The Hunt For Quality Dividend Paying Companies Never Stops: Here Is My August Shopping List

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Includes: CSCO, MCD, QCOM, UTX, WFC
by: The Dividend Bro

Summary

Price targets for stocks on your watch list is essential to buying stocks at reasonable valuations.

Cisco's current yield of 3.4% is very appealing.

McDonald's boasts a dividend growth streak of 40 years.

Qualcomm's five year dividend growth rate is greater than 20%.

United Technologies has raised dividends for almost a quarter of a century.

If you're familiar with any of my articles here on SeekingAlpha, you are probably aware that I like to have a shopping list of stocks always available to me to help me make purchases in companies I deem to be trading at attractive prices. To maintain my shopping list, I update my spreadsheet every week in an attempt to find quality dividend paying companies that are trading at least at a reasonable valuation.

The goal, as always, is to have these dividends pay my wife and I's expenses in retirement. As a recap, the following guidelines serve to help us determine what prices we should pay for a particular company. All information is current as of 7/29/2016.

Purchasing Criteria

The first group of stocks are what we consider the core holdings. For core holdings, we want companies that:

  • Have at least 10 consecutive years of dividend growth.
  • Are considered by S&P Capital/Morningstar to be no more than 5% overvalued.
  • Are considered by F.A.S.T. Graphs to have a current price to earnings ratio that is no more than 5% overvalued when compared to the five-year average price to earnings ratio.
  • Have a dividend yield above 2.0%.
  • Dominate their sector of the economy.

The next group of stocks is considered to be supporting holdings. For supporting holdings, we want companies that:

  • Have 5 years of dividend growth or 10 years of paying uninterrupted dividends.
  • Are considered by S&P Capital/Morningstar to be at least fair valued.
  • Are considered by F.A.S.T. Graphs to have a current price to earnings ratio no more than 5% overvalued when compared to the five-year average price to earnings ratio.
  • Have a dividend yield above 1.0%.

The last group of stocks is the speculative holdings. For speculative holdings, we want companies that:

  • Have recently initiated a dividend.
  • Or have an average dividend growth rate of at least 10% or higher for the life of the dividend.
  • Are considered by S&P Capital/Morningstar/F.A.S.T. Graphs to be at least 5% undervalued.

In my last shopping list updated, published on 6/2/2016, I listed Cisco System (NASDAQ:CSCO), Wells Fargo (NYSE:WFC), Target (NYSE:TGT) and CVS Health Corp (NYSE:CVS) as stocks I was hoping to purchase (click here to read the article). Since that time, I was able to add to our Target and CVS holdings. With fresh capital available for investing in our IRAs, it is time to update my list of top targets. Note: I find all dividend information from David Fish's U.S. Dividend Champions spreadsheet.

Cisco Systems

Current Yield

# Years div growth

3 Year Div Growth Rate

3.41%

6

31.60%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$31

$35.40

$27

F.A.S.T Graphs Current PE

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

Price Target

13.1

11.9

Under $28

When I wrote about Cisco back on June 2nd, the stock was trading at $28.92. The stock continues to rally and closed on Friday at $30.53. I keep waiting for a pullback in order to add to our current position, but so far the stock has refused to cooperate. Even with the continued rally, Cisco yields 3.41%. The company has also raised the dividend an average of 31.60% each year for the last 3 years. Back at the beginning of June, I had hoped to buy another block of Cisco shares under $28. Let's see if that is still my price target.

F.A.S.T. Graphs says the current PE ratio is 13.1, which is more than 9% higher than the five-year average of 11.9. As with the last update, Morningstar says current fair value is $27. That means the company is trading at a 11.56% premium to the current valuation. S&P Capital has raised their fair value from $32.80 to $35.40 and has maintained the twelve-month price target of $31. This is a discount of 15.95% to their fair value and 1.54% discount to their one-year price target. Take the average of these numbers and Cisco is currently overvalued by 0.81%. With just five years of dividend growth, I normally require at least 5% discount to the current trading price. That would mean I would require a price of a shade over $28 per share.

However, Cisco might be one of those special cases where I adjust my rules ever so slightly. The most recent dividend raise was good for 24%. A company with a high dividend and dividend growth is very appealing. Because of this, I might be willing to buy shares of Cisco on any pullback from the current price.

Wells Fargo

Current Yield

# Years div growth

5 Year Div Growth Rate

3.17%

6

49.10%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$57

$53.50

$61

F.A.S.T Graphs Current PE

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

Price Target

11.8

12.1

Under $54

Unlike Cisco, Wells Fargo's share price has shrunk since the last update going from $50.85 at the time of publication to Friday's close of $47.97. The resulting decline means the banking giant now yields 3.17%. Since cutting the dividend in 2009, the dividend has made quite the comeback and is now actually larger than before the slash. The five-year average dividend raise is just under 50%.

Even with this impressive dividend growth, Wells Fargo has only raised dividends for the last six years. That means I would require shares to be at least 5% undervalued by our investment criteria.

Since the last update, Wells Fargo's current price to earnings ratio has fallen to 11.8. This is 2.54% below the five-year average of 12.1. Morningstar maintains their $61 fair value, making the company more than 27% undervalued to Friday's closing price. S&P Capital says fair value is $53.50 and they list their twelve-month price target as $57 per share. These numbers tell us that shares are 11.53% and 18.82% undervalued respectively. In my June update, I stated I believed the company was 9.5% undervalued. After the drop in price, I find shares of banking giant is 15% undervalued. At this price and based on my purchasing guidelines, Wells Fargo remains one of the most undervalued stocks on our watch list. Under $54 and the shares still qualify for purchase.

