Seeking Alpha

5 Safe And Cheap Dividend Stocks To Invest (November 2019)

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Includes: APD, ET, HRL, JNJ, MO, OXY, PFG, PRU, SPY, TXN, WBA, XOM
by: Financially Free Investor
Financially Free Investor
Long-term horizon, dividend growth investing, portfolio strategy
Summary

This article is part of our monthly series where we highlight five companies that are large cap, relatively safe, dividend paying, and also offering large discounts to their historical norms.

It's always a good idea to keep your wish list ready by separating the wheat from the chaff.

We go over the filtering process to select just five such stocks from more than 7,500 companies that are traded on U.S. exchanges, including OTC networks. This month, the selected five companies, as a group, would offer an average of 51% more dividends compared to the beginning of last year.

Markets have been on a tear lately, breezing past their previous all-time highs. The recent catalysts have been better than expected earnings season, good jobs report, latest rate-cut by the Feds, and optimism on the trade talks with China. It appears more likely now that we will have continued the market rally at least until year-end. But nothing is certain, as the earnings season is over for now, and the Fed may take a pause in its pursuit of lower interest rates. So, further progress may solely depend on the outcome of trade talks. Mind you, this is only phase 1 of trade talks with China, which leaves out the resolution of more contentious issues like intellectual property theft, forcible technology transfer, etc., to a later date, most likely after the 2020 elections.

Fortunately, as long-term dividend investors, we need not pay too much attention to the day-to-day movements of the market. We need to pay attention to the quality of companies that we buy and buy them when they are being offered relatively cheap. The markets may be expensive at a given point in time, but there always are some stocks that are being traded cheap in relation to their intrinsic valuation. And that's the focus of this series of articles.

S&P 500 ETF ( SPY) six-month chart, courtesy Yahoo Finance

Irrespective of the market's day-to-day gyrations, we remain on the constant lookout for companies that offer sustainable and growing dividends and maybe trading cheap on a relative basis to the broader market as well as to their respective 52-week highs. We believe in keeping a buy list handy and dry powder ready so that we can use the opportunity when the time is right. Besides, we think, every month, this analysis is able to highlight some companies that otherwise would not be on our radar.

This article is part of our monthly series where we scan the entire universe of roughly 7,500 stocks that are listed and traded on the US exchanges, including over-the-counter (OTC) networks. We usually highlight five stocks that may have temporary difficulties and/or lost favor with the market and offering deep discounts on a relative basis. However, that's not the only criteria that we apply. While seeking cheaper valuations, we also demand that the companies have an established business model, solid dividend history, manageable debt, and investment-grade credit rating. Please note that these are not recommendations to buy, but should be considered as a starting point for further research.

We start with a fairly simple goal. We want to shortlist five companies that are large cap, relatively safe, dividend paying, and trading at relatively cheaper valuations in comparison to the broader market. The objective here is to highlight and bring to the notice of value-oriented readers some of the dividend-paying and dividend-growing companies that may be offering juicy dividends due to a temporary decline in their share prices. The excess decline may be due to an industry-wide decline or some kind of one-time setbacks like some negative news coverage or missing quarterly earnings expectations. We adopt a methodical approach to filter down the 7,500-plus companies into a small subset. Also, to select five stocks, we will choose at least two stocks that have high current yields and the remaining ones that have had high dividend growth.

Note: Please note that when we use the term "safe" regarding stocks, it should be interpreted as "relatively safe" because nothing is absolutely safe in investing. Also, in our opinion, for a well-diversified portfolio, one should have 15-20 stocks at a minimum.

Goals For The Selection Process

We want to emphasize our goals before we get to the actual selection process. Our primary goal is income, and the secondary goal is to grow capital. These goals are by and large in alignment with most retirees and income investors as well as DGI investors. A balanced DGI portfolio should keep a mix of high-yield, low-growth stocks along with some high-growth but low-yield stocks. That said, how you mix the two will depend upon your personal situation, including income needs, time horizon, and risk tolerance.

A well-diversified portfolio would normally consist of more than just five stocks and preferably a few stocks from each sector of the economy. However, in this periodic series, we try to shortlist and highlight just five stocks that may fit most income and DGI investors, but at the same time, are trading at attractive valuations. However, as always, we recommend you do your due diligence before making any decision on them.

Selection Process

The S&P 500 yields less than 1.85% currently. Since our goal is to find companies for our dividend income portfolio, we should logically look for companies that pay yields that are at least better than the S&P 500. Of course, the higher, the better, but at the same time, we should not try to chase high yield. If we try to filter for dividend stocks paying at least 1.90% or above, there are more than 2,000 such companies trading on US exchanges, including OTC networks. If we further limit our choices to companies that have a market cap of at least $10 billion and daily trading volume over 100,000 shares, the number comes down to less than 400 companies.

