My List And Vision Of Core Holdings And Other Selections For The Accelerating Dividends Portfolio

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Includes: AAPL, ABBV, ADP, AMGN, AMZN, BA, BNS, CAH, CE, CME, CSCO, CVS, DPS-OLD, ENB, ETH, EXR, FAST, GILD, GLW, HAS, HD, HON, HUBB, IPG, JNJ, KO, LMT, LYB, MCD, MDT, MGA, MPC, MSFT, MXIM, O, OHI, OXY, PAG, PG, PRU, PSX, QCOM, SBUX, SJM, SKT, STAG, T, TWX, TXN, VFC, VLO, WHR, WYN
by: Accelerating Dividends

Summary

I present my view of what a Core holding is and a selection of stocks that I feel are considered Core.

I present a tiered portfolio design with explanations and stock selections that explain how the design works.

My objective is to develop a portfolio of stocks that are tiered to profit from higher initial dividend growth and from companies who are or will be future Dividend Champions.

Dividend growth stocks, DGI, Core dividend stocks, Core Holdings, Dividend stock portfolio

INTRODUCTION

I have spent many months pouring through David Fish’s Dividend Champion, Contender, Challenger list in order to come up with my list of stocks that I believe would help accelerate the dividend growth of my portfolio. I believe that I have identified a combination of dividend stocks with good yields and strong growth. Some DGI investors may be surprised by some of these choices. By identifying these stocks for my buy list, I have completed one of the goals of my business plan. I have divided the stocks within my portfolio into three categories: core, Supportive and Speculative. There has been a great deal of discussion lately regarding what a core holding means and whether investors have any. This discussion was rather timely while I was preparing this article. I believe in core holdings and I will explain each of these categories and present the stocks that I have selected within each category to one day fill my portfolio.

PORTFOLIO STRUCTURE

The core holdings form the foundation of the portfolio. They are strong companies with products or services that are well known and used. These stocks are the ones that I have little concern about the future of the dividend because they have proven themselves during difficult environments by continuously raising the dividend. These are the stocks that I should never be required to sell and that I will hold long term. These stocks are considered low-risk (volatility) and have a history of solid returns.

I have no limit to the number of core holdings that I will have in my portfolio and I also believe that the holdings can be overweight particularly compared to supportive or speculative holdings. I tend to draw from Dividend Champions and Contenders from David Fish’s work as the source for selecting my core holdings but I am also willing to accept a Dividend Challenger under special circumstances. core holdings should be financially strong which is why I look at such metrics regarding free cash flow (ex. FCF/S above 10%), for a moat (ex. CROIC above 13%), investment grade credit ratings, the dividend’s CAGR’s, EPS growth, and the share price trading at fair value or below. I don’t just focus on one single metric but look at the whole and the long-term trend. We have to remember that all things are relative since not all metrics work for each sector. I am looking for companies at and near the top.

Here is the list of core stocks that I have selected.

Name

Symbol

Sector

CCC yrs

Div. Yield

MR% Inc.

EPS% Payout

DGR 1-yr

DGR 3-yr

DGR 5-yr

DGR 10-yr

Hasbro Inc.

(HAS)

Consumer Discretionary

14

2.89

11.76

52.53

9.9

8.5

11.6

16.0

Home Depot Inc.

(HD)

Consumer Discretionary

8

2.26

28.99

55.19

16.9

20.9

21.6

15.1

VF Corp.

(VFC)

Consumer Discretionary

44

3.12

13.51

60.22

15.0

18.7

18.6

12.2

CVS Health Corp.

(CVS)

Consumer Staples

14

2.49

17.65

40.57

21.4

23.6

27.7

27.0

J.M. Smucker Co.

(SJM)

Consumer Staples

19

2.40

11.94

52.26

8.4

8.9

9.1

9.8

Johnson & Johnson

(JNJ)

Health Care

54

2.65

6.67

53.87

6.8

6.7

7.0

8.0

Medtronic plc

(MDT)

Health Care

39

2.04

13.16

60.78

18.2

14.5

11.6

14.7

Automatic Data Proc.

(ADP)

Information Tech

42

2.32

7.55

61.13

8.2

11.7

11.0

12.6

Microsoft Corp.

