Investing Strategy Update And April Shopping List

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Includes: CVS, QCOM, VZ
by: The Dividend Bro

Summary

Full positions will now be $3,000.

I'm looking for stocks with higher yields and upside potential for this month's purchase.

Verizon, Qualcomm and CVS Health Coporation offer yield and upside.

Before I get to April's shopping list of stocks, I want to discuss a change I've made in my wife's and my investing strategy. For some time, I've regarded a full position as being 5% of our total portfolio. As the portfolio would grow in size, a position would be eligible for an additional purchase. This also allowed me to keep the actual size of our portfolio from becoming public. I'm not terribly comfortable with putting too much personal information on the internet so I had decided to keep that information private. Occasionally, people would leave comments complaining that they couldn't trust my information since I wouldn't reveal specifics. That was fine with me, because I have better things to do than make stuff up. That being said, I've decided to reveal a bit of information regarding sizes of our positions. While I will still refrain from displaying too much information, I will now consider a full position to be $3,000. While positions are welcome (and encouraged) to grow beyond this level, I will hold off making additional buys until I am able to build up all of my core positions. And I won't sell a stock simply because it grew well above this level. Many of our "full positions" are over this level. I won't trim them just to keep them at a certain value.

Taking a suggestion from Chowder and others, once all of our core positions are built up sufficiently, I will then double what a full position is and go back to adding to our holdings. I will continue to use F.A.S.T. Graphs, S&P Capital IQ and Morningstar to help me determine fair value of each stock. I will still be willing to pay a 5% premium for quality companies.

At this point, the only stocks that I consider a full position are: AbbVie (NYSE:ABBV), Altria (NYSE:MO), AT&T (NYSE:T), Boeing (NYSE:BA), General Electric (NYSE:GE), Johnson & Johnson (NYSE:JNJ), JPMorgan (NYSE:JPM), Microsoft (NASDAQ:MSFT), Philip Morris (NYSE:PM), Realty Income (NYSE:O) and Starbucks (NASDAQ:SBUX). All of these companies are dominate in their sector of the economy and have rewarded shareholders with dividend raises for long periods of time. Many of these stocks have had nice capital gains in addition to offering income.

April Shopping List

I am by no means an expert on markets and I've never done well timing them, but I am concerned that this so-called "Trump Rally" has gotten ahead of itself. In addition, we've been in one of the longest bull markets in the history of the stock market. For that reason, I am searching for stocks that offer some potential upside and a dividend higher than 2.5%. Undervalued stocks and higher yields offer some margin of safety in case this market turns south on us. With that in mind, let's check out the companies on my radar screen for April.

Verizon (NYSE:VZ)

Current Yield

# Years div growth

5 Year Div Growth Rate

4.71%

12

3%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$54

$47.50

$50

F.A.S.T Graphs Current PE

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

Price Target

12.8

15.9

Under $60

With one more purchase, Verizon would become a full position for us. As I stated in my March portfolio review, Verizon has had a rough start to 2017. Through the end of last month, the stock has lost more than 8%. Fellow telecom giant AT&T has only lost 2.30%. That seems like Verizon might be due for some catch up. Even if the price still has some free fall to it, I'm not terribly concerned with short term price fluctuations as I want steady, dependable dividends. And Verizon has that. Based on Thursday's closing price of $48.43, the stock sports a 4.77% yield. While the dividend growth isn't much to write home about, I'm not too concerned with that with a yield of this size. The company has also raised dividends for the last 12 years. Obviously, this covers the last recession the U.S. economy experienced. If the company can continue to raise dividends, even if they are of the tiny variety, I'm happy to buy more shares of Verizon

According to F.A.S.T. Graphs list the current price to earnings multiple at 12.8. This is 24% below the average PE multiple over the past 5 years. S&P Capital gives a price target of $54. That would be good for a 11.5% gain based off the 4/6/2017 closing price. S&P Capital lists the current fair value as $47.50, or about 2% below current prices. Morningstar sees fair value as $50 per share. By this measure, the shares have about 3.24% of upside potential. Average these numbers out and I find Verizon to be 9.26% undervalued. Because I consider the company to be a core holding, I would be willing to buy shares of Verizon under $60 a share.

Qualcomm (NASDAQ:QCOM)

Current Yield

# Years div growth

5 Year Div Growth Rate

3.75%

14

19.90%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$70

$66.10

$68

F.A.S.T Graphs Current PE

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

Price Target

12.5

14.9

Under $78

Between fines doled out by South Korea's Free Trade Commission for violating that country's competition law and Apple (NASDAQ:AAPL) suing the company for withheld rebate payments, Qualcomm has had a rough year or so. Morningstar lowered Qualcomm's moat rating from wide to narrow based on the different regulatory investigations into the company's royalties. Qualcomm makes a significant amount of money off of the royalties of chips in smart phones. If this source of revenue is impacted in any meaningful way, the company and stock could suffer. On top of that, Apple's use of Intel (NASDAQ:INTC) modems for some of its iPhone 7s could be a concern for the business going forward as well. Prior to this, Apple had used Qualcomm chips, but now the company could face the possibility of being designed out of the iPhones all together.