We also want stocks that are trading at relatively cheaper valuations, so we will apply an additional filter with a forward P/E of no more than 20. However, a P/E of 20 is not really that cheap, so in our quest for not paying too high a price, we add one more criterion that the close price is at least 7% below the 52-week high (previously 10% below). After applying these additional criteria, we got a smaller set of about 140 companies.

Criteria to Shortlist

  • Market cap >=$10 Billion
  • Daily average volume > 100,000
  • Dividend yield >= 1.90%
  • Dividend growth past five years >= 0%
  • Forward P/E <= 20 or trailing P/E <=25
  • Distance from 52-week high < -7% (previously -10%**)

** We reduced this condition to -7% this time from -10% because most stocks have moved higher with the market, and we wanted to keep a sizable number of stocks in our broad-base filtering criteria at this first stage.

By applying the above criteria, we got roughly 140 companies. The number is still too large to meaningfully present here, so we will narrow down the list further.

Narrowing Down the List

As a first step, we will eliminate stocks that are not part of the CCC list (List of Dividend Champions, Contenders, and Challengers created by David Fish and now maintained by Justin Law). The CCC list currently has 869 stocks in all the above three categories, which includes 137 Champions with more than 25 years of dividend increases, 245 Contenders with more than ten but less than 25 years of dividend increases and 487 Challengers with more than five but less than 10 years of dividend increases. After we apply this filter, we are left with 67 companies on our list.

We also import the various data elements from the CCC list and assign weights based on different criteria as listed below:

  • Current yield: Indicates the yield based on the current price.
  • Dividend growth history (number of years of dividend growth): This indicates the dividend growth rate during the last five years.
  • Payout ratio: This indicates how comfortably the company can pay the dividend from its earnings. This ratio is calculated by dividing the dividend amount per share by the EPS (earnings per share).
  • Past five and 10-year dividend growth: Even though it's the dividend growth rate from the past, this does tell how fast the company has been able to grow its earnings and dividends in the recent past. The recent past is the best indicator that we have to know what to expect in the next few years.
  • EPS growth (mean of previous five years of growth and expected next five years growth): As the earnings of a company grow, more than likely, dividends will grow accordingly. We will take into account the previous five years' actual EPS growth and the estimated EPS growth for the next five years. We will add the two numbers and assign weights.
  • Chowder number: This is a data point that's available on the CCC list. So, what's the Chowder number? This number has been named after well-known SA author Chowder, who first coined and popularized this factor. This number is derived by adding the current-yield and the past five years' dividend growth rate. A Chowder number of "12" or more ("8" for utilities) is considered good.
  • Debt/equity ratio: This ratio will tell us about the debt load of the company in relation to the company's equity. We all know that too much debt can lead to major problems, even for well-known companies. Lower this ratio, better it is. Sometimes, we find this ratio to be negative or unavailable, even for well-known companies. This can happen for a myriad of reasons and not always a reason for concern. This is why we use this ratio in combination with the debt/asset ratio (covered next).
  • Debt/asset ratio: This data is not available in the CCC list, but we add it to the table. The reason we will add this because, for some companies, the debt/equity ratio is not a reliable indicator.
  • S&P's credit rating: Again, this data is not available in the CCC list, and we will add manually. We get it from the S&P website.
  • PEG ratio: This also is called the price/earnings-to-growth ratio. The PEG ratio is considered to be an indicator if the stock is overvalued, undervalued, or fair priced. A lower PEG may indicate that a stock is undervalued. However, PEG for a company may differ significantly from one reported source to another, depending on which growth estimate is used in the calculation. Some use past growth, while others may use future expected growth. We are taking the PEG from the CCC list. The CCC list defines it as the price/earnings ratio divided by the five-year estimated growth rate.
  • Distance from 52-week high: We want to select companies that are good, solid companies but are also trading at cheaper valuations currently. They may be cheaper due to some temporary down cycle or some combination of bad news or simply had a bad quarter. This criterion will help bring such companies (with a cheaper valuation) near the top, as long as they excel in other criteria as well. This factor is calculated as (current price - 52-week high) / 52-week high.

Below is the table (presented in two parts) with the list of 67 companies with weights assigned to each of the 10 criteria. The first table shows the raw data for each criterion, whereas the second table shows the weights for each criterion and the total weight. Please note that both tables are sorted on the total weight.

Table 1A:

Ticker

Market Cap (Billions)

Div. Yield %

Last Close

52 Week High

Distance from 52WK High

No of Yrs. Div.

