- For the dividend growth investor there are no companies that are "hand over fist" deals. However, plenty of fairly valued to slight bargains do exist.
- Many of the companies that were fantastic deals six months ago are the same ones offering the best value today. This is in spite of recent run ups in prices.
- Many deals exist in the healthcare and financial sectors across a broad spectrum of companies. Other sectors offer a few select reasonable values.
In 2009, I decided to switch to dividend growth investing. This style was the investing strategy that resonated the most with me. By focusing on high-quality companies that steadily grow the income over time, I can sleep well at night and see steady progress towards my retirement goals. I want to say it has only been smooth sailing on my DGI journey, but this would be a lie.
Over the past dozen years, I have made many mistakes. I am guilty of falling into chasing yield at times. At times I have sacrificed quality to chase promising dividend growth. And my personal favorite is not buying anything because there are no great bargains – when plenty of fair-priced companies were available.
That is where I find the market today, at least with the DGI companies that I follow. There aren't that many "great" deals out there. Perhaps Altria (MO) could be considered a great deal, as any time the stock has been available at a 7% yield has historically proven to be a fantastic time to buy. Even so, the few companies that might be great deals or even fair deals are not as appealing as they were just a few months ago.
Finding high-quality stocks at a bargain price is hard enough. Finding them with a good initial yield and strong dividend growth can be almost impossible. The last time I found it difficult to find appealing investments was most of 2017, when seemingly everything was high. To be sure, there are still fair-priced companies out there, just not many exciting deals. There is nothing I am buying "hand over fist."
Where's the Value?
Last month I wrote about Home Depot (HD). It approached my buy point of $240 (2.75% yield) when it promptly reversed course and is now sitting near an all-time high. I would have loved to add HD to my portfolio to twin the Lowes (LOW) in my retirement account. However, I am comfortable waiting for the yield I want. To be clear, I still think HD is fair to slightly overpriced. It just doesn't meet my requirements currently.
Health Care Sector
There is still good value in many of the healthcare sector names. In biotech, AbbVie (ABBV), Bristol Myers (BMY), and Amgen (AMGN) are appealing, among others. Walgreens (WBA) is still a decent bargain, mainly if you believe they are heading in the right direction. CVS (CVS) and WBA have been bargains for years, even though after CVS acquired Aetna, it is no longer a true twin to WBA. CVS should be poised to begin growing the dividend again in the upcoming years. Even Johnson & Johnson (JNJ) is reasonably priced today at a 2.5% yield.
Walgreens Boots Alliance
From a dividend growth streak perspective, Walgreens looks fantastic with a 45-year history. However, recent operating results have been less than stellar. The lackluster performance resulted in the dividend growth rate trailing off the last couple of years, falling to less than 3%. Like many stocks, the stock price has run up over the past months but still sits in bargain territory as it was pre-Covid.
The dividend is safe with a payout ratio that has been steady in the 30 to 40% range for years. Additionally, earnings are forecast to grow in the mid-single digits over the next few years, and dividend growth should match. Management has made several missteps over the past few years, but many think things are improving.
A few of the consumer staples are appealing as well, just not exciting deals at this time. Pepsi (PEP) climbed last month but is still sitting at close to a 3% yield. It's a lot more appealing closer to $120 than it is at $140, but still not a bad buy. Below $130, I will consider adding. At a little lower quality, J. M. Smucker (SJM) looks appealing today. There are other names in the consumer staples that are fairly priced, primarily in the food and beverage industries.
J. M. Smucker
With 23 years of dividend growth, SJM is a dividend contender. The company has consistent payout ratios of around 40%, which is safe. The current dividend yield of 2.9% is in line or slightly better than historical averages, but certainly not a screaming bargain. Smucker is another company that started the month in a much better bargain position but is at best fairly valued today.
The real knock on SJM is the lack of current growth. The 5-year dividend growth rate is slightly better than 6%. However, the last couple increases have been paltry at less than 3%. Growth is not expected to accelerate over the next couple of years. Investors looking for more growth in the near future would be better to look elsewhere.