Qualcomm has also had some positive developments. Looking to diversify away from chips for smart phones, Qualcomm announced that it was purchasing NXP Semiconductors (NASDAQ:NXPI). The company will be using a significant portion of its offshore cash hoard to do so. NXP supplies chips in the automotive and security markets. These chips are used in-vehicle infotainment and networking. As cars become more automated, NXP's chips will likely be in greater demand. The company's chips are also used in security cards as well as mobile payments on the iPhone. Even if Qualcomm suffers some setbacks with its royalty payments, the company is now more diversified with NXP in the fold. The deal is expected to close before the end of 2017.

Qualcomm has raised dividends for the past 14 years and the average raise over the past 5 years has been just under 20% per year. The most recent dividend raise was just 7.5%. This is well below the average. A 7.5% raise is still a decent sized raise, but nearly as enticing as previous ones. Shares currently yield 3.75%.

According to F.A.S.T. Graphs, Qualcomm's PE ratio is 12.5 and the average PE over the past 5 years is 14.9. By this measure shares of the chipmaker are almost 20% undervalued. S&P Capital gives a 1-year price target of $70 per share. Based on Thursday's closing price of $56.53, this would offer almost 24% of upside. S&P lists fair value as $66.10 or about 17% higher from the recent close. Morningstar is also bullish on the company, giving a fair value of $68, or 20% above current prices. Average these numbers out and I find shares of Qualcomm to be 20% undervalued. Yes, there are some risks involved with Qualcomm, but there is also a good amount of upside as well. Based on how I value stocks, anything under $78 would qualify the stock for purchase.

CVS Health Corporation (NYSE:CVS)

Current Yield

# Years div growth

5 Year Div Growth Rate

2.60%

14

27.70%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$82

$96.60

$104

F.A.S.T Graphs Current PE

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

Price Target

13.3

16.5

Under $111

Retail and pharmacy benefit manager CVS Health Corporation had a rough 2016, with the stock losing almost 20%. The stock was our second worst performer for last year. The losses have continued into 2017, but not nearly as bad. Since the beginning of the year the stock has dropped 4.32%. I am of the opinion that as our population continues to age, we are going to need more and more prescriptions. And CVS is one of the largest pharmacy benefit managers. As our population ages, CVS stands to benefit from our medical needs.

CVS has raised dividends for the past 14 years and has an average dividend growth rate of almost 28%. The most recent raise, while not nearly as robust as this average, was almost 18%. That's still pretty solid dividend growth.

The other stocks on this month's watch list yield around 4%. Currently, CVS yields around 2.60%, making it the lowest yielding company on this month's watch list. Why include CVS when the yield is so far below the others? It's simple, it's the valuation of the stock. Only two other stocks that I follow offer more upside based on how I value stocks. That upside potential has me intrigued and considering adding to our position.

F.A.S.T. Graphs says the PE ratio is 13.3 and the 5-year average is 16.5. By this measure, shares of CVS are 24% undervalued. S&P Capital gives a price target of $82, or 6.48% of upside potential based on Thursday's closing price of $77.01. S&P Capital says fair value is $96.60. That is a possible 24% of upside based on recent trading prices. Morningstar is even more bullish, saying fair value is $104 per share. That would give shares 35% upside potential. Average these numbers our and I find shares to be 22.76% undervalued. I'd be willing to pay a 5% premium for this stock, so anything under $111 would qualify for purchase. CVS is one purchase away from becoming a full position for us.

Conclusion

From now on, I will consider a full position to be worth $3,000. Positions are welcome to grow beyond this figure as I won't engage in trimming just to trim. My philosophy of being very reluctant to sell will continue. Once I've built up our core holdings to this level, I will then double the size of what positions can be and continue to add.

This month, I am looking at higher yielding stocks that offer some upside potential. Verizon, Qualcomm and CVS Health Corporation are all dominate in their sector of the economy, offer enticing yields and generous dividend growth. What are your thoughts on these companies? Which stocks are you looking at for purchase?

Disclosure: I am/we are long AAPL, BA, ABBV, SBUX, GE, QCOM, CVS, VZ, T, PM, MO, JNJ, MSFT, MO, JPM.

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 not investment professionals. Please do your own research before making an investment decision.