DGR 5-YRS

DGR 10-YRS

Payment Ratio

Chowder Number

Past 5-YR Growth

Est. 5YR Growth

Debt/ Equity

Debt/ Asset

S&P Credit Rating

PEG Ratio

Ticker

PRU

36.64

4.39

92.97

105.71

-12.05%

11

15.78

20.03

42.02

20.17

52.30

7.85

0.35

0.03

A

1.22

PRU

MO

83.67

7.50

45.06

65.87

-31.59%

50

9.70

9.46

97.67

17.20

10.80

6.59

2.02

0.46

BBB

1.98

MO

PFG

14.88

4.12

54.55

60.68

-10.10%

11

16.47

16.65

41.35

20.59

12.70

6.33

0.28

0.01

A-

1.58

PFG

TXN

110.16

3.05

118.04

131.69

-10.37%

16

19.71

20.43

66.79

22.76

23.80

10.00

0.68

0.32

A+

2.19

TXN

RCL

22.81

2.87

111.18

130.89

-15.06%

9

32.59

15.34

35.45

35.46

31.90

11.25

0.93

0.36

BBB-

1.10

RCL

WBA

48.89

3.34

57.38

85.69

-33.04%

44

7.32

15.01

37.20

10.66

13.00

1.59

0.73

0.26

BBB

7.00

WBA

BEN

13.88

3.78

28.05

35.67

-21.36%

39

18.73

13.18

41.11

22.50

-1.10

-3.52

0.07

0.05

A+

n/a

BEN

APD

47.0

2.18

213.56

231.81

-7.87%

37

8.94

9.60

59.49

11.11

10.10

12.19

0.34

0.20

A

2.24

APD

HRL

21.83

2.05

41.26

45.89

-10.09%

53

17.14

15.02

46.15

19.20

12.10

5.00

0.00

0.03

0.00

4.50

HRL

JNJ

347.51

2.88

131.20

147.84

-11.26%

57

6.45

7.03

59.38

9.33

3.10

5.96

0.48

0.20

AAA

3.46

JNJ

MET

43.8

3.76

47.26

50.92

-7.19%

7

13.02

9.67

28.95

16.78

11.10

6.22

0.26

0.02

A-

1.24

MET

NTAP

13.29

3.44

57.09

82.84

-31.08%

7

31.95

n/a

48.98

35.39

19.80

7.23

1.83

0.21

BBB+

1.97

NTAP

ET

33.03

9.69

12.91

16.06

-19.61%

13

13.35

9.61

99.19

23.04

55.90

16.50

2.23

0.52

BBB-

0.62

ET

DFS

25.16

2.19

81.72

92.91

-12.04%

9

15.18

20.11

19.89

17.37

9.50

10.20

2.30

0.23

BBB-

0.89

DFS

LNC

11.31

2.62

58.02

67.15

-13.60%

9

22.42

-2.27

20.90

25.04

10.30

10.75

0.32

0.02

A-

0.74

LNC

CSCO

201.62

2.95

47.03

58.05

-18.98%

9

14.51

n/a

50.00

17.46

13.50

6.83

0.73

0.25

AA-

2.48

CSCO

AMTD

21.05

3.13

39.21

57.38

-31.67%

10

18.98

n/a

31.31

22.21

15.10

-6.36

0.42

0.09

A

n/a

AMTD

MMM

94.88

3.49

170.09

219.50

-22.51%

61

16.45

10.52

70.07

19.94

6.40

2.32

1.58

0.42

AA-

8.64

MMM

OXY

30.31

7.80

42.29

73.72

-42.63%

16

5.41

10.22

62.95

13.21

-2.60

5.00

0.48

0.24

BBB

n/a

OXY

TRV

33.83

2.50

130.72

154.83

-15.57%

15

9.10

9.80

36.85

11.61

-1.00

10.19

0.26

0.06

A

1.45

TRV

CHRW

10.24

2.64

74.70

92.33

-19.09%

21

6.07

7.89

40.00

8.72

12.40

5.63

0.79

0.29

BBB+

2.69

CHRW

KR

19.75

2.60

24.99

31.39

-20.39%

14

11.50

11.88

31.68

14.10

21.00

4.88

1.55

0.46

BBB