(MSFT)

Information Tech

15

2.28

8.33

73.58

14.0

14.9

16.7

14.8

Texas Instruments

(TXN)

Information Tech

13

2.45

31.58

57.64

17.1

15.3

24.0

28.9

Realty Income Corp.

(O)

REITs

24

4.66

3.95

223.54

5.3

3.7

6.6

4.7

Omega Healthcare Investors

(OHI)

REITs

15

8.47

1.64

137.02

8.3

8.3

8.8

9.4

Source: David Fish

At the moment, I have selected 12 stocks labeled as core. I am currently long HAS and OHI. Some of you may be wondering why I don’t have other classic dividend growth stocks such as Coca-Cola (KO), Procter & Gamble (PG), McDonald's (MCD) or others. My reason is twofold. The first reason is because these companies have low dividend growth at the moment and they also generally have low dividend yields as well which does not compensate for the low dividend growth. These companies also have low revenue growth in general which does not support larger dividend increases in the future. I am attempting to assemble my portfolio now and low yields with low growth aren’t going to accelerate my dividend income stream particularly if I want my dividend income to replace my income requirements at retirement. That is my second reason. Although these are fantastic companies, they were more fantastic in the past for investors who bought positions then than they are now.

The two stocks that I currently have my eye on are VFC and O. VFC has been a dividend growth powerhouse over the past several years but that growth appears to be slowing of late. One of the reasons I like VFC is because it’s FCF/S ratio has a 5-year median of 10.81% which suggests that the company is a free cash flow generating machine. Also, the company’s CROIC has a 5-year median of 16.40% which suggests that the company has a moat. VFC’s return on equity has also been good with a 5-year median of 21.19%. The company’s current and quick ratios are all nicely above 1 which means that the company can cover its debt obligations. The total debt to equity is 59.32% which is a little higher than I like but remains manageable. Although VFC falls in the retail space, it is a manufacturer and supplier and not a reseller. As such, VFC can sell directly to consumers via its e-commerce platform which accounts for 16% of sales and is the fastest growing channel for the company (source). Although it is a small percentage of sales, VFC also has the advantage of selling its products wherever it can and with whomever they choose including Amazon (AMZN). As a result, I am not overly concerned about VFC’s future but see VFC’s stock price being punished due to the negative sentiment in the retail sector.

The infographic below shows a DCF model run by Simply Wall St. At the moment, shares of VFC are trading 12.21% below their estimated fair value of $61.11 which suggests a bargain. I am waiting however for the stock price to drop below $50 (in the green section) before buying.

Source: Simply Wall.St

SUPPORTIVE holdings or sometimes called satellite holdings in the literature are stocks that have demonstrated a commitment to dividend growth and have the potential to become the next dividend champions. They are different than core holdings for a few reasons; they may be more volatile, their dividend history is less established (perhaps under 10 years), and have higher growth prospects (dividend and EPS) leading to a higher total return. These holdings can be converted to core holdings if the company maintains its financial strength and dividend commitment. SUPPORTIVE holdings can be a Champion, Contender or Challenger.

Here is the list of SUPPORTIVE stocks that I have selected.

Name

Symbol

Sector

CCC yrs

Div. Yield

MR% Inc.

EPS% Payout

DGR 1-yr

DGR 3-yr

DGR 5-yr

DGR 10-yr

Amgen Inc.

(AMGN)

Health Care

7

3.03

15.00

44.83

26.6

28.6

48.2

n/a

Cardinal Health Inc.

(CAH)

Health Care

20

2.54

3.00

43.16

14.6

13.1

15.3

22.7

Cisco Systems Inc.

(CSCO)

Information Tech

7

3.39

11.54

59.79

20.7

15.1

40.6

n/a

Extra Space Storage Inc.

(EXR)

REITs

7

3.64

32.20

134.48

30.8

26.4

39.2

12.4

Fastenal Company

(FAST)

Industrials

18

2.74

6.67

73.99

7.1

14.5

18.0

19.6

Hubbell Inc.

