4 Dividend-Paying Stocks That We Don't Yet Own

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Includes: BDX, LMT, NKE, SO
by: The Dividend Bro
Summary

While I intend to spend 2017 adding to our current holdings, there are a few stocks I wouldn't mind adding to our dividend growth portfolio.

Becton, Dickinson and Company, Southern Company and Nike are all within my buy range.

While overvalued, Lockheed Martin has long been a target for us. I hope to be able to purchase shares this year.

In my year-end portfolio update, I stated that I hoped to spend 2017 buying stocks that are already in the dividend growth portfolio that my wife and I fund. We currently sit at 35 positions, many of which are below a half position. In fact, I would consider just Altria (NYSE:MO), Johnson & Johnson (NYSE:JNJ), General Electric (NYSE:GE) and Microsoft (NASDAQ:MSFT) to be full positions. Because so many of our holdings are on the small side, I am hoping to add to these positions during the course of this year. In a previous article, I wrote about 6 stocks we already own that I want more of. And while I am focused on adding to what we have, there are still some companies that I want to own, but haven't yet had the chance to buy.

As a reminder, here are my investment guidelines:

Core holdings are those 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%.
  • Have displayed market dominance in their sector of the economy.

Supporting holdings are those 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%.

Speculative holdings are those 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.

Becton, Dickinson and Company (NYSE:BDX)

Current Yield

# Years div growth

5-Year Div Growth Rate

1.71%

45

10.60%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$180

$193.30

$186

F.A.S.T Graphs Current PE

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

Price Target

19.1

17.1

Under $193

Becton, Dickinson and Company sells medical devices, supplies, lab equipment and diagnostic tools that are used by hospitals and medical labs around the world. The company is composed of three divisions: medical systems, diagnostic and biosciences. Among the company's main products in the medical system division are hypodermic syringes and needles as well as insulin syringes. BDX also produces anesthesia needles as well as surgical blades. Its diagnostic division produces products that are used for specimen collection. The biosciences division helps medical researchers study cells in an effort to understand and manage disease as well as assist with diagnosis. In 2015, the company bought CareFusion, which provides hospitals and doctors with diagnostic products and medical devices. It's not an exaggeration to say that if you need to go to the hospital, you're probably going to need a product produced by Becton, Dickinson and Company. This type of market dominance is what I am looking for when purchasing a stock.

Becton, Dickinson and Company has raised dividends for 45 years in a row. A company with a dividend streak such as this is probably not going to have to cut its dividend. This type of dedication to rewarding shareholders is impressive - as is the company's consistent dividend raises. The average dividend raise over the past 5 years is over 10%. The company has given shareholders a 10%-ish raise almost every year since 2012. You can almost set your watch to this type of bump from BDX.

F.A.S.T. Graphs says the current PE is 19.1. This is 10.5% higher than the 5-year average PE or 17.1. S&P Capital gives a price target of $180, which is 5.3% higher than the 1/10/2017 closing price of $170.95. Their current fair value for BDX is $193.30 or 13% higher from here. Morningstar gives a fair value of $186, which is almost 9% higher from Tuesday's close. Average these numbers out and I find BDX to be 4.2% undervalued. With more than 4 decades of dividend growth, I would be willing to pay 5% above what I feel is fair value. Any price under $193 and I would be a buyer of Becton, Dickinson and Company.

Southern Company (NYSE:SO)

Current Yield

# Years div growth

5-Year Div Growth Rate

4.63%

16

3.50%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$48

$49

$48

F.A.S.T Graphs Current PE

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

Price Target

16.8

16.7

Under $52

We don't own a single utility in our dividend growth portfolio, which seems strange since dividends are the primary reasons many dividend investors own such a company. Even in a recession, people are going to pay their electricity bill. Southern Company, which operates utility and nuclear power plants in the southern United States, has raised dividends each of the past 16 years. Over the past 5 years, the company has given investors an average dividend raise of 3.6%. Some may scoff at this low raise, but based on the 1/10/2017 closing price of $48.38, you would have a starting yield of 4.63%. That is a very solid yield and takes the sting out of having a growth rate that is on the smaller side.