2.50

KR

CAH

14.46

3.89

50.44

57.63

-12.48%

23

10.19

17.52

42.67

14.08

6.10

3.03

1.27

0.22

BBB+

3.61

CAH

EPD

56.98

6.80

26.25

30.68

-14.44%

22

4.91

5.31

76.96

11.71

6.10

10.85

1.10

0.46

BBB+

1.04

EPD

XOM

285.90

5.15

69.60

83.38

-16.53%

37

5.60

7.62

83.86

10.75

-8.20

8.22

0.24

0.12

AA+

1.98

XOM

ADM

23.42

3.33

42.43

48.72

-12.91%

44

12.01

9.93

61.40

15.34

9.10

-8.80

0.50

0.23

A

n/a

ADM

MXIM

15.9

3.27

60.55

65.34

-7.33%

18

11.97

8.55

62.95

15.24

20.00

9.21

0.54

0.27

BBB+

2.09

MXIM

HPQ

25.74

3.69

17.78

25.50

-30.27%

9

16.34

13.96

23.56

20.03

-7.70

3.80

2.00

0.16

BBB

1.68

HPQ

GPC

14.9

2.97

104.71

115.14

-9.06%

63

5.69

6.33

55.96

8.66

4.60

4.70

0.94

0.32

A-

4.01

GPC

CB

69.5

1.97

150.44

162.06

-7.17%

26

7.57

10.20

36.99

9.53

-5.00

7.33

0.25

0.08

A

2.57

CB

OMC

16.8

3.37

77.05

84.77

-9.11%

10

9.86

14.87

43.70

13.22

9.90

5.10

2.13

0.27

BBB+

2.54

OMC

MPLX

27.88

10.13

25.90

35.68

-27.41%

7

19.26

n/a

116.31

29.54

17.30

5.09

2.27

0.59

BBB

2.23

MPLX

GLW

22.79

2.70

29.58

35.08

-15.68%

9

13.05

13.67

48.19

15.75

-3.30

10.37

0.59

0.26

BBB+

1.73

GLW

HSY

30.78

2.11

143.07

161.40

-11.36%

10

8.77

8.76

53.87

10.88

9.00

8.75

2.58

0.56

A

2.92

HSY

MCD

149.38

2.36

193.94

221.15

-12.30%

44

6.07

9.94

65.36

8.62

6.60

6.15

2.00

0.98

BBB+

4.18

MCD

ADI

39.39

2.03

109.37

124.64

-12.25%

17

7.14

9.43

53.07

9.17

13.90

9.34

0.48

0.26

BBB

2.81

ADI

OKE

28.8

5.1

70.25

76.5

-8.17%

17

20.22

16.90

121.19

25.46

15.90

13.94

1.75

0.59

BBB

1.66

OKE

NUE

16.33

2.97

55.35

64.21

-13.80%

46

0.67

1.50

27.26

3.64

37.30

-4.16

0.42

0.24

A-

n/a

NUE

SPG

46.41

5.57

154.10

190.59

-19.15%

10

12.56

8.85

112.30

18.14

16.60

8.60

8.11

0.75

A

2.34

SPG

BK

44.07

2.65

47.16

53.98

-12.63%

9

12.39

0.80

32.89

15.04

17.80

2.98

0.79

0.09

A

4.17

BK

VFC

32.77

2.09

82.89

95.55

-13.25%

47

15.61

12.49

62.34

17.95

1.40

6.70

0.53

0.31

NA

3.98

VFC

DAL

35.62

2.92

56.02

63.16

-11.30%

7

61.29

n/a

22.55

64.22

-14.30

10.81

0.67

0.16

BBB-

0.71

DAL

PM

126.7

5.75

82.97

91.91

-9.73%

12

4.84

16.02

97.10

10.58

-0.60

7.30

2.00

0.80

A

2.32

PM

CVX

220.5

4.1

116.21

126.68

-8.26%

32

2.81

5.88

61.74

6.91

-7.00

4.88

0.20

0.12

AA

3.09

CVX

BA

191.30

2.42

345.19

440.62

-21.66%

8

28.66

15.64

126.07

31.08

24.50

9.41

2.00

0.12

A

5.54

BA

MDLZ

75.6

2.17

52.03

56.63

-8.12%

8

11.24