In the financial sector, the asset managers are mostly reasonably priced. My favorites here are BlackRock (BLK) and Ameriprise (AMP), but I also like T. Rowe Price and its 35 years of dividend increases. An investor who wanted to go for deep value might be interested in Franklin Resources (BEN), which has been raising the dividend for 41 years. Of course, BEN has growth concerns, so be sure that it fits your portfolio.
BEN has been underpriced for several years now but is not nearly as attractive today as it was a few months ago. Its current yield of 3.7% is still better than its historical averages. With 41 years of dividend growth and a payout ratio of around 40%, the dividend appears safe. The five and 10-year dividend growth rates look great at over 10%, even with the recent tapers. However, the lack of growth and the increase in the payout ratio in recent years should give investors pause.
A few insurance companies offer value as well. Aflac (AFL), one of my favorites, is a slight bargain to fairly priced. Although, Aflac is yielding a little below where I want to be adding at around 2.6%. Prudential (PRU), while nowhere near the bargain it was a few months back, still looks appealing. I have been digging into this company more closely lately and will likely start a position before this article is published.
Prudential offers a 5% yield, five and 10-year dividend growth of over 10%, and a low cash-flow payout ratio. It has a relatively short dividend growth history, however, at only 13 years. While this is very short compared to some of the champions like Cincinnati Financial (CINF), you are paying for a champion's safety as most are significantly overvalued. Additionally, Prudential's "A" credit rating, growth prospects, and relatively low debt are all appealing and indicate future dividend increases.
Any number of banks currently offer fair, but not great, prices. The regional banks offer slightly better prices than the large national ones. The dividend contenders and challengers provide more value than the champions. Most of these banks will have cut the dividend during the Great Recession but are hopefully in the process of building new streaks. As with insurance, if you want the safety of a dividend champion, be prepared to overpay.
First Interstate BancSystem (FIBK)
First Interstate is a small regional bank operating primarily in the northern Rocky Mountains and Pacific Northwest. The bank has consistently raised the dividend since the GFC at a better than 10% clip, although the most recent increase in February was about 8%. The payout ratio was steady pre-Covid in the mid 40% range but increased significantly last year. I expect slower dividend growth over the next couple of years to allow the payout ratio to come down. Nonetheless, FIBK is similar to many small regional banks in terms of value, dividend growth, and dividend safety available today.
Defense & Aerospace
Defense companies just a month ago were still at bargain prices. These deals haven't completely evaporated but are much closer to fairly valued today. At present, this group is pretty much trading as a group so that investors can find similar value across most companies. Candidates worth considering include Lockheed Martin (LMT), Northrup Grumman (NOC), General Dynamics (GD), and Raytheon Technologies (RTX). Investors looking for a smaller company might consider Huntington Ingalls (HII).
Huntington Ingalls Industries
Huntington Ingalls is a lesser-known defense contractor that specializes in shipbuilding. HII has a short dividend growth history of only nine years, but it has averaged very high dividend growth during this time. It has a five-year dividend growth rate of over 20%, which is typically not sustainable over the long term. However, with payout ratios in the mid 20% range, there is plenty of room to continue growing the dividend.
The oil and gas industry is an ongoing saga. While prices have come up, there may still be further price increases. However, I am not comfortable holding most of these companies in my dividend growth portfolios. To be sure, some of these companies may have decades of dividend growth left in them.
From a dividend growth perspective, the only place I am comfortable investing in this industry is pipelines. And even then, I expect a great value, as the dividend growth rate likely won't meet my requirements. The best and safest of the pipeline companies is Enterprise Products Partners (EPD). The company is still slightly undervalued and offers an 8% yield. However, I require a steeper value in this industry and only add at yields greater than 10%. This yield is in the top 95% of its historical range.
This article was written by
Analyst’s Disclosure: I am/we are long MO, LOW, ABBV, AMGN, CVS, BMY, WBA, JNJ, PEP, SJM, BLK, AMP, AFL, PRU, CINF, LMT, GD, EPD. 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.
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