By Marshall Hargrave
Dividend-paying stocks are very attractive in a low-rate environment, just like the current macro conditions we find ourselves in, where the Fed has vowed to keep target rates low through mid-2015. Worth noting is that dividend stocks are not without risks; we look to limit this risk by ensuring the companies we screen can afford to pay dividends during an extended economic contraction, as exhibited by a payout ratio of less than 50% (check out our list of five "dirt cheap" dividend stocks hinged on a global recovery).
When putting together a portfolio of stocks that are solid investments over a five-year time horizon, it only makes sense to ensure these stocks can provide not only dividend income, but price appreciation as well. All of our picks are expected to grow earnings by at least 10% annually over the next five years. In short, our final criteria ensure that investors do not overpay for this growth. As is standard, we use P/E and PEG ratios to confirm that the stock's growth is offered at a reasonable price; this includes only considering stocks that trade at a PEG of less than 1.5. We also maintain that our dividend stocks are cheap relative to the overall market, by only including stocks that trade at a P/E below the S&P 500's current earnings multiple of 17x.
First up is the well-known tech giant Apple Inc. (AAPL). The company pays the lowest dividend yield of the bunch at 1.8%, but boasts its highest estimated earnings CAGR at 21%. Apple has recently launched its iPhone 5, a new iPad and the iPad Mini, but is down over 10% over the past month. The launch of the iPhone 5 has seen some headwinds due to production issues, but we believe the bears have overrun their mark, so to speak.
The company's $575 stock price and around $550 billion market cap is intimidating for some investors, yet keeping these numbers in perspective is important. Apple's PEG of only 0.6 suggests it could be severely undervalued. The company is making way in the mobile subscriber market, which is a big positive given the fact that iPhone sales make up almost 50% of the company's revenue. Apple now owns 17.5% of the mobile subscriber market, up from 15.4% at the midway point of its last fiscal year.
Our second long-term dividend stock is the diversified tech company 3M Co (MMM). Of our five, 3M has one of highest dividend yields at 2.6%, with a payout of only 37%. The company recently announced 3Q results, pushing the stock down 5% due to reduced guidance. However, we see this as a possible buying opportunity given we are looking at a five-year horizon, where 3M is expected to grow earnings at an estimated CAGR of 10%. Although the company is seeing sluggish demand in Asia, it's performing well in the U.S. and Latin America, having grown volumes 1.5% and 6.9% last quarter respectively. Over the long haul, 3M has a diversified product mix that includes industrial, healthcare, electronic and graphics products. The company continues to seek organic growth, having spent over 5% of sales on research and development in 2011 and 2010.
The company paying the highest dividend of our five picks, at a 2.7% yield, is United Technologies Corporation (UTX). United Technologies is the aerospace-industrial giant that recently purchased Goodrich in an effort to expand its commercial aircraft products offering. The acquisition will also help the company recognize cost synergies and integrate products for use in Boeing and Airbus aircrafts. The company has a hand in various global industries and will not only benefit from upswings in aerospace, but also growth in residential and commercial construction in emerging markets, which will be driven by the company's climate control and security segment.
The earthmoving manufacturer, Caterpillar Inc. (CAT), trades at the cheapest P/E of our five stocks at 9x, and also has one of the highest expected five-year EPS annual growth rates of the bunch at 14%, behind only Apple. Caterpillar lowered guidance based on a poor global outlook, yet its stock price has held up relatively well since the announcement. Although a global slowdown may slow sales, the company is expected to see increased demand from North America as depreciation rates are generally above average levels. In the longer term, Caterpillar will play a pivotal role in providing machinery for the urbanization of emerging markets. On an equally important note, the company's 2011 purchase of Bucyrus International expanded its mining footprint quite significantly.
Last but certainly not least, The Boeing Company (BA) is the world's second-largest manufacturer of commercial jets. Boeing has a high-quality dividend with a yield of 2.5%, while paying out only 31% of earnings to income-seeking investors. For the near term, the company is expected to grow revenue 19% in 2012 as the secular uptrend in commercial airline demand continues. Over the longer term, the company should see sustained demand from emerging economics, such as Asia and the Middle East, as they increase their fleet sizes. Additionally, the U.S. is set to increase its footprint in this marketplace as it replaces aircraft with more fuel-efficient airliners.