n/a

45.60

13.42

12.10

5.90

0.74

0.31

BBB

3.56

MDLZ

CLX

18.53

2.87

147.04

166.36

-11.61%

42

6.62

8.02

66.98

9.49

7.50

2.86

4.80

0.51

A-

8.16

CLX

STT

24.0

3.15

67.76

74.38

-8.90%

9

11.78

6.59

41.77

14.93

7.40

-8.41

0.52

0.06

A

n/a

STT

KMB

45.6

3.1

132.04

142.74

-7.50%

47

5.49

6.20

70.31

8.60

-2.70

5.39

2.00

0.52

0.00

4.20

KMB

IBM

118.44

4.85

135.53

151.36

-10.46%

24

10.91

12.57

59.23

15.76

-5.20

1.39

4.14

0.51

A

8.77

IBM

PFE

212.23

3.75

38.39

46.23

-16.96%

9

7.21

0.61

70.24

10.97

1.00

5.60

0.78

0.30

AA-

3.35

PFE

EXR

14.5

3.21

111.22

123.52

-9.96%

10

18.30

12.88

109.76

21.51

15.20

6.00

2.06

0.63

BBB

5.70

EXR

IP

17.2

4.58

43.96

47.76

-7.96%

10

9.32

6.92

52.56

14.02

0.70

-1.77

1.43

0.32

BBB

n/a

IP

EIX

22.56

3.90

65.58

76.36

-14.12%

16

12.38

7.09

45.00

16.28

-20.30

3.90

1.64

0.30

BBB

n/a

EIX

HAS

12.29

2.80

96.44

126.07

-23.50%

16

9.54

12.46

127.10

12.33

-1.10

11.20

0.93

0.34

BBB

4.06

HAS

SJM

12.05

3.33

105.58

127.50

-17.19%

22

8.18

9.97

74.58

11.51

-3.50

3.30

0.72

0.36

BBB

6.79

SJM

AVGO

116.2

3.62

296.59

320.53

-7.47%

9

55.11

n/a

147.43

58.73

39.60

16.05

1.75

0.53

BBB-

2.54

AVGO

IFF

13.03

2.46

121.74

152.15

-19.99%

17

14.71

11.53

79.79

17.17

-0.20

3.80

0.73

0.34

BBB

8.55

IFF

CL

58.86

2.51

66.81

75.57

-11.59%

56

4.53

7.85

63.24

7.04

3.60

1.19

2.00

0.52

0.00

21.16

CL

LLY

109.41

2.26

112.51

131.02

-14.13%

5

2.80

1.81

55.60

5.06

-5.30

9.78

5.68

0.42

A+

2.51

LLY

CCI

57.7

3.24

137.42

149.07

-7.82%

6

n/a

n/a

242.42

n/a

55.10

21.00

1.52

0.62

BBB-

3.33

CCI

ABBV

117.61

5.38

81.75

94.27

-13.28%

7

17.54

n/a

153.96

22.92

7.60

4.55

2.00

0.10

A-

6.30

ABBV

GILD

80.69

3.96

64.66

72.48

-10.79%

5

n/a

n/a

119.43

n/a

18.10

1.81

1.15

0.43

A

16.77

GILD

CNP

14.6

3.96

29.02

31.4

-7.58%

14

6.02

4.30

101.77

9.98

0.40

4.88

2.36

0.43

BBB+

5.26

CNP

LVS

47.5

4.98

63.05

68.44

-7.88%

8

16.47

n/a

90.86

21.45

2.40

2.32

2.16

0.53

BBB-

7.85

LVS

VTR

24.27

4.87

64.03

75.23

-14.89%

9

5.83

5.88

257.72

10.70

-5.70

6.90

0.93

0.50

BBB+

7.70

VTR

K

21.63

3.59

63.68

71.86

-11.38%

16

4.10

5.40

91.94

7.68

-5.10

0.75

3.52

0.50

BBB

34.18

K

Table-1B:

This second table shows the weights for each criterion and the total weight sorted on ‘Total Weight.’

Ticker

WT. Div. YLD

WT. Hist. (Div)

WT. Payout Ratio

WT. Chowder number

WT. DGR- 10

WT. Growth (past+future)

