyeing Aflac (AFL)
Aflac provides supplemental health and life insurance to consumers through the company's various subsidiaries in the U.S. and Japan. AFL shares trade with a P/E ratio of just 8.8. Over the long term Aflac is expected to grow earnings per share at an annualized rate of 10.5%. While Aflac shares, trading for $48.65, offer a dividend yield of 2.7% the company has room to grow the dividend with its 23.5% payout ratio.
With growing earnings and double-digit growth expected Aflac appears to be a stock that can provide share price appreciation and dividend growth exceeding the broader market for years to come.
The consumer goods segment offers a number of opportunities for great dividends. Companies like Coca-Cola (KO), Phillip Morris (PM), and Procter and Gamble (PG) all offer great dividends for investors, but I have my eye on Johnson Controls, Inc. (JCI)
JCI provides automotive interiors and energy optimization services for buildings. Johnson Controls is not a typical dividend growth stock, as it froze its dividend in 2009 after a 33-year streak of increases. The company has however increased the dividend in successive years and appears poised to begin a new streak of increases.
As the automotive industry continues growing to meet pent-up demand JCI should stand to benefit. With a current P/E ratio of 11.5 versus a 5-year average of 20, shares appear under valued. Along with being undervalued, shares appear poised to grow with EPS projected to grow 16.7% annually over the next 5 years. With a payout ratio of 28% JCI could be a stock that rewards shareholders greatly over the years ahead.
Technology stocks and dividends have not typically gone hand in hand, but over the past few years dividends have begun to become a larger and larger part of the technology market, as great technology stocks like Microsoft (MSFT) and Apple (AAPL).
Intel Corp. (INTC) is the tech stock I have an eye on. The company issued guidance that Q3 revenue will come in below expectations, and lowered guidance for the full year. In the wake of this lowered guidance, shares have suffered. While short-term challenges exist for the company in the long term opportunities still exist.
Intel has grown its dividend by 15% over the past 5 years, and currently pays out just 34% of earnings as dividends. Trading at a TTM P/E of 9.8 and expected to grow earnings at a 12% rate over the next 5 years, Intel appears poised to return value to shareholders. As the economy and hiring recover PC sales will increase. In the meantime, Intel efforts into the world of mobile and tablet will begin to take hold and INTC will start taking market share.
While the market as a whole can be overbought and oversold, individual stocks will always present opportunities for buying stocks at value. Prudent dividend growth investors who scrutinize stocks and the market can generally identify opportunities to invest in quality companies that will provide income for may years at outstanding values.
Stay tuned for part two of this series, which will cover the remainder of the market (Oil and Gas, Industrials, Telecom and Consumer Services)
Disclosure: I am long JNJ.