(HUBB)

Industrials

9

2.50

11.11

53.44

15.6

11.9

11.2

7.0

Lockheed Martin

(LMT)

Industrials

14

2.67

10.30

58.38

10.1

12.3

15.8

18.4

LyondellBasell Industries NV

(LYB)

Materials

6

3.41

8.97

37.32

9.5

18.5

43.4

n/a

Maxim Integrated Products

(MXIM)

Information Tech

15

2.82

10.00

76.30

8.6

8.0

7.9

8.4

Prudential Financial Inc.

(PRU)

Financials

9

2.79

7.14

30.99

14.8

17.4

14.1

11.4

Qualcomm Inc.

(QCOM)

Information Tech

14

4.29

10.42

64.63

11.3

16.8

19.9

16.5

Starbucks Corp.

(SBUX)

Consumer Discretionary

7

1.87

25.00

51.28

25.0

24.1

24.9

n/a

Tanger Factory Outlet Centers

(SKT)

REITs

23

4.61

14.04

64.68

15.1

12.5

9.7

6.5

AT&T Inc.

(T)

Telecommunications

33

5.33

2.08

93.33

2.1

2.2

2.2

3.7

Wyndham Worldwide Corp.

(WYN)

Consumer Discretionary

8

3.27

16.00

41.88

19.0

19.9

27.2

n/a

Source: David Fish

Within this list you will find companies with from the Champions, Contenders and Challengers list. Within this list I am currently long AMGN, FAST, LYB, QCOM, SBUX, SKT, T and WYN.

I may label some companies as SUPPORTIVE while certain challenges are being worked out. For example, I see QCOM as a potential core holding however due to the number of lawsuits against the company at this time, I feel it is better to wait and see what the outcome will be and how it will affect the future free cash flow of the company and its ability to grow the dividend. If QCOM receives a small percentage in royalty revenues, plus hefty fines or penalties, it could have a serious impact. SKT is another that is being punished because of its exposure to the retail sector. What is important to note is that SKT has a growing dividend CAGR compared to many companies whose dividend growth is declining! Brad Thomas released two articles recently (here and here) that shows how SKT portfolio model is different than other retail REITs which should help protect it. However, I am waiting to upgrade this stock to core until things settle down in retail. I am very happy to have this high yielder and high dividend grower to support my dividend income. I like T for the 5%+ yield I was able to acquire upon purchase. This is providing lots of cash quickly compared to other stocks and despite the low dividend growth, it will be many years assuming things stay the same where a company like JNJ would surpass the dividend income generated by T. I see T as a way of boosting my income to purchase additional shares of other stocks. T could be upgraded to core if things work out with the Time Warner (TWX) buyout and the DirecTv acquisition.

In the case of T, analysts are expecting AT&T’s future to look bright as they are estimating a growth of 17.5% in earnings after 1 year and 27.6% growth in 3 years. Let’s hope their right!

Source: Simply Wall.St

Finally, I am leaving some room for SPECULATIVE holdings. SPECULATIVE holdings can include companies that have initiated a new dividend policy such as AMGN, Gilead (GILD) or Apple (AAPL). Spinoffs would also be considered SPECULATIVE until their dividend policy is more solidified. Companies with dividend cuts or freezes in the past would also be held here until it becomes more evident that the company will maintain a consistent dividend. I expect these companies to comprise mostly of Dividend Challengers.

One of the reasons for getting in on a company that has just initiated a new dividend policy is because of the first few years where the dividend growth is very high which can help outperform other stocks with low dividend growth and low dividend yield. Obviously, there is much more risk with these holdings such as another dividend cut or freeze. That is why SPECULATIVE holdings should consist of the fewest number of stocks in my portfolio. These holdings can be upgraded to SUPPORTIVE and can also be sold if a core or SUPPORTIVE holding becomes fairly valued or undervalued and there is no other cash available.

Here is the list of SPECULATIVE stocks that I have selected.

Name

Symbol

Sector

CCC yrs

Div. Yield

MR% Inc.

EPS% Payout

DGR 1-yr

DGR 3-yr

DGR 5-yr

DGR 10-yr

Ethan Allen Interiors Inc.

(ETH)

Consumer Discretionary

7

2.72

11.76

43.18

30.8

22.5

23.2

(0.8)

Interpublic Group of Companies Inc.