WT. Debt/ Equity &Asset

WT. S&P Credit/ Rating

WT. PEG

WT. Distance 52-WK HIGH

TOTAL WEIGHT

PRU

4.39

2.20

7.25

9.00

9.00

6.62

4.81

9.00

5.78

2.41

60.45

MO

7.50

10.00

0.29

8.00

6.50

5.80

3.76

5.00

5.02

6.32

58.19

PFG

4.12

2.20

7.33

9.00

8.00

6.11

4.86

8.00

5.42

2.02

57.06

TXN

3.05

3.20

4.15

9.00

9.00

7.33

4.50

9.50

4.81

2.07

56.62

RCL

2.87

1.80

8.07

10.00

8.00

7.75

4.36

4.00

5.90

3.01

55.75

WBA

3.34

8.80

7.85

7.00

8.00

4.53

4.51

5.00

0.00

6.61

55.63

BEN

3.78

7.80

7.36

9.00

7.50

-1.54

4.94

9.50

3.00

4.27

55.61

APD

2.18

7.40

5.06

7.00

6.50

7.37

4.73

9.00

4.76

1.57

55.58

HRL

2.05

10.00

6.73

8.50

8.00

5.67

4.99

5.00

2.50

2.02

55.45

JNJ

2.88

10.00

5.08

6.50

6.50

3.02

4.66

10.00

3.54

2.25

54.43

MET

3.76

1.40

8.88

8.00

6.50

5.77

4.86

8.00

5.76

1.44

54.37

NTAP

3.44

1.40

6.38

10.00

5.00

6.41

3.98

6.50

5.03

6.22

54.35

ET

9.69

2.60

0.10

9.00

6.50

8.00

3.63

4.00

6.38

3.92

53.82

DFS

2.19

1.80

10.00

8.00

9.00

6.57

3.74

4.00

6.11

2.41

53.81

LNC

2.62

1.80

9.89

10.00

0.00

7.02

4.83

8.00

6.26

2.72

53.13

CSCO

2.95

1.80

6.25

8.00

5.00

6.28

4.51

9.60

4.52

3.80

52.70

AMTD

3.13

2.00

8.59

9.00

5.00

1.88

4.75

9.00

3.00

6.33

52.67

MMM

3.49

10.00

3.74

8.50

7.50

2.91

4.00

9.60

-1.64

4.50

52.60

OXY

7.80

3.20

4.63

7.50

7.50

0.80

4.64

5.00

3.00

8.53

52.60

TRV

2.50

3.00

7.89

7.00

6.50

3.06

4.84

9.00

5.55

3.11

52.46

CHRW

2.64

4.20

7.50

6.50

6.50

5.88

4.46

6.50

4.31

3.82

52.31

KR

2.60

2.80

8.54

7.50

7.50

5.63

4.00

5.00

4.50

4.08

52.14

CAH

3.89

4.60

7.17

7.50

8.50

3.04

4.26

6.50

3.39

2.50

51.34

EPD

6.80

4.40

2.88

7.00

5.00

5.65

4.22

6.50

5.96

2.89

51.30

XOM

5.15

7.40

2.02

7.00

6.50

0.01

4.82

9.90

5.02

3.31

51.12

ADM

3.33

8.80

4.82

8.00

6.50

0.10

4.64

9.00

3.00

2.58

50.77

MXIM

3.27

3.60

4.63

8.00

6.50

7.07

4.60

6.50

4.91

1.47

50.54

HPQ

3.69

1.80

9.56

9.00

7.50

-1.30

3.92

5.00

5.32

6.05

50.54

GPC

2.97

10.00

5.50

6.50

5.00

3.10

4.37

8.00

2.99

1.81

50.25

CB

1.97

5.20

7.88

6.50

7.50

0.78

4.84

9.00

4.43

1.43

49.52

OMC

3.37

2.00

7.04

7.50

7.50

5.00

3.80

6.50

4.46

1.82

48.99

MPLX

10.00

1.40

-2.04

10.00

5.00

5.70

3.57

5.00

4.77

5.48

48.88

GLW

2.70

1.80

6.48

8.00

7.50

2.36

4.58

6.50

5.27

3.14

48.31

HSY

2.11

2.00

5.77

7.00

6.50

5.92

3.43

9.00

4.08

2.27

48.07

MCD

2.36

8.80

4.33

6.50

6.50

4.25

3.51

6.50

2.82

2.46

48.03

ADI

2.03

3.40

5.87

6.50

6.50

7.11

4.63

5.00

4.19

2.45

47.68

OKE

5.10

3.40

-2.65

10.00

8.00

8.00

3.83

5.00

5.34

1.63

47.65

NUE

2.97

9.20

9.09

3.64

1.50

2.61

4.67

8.00

3.00

2.76

47.45

SPG

5.57

2.00

-1.54

8.50

6.50

6.87

0.57

9.00

4.66

3.83

45.96

BK

2.65

1.80

8.39

8.00

0.80

4.99

4.56

9.00

2.83

2.53

45.55

VFC

2.09

9.40

4.71

8.50

7.50

2.70

4.58

0.00

3.02

2.65

45.15

DAL

2.92

1.40

9.68

10.00

5.00

-1.16

4.59

4.00

6.29

2.26

44.97

PM

5.75

2.40

0.36

7.00

8.00

2.23

3.60

9.00

4.68

1.95

44.97

CVX

4.10

6.40

4.78

5.00

5.00

-0.71

4.84

9.75

3.91

1.65

44.73

BA

2.42

1.60

-3.26

10.00

8.00

7.14

3.94

9.00

1.46

4.33

44.63

MDLZ

2.17

1.60

6.80

7.50

5.00

5.97

4.48

5.00

3.44

1.62

43.58

CLX

2.87

8.40

4.13

6.50

6.50

3.45

2.35

8.00

-1.16

2.32

43.36

STT

3.15

1.80

7.28

7.50

5.00

-0.34

4.71

9.00

3.00

1.78

42.88

KMB

3.10

9.40

3.71

6.50

5.00

0.90

3.74

5.00

