Fresh off of a little break for the Memorial Day weekend, I’m back to thinking and writing about high-quality dividend growth stocks.
Well, I should say back to writing. I’m always thinking about this stuff.
Specifically, I’m thinking about what stocks right now look attractive to add to theFreedom Fund. Since this portfolio of mine will be one day literally paying for my freedom by generating enough dividend income for me to live off of, it’s in my best interest to stuff it with the best businesses at the best valuations I can find at any given time while still keeping diversification in mind.
Lower valuations usually come with higher yields (relative to the yield you’d get at a higher valuation), since price and yield are inversely correlated. And great businesses tend to routinely grow their profit, with that rising profit allowing for rising dividend payments. Finally, diversification acts as a great safety valve, ensuring that increasing dividend income should continue to flow even if one company or one industry experiences short-term or even long-term issues.
I’ll start by noting that my primary interests and big ideas this month will likely seem repetitive.
I am first and foremost interested in adding to stocks that I’ve recently been buying. I initiated a stake inUnion Pacific Corporation (UNP) about three weeks ago and then shortly thereafter averaged down. That stock is still in my wheelhouse, so I am very likely to add to that name once again this coming month.
W.P. Carey Inc. (WPC) and Omega Healthcare Investors Inc. (OHI) are a couple of REITs I’ve been buying up lately, and both are also still trading around the price I recently paid. So I remain interested in those stocks as well.
Apple Inc. (AAPL) is another stock that remains on my list. I initiated a very small position back in early April, before they announced their most recent blockbuster quarter. AAPL is on the upper end of what I’m willing to pay, but I’d love an opportunity to double down here. I used up a free trade in my Scottradebrokerage account to initiate that small stake and I’ll likely use another to double the size of that position. Great brands, super loyal customers, and just fantastic fundamentals across the board. Not really much to dislike there. I’d love a cheaper price, but that’s the same tune I’m always singing.
However, my ideas don’t end there. Let’s see what else is catching my eye right now!
Travelers Companies Inc. (TRV)
This is a stock I’ve been watching for some time now. Much to my chagrin, I’ve watched it mostly increase in price over the last year. But a small pullback since the middle of April is opening up a potential chance to finally pull the trigger. I love the insurance industry. It’s an industry that’s been around for a very long time and will likely remain profitable for the foreseeable future. It’s also an industry that I’ve previously mentioned wanting more exposure to. Travelers would give me diversification in the industry due to its exposure to P&C, whereas my current major insurance holding in Aflac Incorporated (AFL) offers primarily supplemental insurance. TRV was on my watch list back in September 2014, but I never pulled the trigger. Might be time to rectify that.
I just recently penned a piece on TRV’s fundamentals and valuation, concluding that the quality is high and the valuation is attractive right now. Trading for a P/E ratio of 9.96, its valuation appears to be much more attractive than many other major P&C insurers I follow. The yield of 2.38% is in line with its five-year average, but well above that of the broader market. TRV is building up a nice track record regarding their dividend – they’ve increased it for the past 11 consecutive years; I currently see no reason why that streak won’t continue. And with a 10-year dividend growth rate of 9.5%, the dividend metrics here are quite appealing.
Starbucks Corporation (SBUX)
Although it’s not my top idea right now, this stock offers a lot to like. Another name I’ve watched relentlessly rise in price, Starbucks operates the largest coffee chain in the world. A great and seemingly unassailable brand, strong customer loyalty, corporate awareness of and focus on the customer, and a product that people enjoy all bode well for continued success. It seems unlikely I’d have enough capital to stretch beyond the stocks I’ve already mentioned above, but SBUX is a company I’d love to own equity in at some point. I occasionally write at a Starbucks that’s within walking distance from our apartment, and that place is absolutely packed every single time I go there. I like that.
The valuation appears at the very upper end of fair. I think a case could be made it’s worth up to $50 per share, but it’s slightly beyond even that. I never mind paying a fair price for a great business, but I also don’t like (or recommend) overpaying. The P/E ratio is 30.32, which is strong even for a company growing at a rapid clip. And the yield of 1.24% doesn’t exactly get my blood pumping. But I suspect they’ll continue to grow their dividend for many years beyond the current five-year track record they’ve already built. Over that last three years alone, the dividend has grown at an annual rate of 25.2%. Great brand, great business, and great dividend growth. And it’s easy to understand how they make money and how they’ll likely continue to make money. But the valuation is a bit of a stretch here. Nonetheless, it remains on my mind.
Gilead Sciences, Inc. (GILD)
This one’s a dark horse, but it’s recently popped up on my radar. I don’t have any exposure to any pure-play pharmaceutical companies, let alone biopharmaceutical, due to my longstanding concerns over drug pipelines that have to constantly remain robust and the expiration of patents that can send profit into a free fall. That said, our global population is increasing in size and age. And increasing wealth across the board means increasing access to high-quality medical care and associated pharmaceuticals. Moreover, there are still a lot of diseases and medical issues that need attention, money, and treatments. I also recently discussed that my overall allocation to high-quality healthcare stocks is below what I’m aiming for, so I’ve got some room to ramp up exposure in this area of the economy.
GILD just recently initiated a dividend (and a significant stock buyback plan), so it’s not at the top of my list. But the company’s recent growth is nothing short of breathtaking. The runway for growth seems to be sustainable due to the fact that a significant number of their drugs, like blockbuster Sovaldi, have patent protection for more than a decade. The stock yields only 1.54% right now, so one would have to hope that management remains committed to growing the dividend. However, a lowly P/E ratio of only 12.69 (due to rapidly expanding EPS) seems pretty attractive for a company growing so fast. For perspective, EPS has grown at a compound annual rate of over 37.08% over the last decade, though a substantial portion of that growth happened just recently. This is a very interesting stock.
Conclusion
So those are some of my top ideas right now. I kind of listed them in order, meaning I’m highly likely to buy more UNP, OHI, AAPL, and WPC before buying anything new. But I do think TRV is very interesting here as well. It’s unlikely I’d have capital left over for SBUX and/or GILD after all of that, but I do like both businesses due to what I see as a lot of potential for future growth. Amgen, Inc. (AMGN) is another I’ve been looking at a bit (in the same vein as GILD), but the valuation and growth seem to favor GILD.
In addition to these ideas, there are a number of stocks, like Diageo PLC (DEO) and Archer Daniels Midland Company (ADM), that I remain interested in from prior watch lists. I’m also strongly considering adding to my position in T. Rowe Price Group Inc. (TROW) as the stock is near the same valuation as it was I initiated my stake in the company a couple months back. Franklin Resources, Inc. (BEN) is another great stock that I’ve been watching, which would complement TROW quite well. As always, so many stocks, so little capital!
Full Disclosure: Long UNP, OHI, WPC, AAPL, AFL, and TROW.
What’s on your watch list for this month? Any high-quality dividend growth stocks out there that are particularly attractively valued?
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