F.A.S.T. Graphs says the current PE ratio is 16.8, which is essentially in line with the company's 5-year average ratio of 16.7. S&P Capital gives a 12-month price target of $48 and a fair value of $49. Morningstar says fair value is $48. Each of these numbers is right around the recent share price. Average all of these numbers together and I find the company to be less than a quarter of a percentage point overvalued. With 16 years of dividend growth, I find it acceptable to pay a 5% premium to what I think is fair value. I'd be willing to buy shares of Southern Company below $52.

Nike (NYSE:NKE)

Current Yield

# Years div growth

5-Year Div Growth Rate

1.36%

15

15.60%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$60

$57.20

$58

F.A.S.T Graphs Current PE

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

Price Target

23.5

24.3

$64

Nike made our December shopping list, but we chose to go with Disney (NYSE:DIS) at that time instead, but much of what attracted me to the company is still in play. Nike is the #1 company in athletic shoes, sportswear and training apparel. It is also one of the most valuable and recognizable brands in the world. The stock has climbed 5% since the beginning of the year, but is still down almost 16% since the start of 2016. Market sentiment seems to be against the company even though it is a power brand. Investors seem to think no one is ever going to buy another product that has the famous swoosh symbol. Nike has raised dividends each of the last 15 years and gave shareholders a 15.60% dividend raise in 2016. Is Nike still as undervalued as I found it to be back in December?

According to F.A.S.T. Graphs, the current PE ratio of 23.5 is 3.4% below the 5-year average of 24.3. S&P gives a one-year price target of $60, which is 13% above Tuesday's close of $53.11. They say fair value is $57.20, giving shares of Nike almost 8% upside. Morningstar gives a fair value of $58, which would be good for a 9.2% gain in share price. Average these numbers out and I find the company to be 8.32% undervalued - even after the small run the shares have had since the start of 2017. Given Nike's dividend growth history, I am willing to buy shares below $64.

Lockheed Martin (NYSE:LMT)

Current Yield

# Years div growth

5-Year Div Growth Rate

14

15.80%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$302

$193.50

$224

F.A.S.T Graphs Current PE

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

Price Target

21.1

15.6

Under $250

Lockheed Martin, the world's largest defense contractor, has become my White Whale. I've written about the company a number of times, but it has never gotten within my buy range. In October, the stock had traded down into the $230 range and I thought I would finally be getting my shot to acquire shares of the company that has given investors an average dividend raise of more than 18% each of the last 5 years. This was right before the company released its most recent earnings report. Of course, the company blew away the numbers: Earnings per share beat by $0.75 and revenue beat by $100 million and was almost 15% better than the previous year. The company also raised the dividend 10% and added $2 billion to its share repurchase authorization. And like that, my chance was gone. My hope is that I will get an opportunity to buy into Lockheed Martin at some point in 2017.

F.A.S.T. Graphs gives a current price to earnings ratio of 21.1. Compared to its 5-year average PE of 15.6, the stock is 26% overvalued. S&P Capital gives a 12-month price target of $302 and a current fair value of $194.50. Based on Tuesday's close of $256.37, I find the stock to be 18% undervalued and 24% overvalued by these two measurements, respectively. Morningstar lists fair value as $224, or 12.6% below the recent share price. Averaging these numbers out, I find the stock to be a little more than 11% overvalued. With 14 years of dividend growth, I would normally need the price to come down to the $236 level in order to purchase.

Chowder, one of the lead voices on dividend investing here on Seeking Alpha, has said repeatedly that the strong often gets stronger. One of my personal goals for 2017 is to have less fear in buying a quality company that is getting stronger and has a share price accelerating in kind. A company that deserves a premium to its fair value rarely goes on sale. My rules are in place because it helps me to take some of the emotion out of investing. Sometimes those rules keep me out buying a company such as Lockheed Martin. Lockheed Martin is the one company I follow that I would be willing to bend my investment rules. At $250, shares would yield a little under 3% and would be 10% overvalued. That is my target price.

Conclusion

While I am focused on adding to our current holdings, there are a few companies that I've had my eye on for some time that I have yet to add to our stable of dividend paying stocks. Becton, Dickinson and Company, Southern Company, Nike and Lockheed Martin are a few names that we don't yet own, but might look to add in the coming months. What do you think of these picks? What's on your shopping list for 2017?

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NKE, SO, BDX, LMT 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: We are long MO, JNJ, DIS, GE and MSFT. We are not investment professionals. Please do your own research before making a financial decision.