2.80

1.50

41.65

IBM

4.85

4.80

5.10

8.00

7.50

-1.27

2.68

9.00

-1.77

2.09

40.97

PFE

3.75

1.80

3.72

7.00

0.61

2.20

4.46

9.60

3.65

3.39

40.18

EXR

3.21

2.00

-1.22

9.00

7.50

6.00

3.66

5.00

1.30

1.99

38.44

IP

4.58

2.00

5.93

7.50

5.00

-0.36

4.13

5.00

3.00

1.59

38.37

EIX

3.90

3.20

6.88

8.00

6.50

-5.47

4.03

5.00

3.00

2.82

37.86

HAS

2.80

3.20

-3.39

7.00

7.50

3.37

4.37

5.00

2.94

4.70

37.48

SJM

3.33

4.40

3.18

7.00

6.50

-0.07

4.46

5.00

0.21

3.44

37.45

AVGO

3.62

1.80

-5.00

10.00

5.00

8.00

3.86

4.00

4.46

1.49

37.23

IFF

2.46

3.40

2.53

8.00

7.50

1.20

4.47

5.00

-1.55

4.00

37.00

CL

2.51

10.00

4.60

5.00

6.50

1.60

3.74

5.00

-5.00

2.32

36.26

LLY

2.26

1.00

5.55

5.00

1.81

1.49

1.95

9.50

4.49

2.83

35.88

CCI

3.24

1.20

-5.00

10.00

5.00

8.00

3.93

4.00

3.67

1.56

35.60

ABBV

5.38

1.40

-5.00

9.00

5.00

4.05

3.95

8.00

0.70

2.66

35.14

GILD

3.96

1.00

-2.43

10.00

5.00

4.60

4.21

9.00

-5.00

2.16

32.50

CNP

3.96

2.80

-0.22

6.50

4.30

1.76

3.61

6.50

1.74

1.52

32.46

LVS

4.98

1.60

1.14

9.00

5.00

1.57

3.66

4.00

-0.85

1.58

31.68

VTR

4.87

1.80

-5.00

7.00

5.00

0.40

4.29

6.50

-0.70

2.98

27.13

K

3.59

3.20

1.01

6.50

5.00

-1.45

2.99

5.00

-5.00

2.28

23.11

Selection of the Final 10

To select our final ten companies, we will follow a three-step process:

  • Step1: We will first take the top ten names in the above table (based on total weight).
  • Step 2: Now, we will take the top 25 (based on total weight) and then sort the list based on dividend yield (highest at the top). We will take the top 5 after the sort to the final list.
  • Step 3: We will again take the top 25 (based on total weight) and sort the list based on five-year dividend growth (highest at the top). We will take the top 5 after the sort to the final list.

From the above three steps, we have a total of 20 names in our final consideration. MO, RCL, and TXN appeared twice. After removing duplicates, we are left with 17 names. Since there are too many names from the financial sector, we remove most of them except for the top two, PRU and PFG. Both PRU and PFG operate in similar business segments, but we are keeping both in the top 10 because we want to provide readers the choice to choose from. But we remove BEN, LNC, and AMTD. We drop NTAP due to its short dividend history, company-specific headwinds, and uncertain growth going forward. We also drop RCL as we believe the stock is too sensitive to economic conditions and will be hard hit if we were to enter into a downturn. We also keep both OXY and XOM in our top 10 list even though they operate in the same business segment (again to provide the readers with more choice). So, this time around, our final list consists of 11 stocks (instead of the usual 10), which is as follows:

TABLE-2:

Company Name

Ticker

Mkt Cap (Billions)

Div. Yield %

Close price 11/01/19

52 Week High

Distance from 52WK High

Yrs Div

DGR 5 Yr

DGR 10 Yr

Total Weight

Final Selection

Prudential Financial, Inc.

(PRU)

36.64

4.39

92.97

105.71

-12.05%

11

15.78

20.03

60.45

YES

Altria Group, Inc.

(MO)

83.67

7.50

45.06

65.87

-31.59%

50

9.70

9.46

58.19

YES

Principal Financial Group, Inc.

(PFG)

14.88

4.12

54.55

60.68

-10.10%

11

16.47

16.65

57.06

Texas Instruments Incorporated

(TXN)

110.16

3.05

118.04

131.69

-10.37%

16

19.71

20.43

56.62

YES

Walgreens Boots Alliance, Inc.

(WBA)

48.89

3.34

57.38

85.69

-33.04%

44

7.32

15.01

55.63

Air Products and Chemicals, Inc.