(IPG)

Consumer Discretionary

5

2.96

20.00

83.72

25.0

26.0

20.1

n/a

Magna International Inc.

(MGA)

Consumer Discretionary

7

2.40

10.00

21.53

13.6

16.0

14.9

10.2

Penske Automotive Group Inc.

(PAG)

Consumer Discretionary

7

2.85

3.45

30.00

17.0

21.1

35.6

15.1

Whirlpool Corp.

(WHR)

Consumer Discretionary

6

2.34

11.11

34.72

13.0

18.0

15.1

8.5

Dr Pepper Snapple Group

(DPS-OLD)

Consumer Staples

8

2.55

9.43

51.10

11.9

11.8

12.7

n/a

Enbridge Inc.

(ENB)

Energy

21

4.46

8.26

105.36

8.3

8.8

10.0

12.0

Marathon Petroleum Corp.

(MPC)

Energy

6

2.72

12.50

67.61

19.3

20.9

43.3

n/a

Occidental Petroleum

(OXY)

Energy

13

4.96

1.33

n/a

2.4

8.2

12.1

14.6

Phillips 66

(PSX)

Energy

5

3.49

12.50

86.01

12.4

22.7

n/a

n/a

Valero Energy Corp.

(VLO)

Energy

7

4.27

16.67

56.80

41.2

42.3

54.3

24.2

Bank of Nova Scotia

(BNS)

Financials

6

4.18

9.09

49.79

8.0

10.1

10.6

9.3

AbbVie Inc.

(ABBV)

Health Care

5

4.22

12.28

70.14

12.9

12.5

n/a

n/a

Boeing Company

(BA)

Industrials

6

3.11

30.28

74.15

19.8

31.0

21.0

13.8

Honeywell International Inc.

(HON)

Industrials

6

2.02

11.76

42.83

14.1

13.4

12.3

10.4

CME Group Inc.

(CME)

Information Tech

7

2.25

10.00

58.28

20.0

10.1

16.5

16.9

Corning Inc.

(GLW)

Information Tech

7

2.11

14.81

18.96

12.5

11.5

19.1

n/a

Celanese Corp.

(CE)

Materials

7

2.12

20.00

23.30

20.0

38.0

41.9

24.0

STAG Industrial Inc.

(STAG)

REITs

7

5.36

0.73

560.02

2.3

5.9

24.4

n/a

Source: David Fish

The only stock I have as a SPECULATIVE holding is ABBV. I am in no hurry to buy SPECULATIVE holdings and as you may have noticed, all of my energy picks are currently found in this list. With the uncertainty surrounding the price of oil and with multiple analysts predicting that electric vehicles will sell for less than conventional vehicles in as little as 5 years (one of many sources), the future of big oil remains volatile. That is why I am taking a wait and see approach for the moment despite many juicy yields!

What I like about this group of stocks is the dividend growth with yields around 2.5% for the most part. Some like BA have a yield around 3% and a recent dividend increase of 30%! The main reasons I am holding back on BA is valuation (see the graph below), and its high payout ratio (nearly 75%) but since the company has a strong backlog, new deals for commercial and military aircraft, continued support from the US Government in its acquisition of F/A-18E/F super hornet jets along with a new arms deal between the US and Saudi Arabia, things do look positive for the company.

Source: CNN Money

Stocks that I do not own at the moment make up my watch list. I will continue to monitor and analyze these companies in order to see if changes are required.

CONCLUSION

My objective is to develop a portfolio of stocks that are tiered to profit from higher initial dividend growth and from companies who are or will be future Dividend Champions. This tiered design allows for some more volatile or riskier dividend growth stocks while reducing their impact on the portfolio should they not work out.

I welcome your feedback and opinion. Stock ideas with reasoning are always welcome!

I hope you enjoyed this article. If you want to be notified when my future articles are published, please consider following me as a Seeking Alpha author by clicking the "Follow" button at the top of the article beside my name Accelerating Dividends. Thanks for reading.

Disclosure: I am/we are long ABBV, AMGN, FAST, LYB, QCOM, SBUX, SKT, T, WYN, HAS, OHI.

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.