McDonald's (NYSE:MCD)

Current Yield

# Years div growth

5 Year Div Growth Rate

3.03%

40

8.80%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$140

$104.40

$128

F.A.S.T Graphs Current PE

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

Price Target

22.5

17.9

Under $124

The fast food chain has been on my radar ever since they made all day breakfast and started showing promising earnings results. I haven't yet strongly considered McDonald's because the stock has run up almost 33% in the year before the latest earnings report came out. Since reporting earnings on 7/26/2016, the stock has dropped almost 8%. That, ladies and gentlemen, is a good sized pullback in a short amount of time. McDonald's now yields above 3% and has raised dividends for the last 40 years. That is an impressive history and one that shows the company is serious about their dividend. The five-year dividend growth rate is 8.8%. All of these numbers are pretty solid and when you combine the dividend history with a large pullback, McDonald's becomes an intriguing stock to consider for purchase. Does the current valuation make a compelling case for us to buy shares?

F.A.S.T Graphs gives the current PE as 22.5 and the five-year average at 17.9. By this number, McDonald's shares are 20% overvalued. Normally, I wouldn't even consider a company that much overvalued, but the burger and fry giant has performed much better financially in the recent period. S&P Capital says fair value is $104.40, meaning shares are currently 11.26% overvalued. Their twelve-month price target is $140. This would represent a 19% discount. Morningstar gives us a fair value of $128, which would be good for an almost 9% gain. Averaging out these metrics and shares of McDonald's are roughly 1% overvalued. With 40 consecutive years of dividend growth, I am willing to pay 5% premium to fair value. McDonald's would qualify for purchase under $124 per share.

United Technologies Corporation (NYSE:UTX)

Current Yield

# Years div growth

5 Year Div Growth Rate

2.45%

23

8.50%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$124

$114

$122

F.A.S.T Graphs Current PE

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

Price Target

16.7

16

Under $127

United Technologies is a company I've followed for a while and I wrote about the Aerospace & Defense company on 5/9/2016 (you can read the article here). Since then, United Technologies has gained 5.76%. The company currently sports a 2.45% based on Friday's close and has raised dividends an average of 8.5% per year for the last five years. United Technologies has also shown a dedication to rewarding shareholders with twenty-three consecutive years of dividend growth. Even though we own Boeing (NYSE:BA), General Electric (NYSE:GE) and Honeywell (NYSE:HON) in the industrial/aviation sector of the economy, having the option to add a company with nearly a quarter century of dividend raises at a compelling valuation is very enticing.

When I first discussed United Technologies, the company's current price to earnings ratio according to F.A.S.T. Graphs was lower than the average five year. That has changed as the current PE is 16.7 which is over 4% higher than the five-year average of 16. S&P Capital's twelve-month price target remains $124, but the fair value has been raised from $104 to $114. United Tech is now undervalued by 15% and 5.90% respectively to these metrics. Morningstar has raised their fair value to $122, which if realized would result in a 13.33% gain for the stock. Altogether, I find that the company is 7.56% undervalued, qualifying it for purchase at current levels. Because our portfolio has a fair amount of exposure to industrials, particularly those in the aerospace industry, I might wait for a pullback before pulling the trigger.

Qualcomm (NASDAQ:QCOM)

Current Yield

# Years div growth

5 Year Div Growth Rate

3.39%

14

20.20%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$70

$73.30

$68

F.A.S.T Graphs Current PE

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

Price Target

14.4

14.4

$75

Qualcomm is a recent addition to our watch list and I've found the semiconductor and telecommunication equipment company to be an intriguing story. As the maker of chips that go inside of cell phones, the company is in a pretty favorable spot in terms of ability to grow revenues and grow dividends. If you're like me, you probably feel lost without your phone. Once someone adopts a smart phone, they probably are not willing to downgrade.

The company currently has a 3.39% yield and has raised dividends an average of more than 20% each year for the last five-years. Now, it should be noted that the company's dividend growth has been all over the place for the past five years and not very consistent, ranging as high as 34.70% in 2013 and as low as 10% for the most recent quarter. A 10% raise, low by Qualcomm standards, is still substantial. The company has also raised dividends for the last fourteen years. Dominate market share, a good dividend yield and solid dividend growth makes Qualcomm attractive, even after rising almost 11% since the most recent earnings report.

F.A.S.T. Graphs tells us that the company currently has a PE ratio of 14.4, which is spot on for the five-year average. Morningstar sees fair value at $68 or 8.66% higher from Friday's close of $62.58. S&P Capital give a fair value of $73.30 and a twelve-month price target of $70, which shows they believe the company is 17.13% and 11.86% undervalued respectively to these metrics. Find the average of these metrics and our guidelines say Qualcomm is 9.41% undervalued. Because I am willing to pay a 5% premium for a company that has at least ten years of dividend growth, I would be willing to buy shares of the company for under $75.

Conclusion

I like having a shopping list ready so that I can pick up shares of quality companies at valuations I want to pay for them. As of now, Cisco, Wells Fargo, McDonald's, United Technologies and Qualcomm are at the top of my list. Each of these companies is an industry leader, has a solid yield and shown commitment to rewarding shareholders with yearly dividend raises. What do you think of my picks? What stocks are on your watch list?

Disclosure: I am/we are long CVS, TGT, BA, HON, GE, CSCO.

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: We might initiate a long position WFC, UTX, MCD or QCOM over the next 72 hours. As a reminder, we are not financial professionals. Please do your own research before making an investment decision.