(APD)

47.0

2.18

213.56

231.81

-7.87%

37

8.94

9.60

55.58

Hormel Foods Corporation

(HRL)

21.83

2.05

41.26

45.89

-10.09%

53

17.14

15.02

55.45

Johnson & Johnson

(JNJ)

347.51

2.88

131.20

147.84

-11.26%

57

6.45

7.03

54.43

YES

Energy Transfer LP

(ET)

33.03

9.69

12.91

16.06

-19.61%

13

13.35

9.61

55.63

Occidental Petroleum Corporation

(OXY)

30.31

7.80

42.29

73.72

-42.63%

16

5.41

10.22

52.60

Exxon Mobil Corporation

(XOM)

285.90

5.15

69.60

83.38

-16.53%

37

5.60

7.62

51.12

YES

Final Step: Narrowing Down to Just Five Companies

This final step is not really all that important. The reason is that this step will be a subjective one and based solely on our perception. The readers could select any of the above 11 names according to their own choosing or as many as they like. However, one should preferably only choose one out of PRU/PFG (similar business model) and one out of OXY/XOM (both being oil and gas companies). However, if we only had five spots to fill, and that was our goal, we would select the following. One overriding factor was to select at least a couple of companies with a high current yield. The readers could differ with the selections, and they may come up with their own set of five companies. Here's what we selected for this month:

Final List:

It goes without saying that each company comes with certain risks and concerns. Sometimes these risks are real, but other times, they may be a bit overblown and temporary. We know some folks may not like to invest in MO, not only because it's a tobacco stock, but also because the company has a lot of uncertainty going on because of its current struggles and its JUUL investment at a very high premium. If that's the case, one could choose another stock from our list of 10 above. However, we believe MO is trading quite cheap, providing a margin of safety, and most of the risks are already built into the price.

Nonetheless, we think these five companies would form a solid group of dividend companies that would be appealing to income-seeking conservative investors, including retirees and near retirees. Our final list of five has at least 10 years of dividend history (including two dividend-kings, and one dividend-aristocrat), better than investment-grade debt rating (four of them better than A rating), and trading on an average of 15% discount from their 52-week highs. Their average dividend/income (as a group) is very attractive at 4.54%, which is nearly 51% higher than what it was at the beginning of last year. Though we selected only five stocks based on several criteria, however, there are many other stocks on our extended list that may be equally appealing.

Below is a snapshot of five companies showing their current discount and dividend yield compared to the beginning of last year, i.e., January 2018.

Table-3A:

Ticker

Company name

Industry Segment

Close Price on 11/01/2019

52-Week High

Difference/ Discount

( PRU)

Prudential Financial, Inc

Financial Services (Insurance, Asset Management)

92.97

106.4

-12.62%

( MO)

Altria Group, Inc.

Consumer/ Tobacco

45.06

66.04

-31.77%

(TXN)

Texas Instruments Inc.

Technology/ Semiconductor

118.04

132.2

-10.71%

(JNJ)

Johnson & Johnson

Healthcare/Drugs

131.2

148.99

-11.94%

(XOM)

Exxon Mobil Corp.

Energy/ Oil & Gas

69.6

83.75

-16.90%

Average

91.37

107.48

-14.98%

Table-3B:

Ticker

S&P Credit Rating

Dividend Yield on 10/04/2019

Dividend Yield, Last year (Jan. 2018)

Difference in Yield

( PRU)

A

4.30%

2.60%

65.6%

( MO)

BBB

7.46%

3.96%

88.4%

(TXN)

A+

3.05%

2.35%

29.8%

(JNJ)

AAA

2.90%

2.41%

20.0%

(XOM)

AA+

5.00%

3.62%

38.0%

Average

4.54%

2.99%

51.96%

Conclusion

At the beginning of January 2018, the average dividend yield of these five stocks (as a group) was 2.99%. During the course of last year, all five of these companies have raised their dividend payouts. Also, stock prices of many of these stocks have come down. If you were to buy these five companies today and invest equal amounts, you would get roughly a 4.54% dividend, which is about 51% higher over what it was at the beginning of last year. Price wise, they are on an average 15% below their 52-week highs and 12% below their prices at the beginning of 2018. We believe that not much has changed with regard to the fundamentals or the quality of these companies, yet we are being offered a much higher dividend payout. So we think that this group makes an excellent watch list for further research.

Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, ARCC, AWF, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, NBB, NLY, NNN, O, OHI, PCI, PDI, PFF, RFI, RNP, STAG, STK, UTF, VTR, WPC, TLT. 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: Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. Any stock portfolio or strategy presented here is only for demonstration purposes.