Sunday, February 14, 2016
Seven Dividend Stocks for 2016
Mike Holland, veteran money manager and frequent contributor to financial news shows, was on The Nightly Business Report this last Thursday. Back in the 1980's, Mr. Holland would discuss investing on Louis Rukeyser's "Wall Street Week in Review." I think he was even one of Lou's elves.
More recently on the Nightly Business Report, Holland listed seven dividend stocks for income investors to consider. Since one of the early lessons in life is to seek expert advice, I decided to take advantage of this expert's advice and make these seven stocks the focus of my analysis this week.
In this post, I overlay my M* 2016 Dividend screening criteria on these seven stocks to determine if I should include one or more in my portfolio.
My 2016 screening criteria are in the table below.
The seven stocks, in alphabetical order are Chubb (CB), General Electric (GE), Johnson and Johnson (JNJ), JP Morgan (JPM), Three M, (MMM), Microsoft (MSFT), Exxon Mobil, XOM.
Chubb, the smallest cap. stock in the group has solid fundamentals. See the table below.
CB earned over eight dollars per share and paid out only 30% of that in dividends. With a D/E ratio of only .14 this is a solid stock. Unlike the life and health insurers, as a property and casualty insurer, Chubb is less vulnerable to interest rate influences than the life insurers.
My major concern about CB is their low yield. At 2.34%, CB is below my minimum criteria of 2.75%. Therefore, you will not see CB in the 2016 portfolio. However, covered calls on Friday were encouraging so we will see on Monday if we can make up for the meager yield with covered calls.
Another fundamental that makes me want to own Chubb is the dividend growth of 20.92% per year over the past 5 years. Dividend growth is greater than revenue growth (rev. growth = 7.43%) but I would settle for a pay raise of 7.43% should the dividend growth reflect revenue growth.
General Electric (GE)
I can understand including GE as a core holding if you look at 100 years of history, but even I do not have a hundred years to wait. I need to be sure my stocks can pay the dividend and increase it. To pay and increase dividends, the company has to earn more than it pays out.
If recent revenue growth was compelling, suggesting that earnings also will grow, then I might consider GE, but this is not the case so GE is out of the picture. See the table below.
Johnson and Johnson (JNJ)
JNJ is the big engine that could! As you can see in the table below, JNJ has revenue growth, it has dividend growth, it has almost no debt, and almost no excitement. Covered calls are non existent. Johnson and Johnson is truly a core holding that I own and I expect every conservative investor owns.
You get global diversification without significant currency risk when you own JNJ. It just seems so boring which is exactly what a conservative income investor needs for some of her portfolio.
You can go broke on boring. Who can live on 2.95%, so let us look onto to the rest of the list.
J.P. Morgan (JPM)
JPM, a bank stock is of interest. Technically, the dividend has increased an average of 148% over the past five years. This would seem incredible until you add in the history. JPM, like all big banks was a victim of the 2008/2009 disruption of credit markets. Having cut their dividend to almost nothing, they clawed their way back to deliver a healthy dividend yield of just over 3%.
JPM has paid the price of the global financial crisis on 2008/2009 and that is evident in their balance sheet. With a D/E (debt to equity) ratio of 1.46, JPM is not a candidate for inclusion in my 2016 portfolio or in my personal portfolio.
The table below tells it all.
I used to own 3M. I cannot remember why I sold it: probably because I wanted more than 3% yield and sold covered calls that were called away. Today, I am looking at MMM again.
Revenue growth is slower than dividend growth. This tells me, I may not see the same dividend growth in the future as has occurred over the past five years. Yet, if dividend growth slows to equal revenue growth, then I would still be happy. If revenue growth slows as well, there could be trouble.
I look to covered calls to make up the difference and on Friday (2/12/2016) I found a few good calls. The good balance sheet (D/E .75), relatively good yield (2.88%) and prospects for additional income from covered calls make MMM an excellent inclusion in my 2016 portfolio.
I like MSFT even more than I like MMM. Of the seven stocks reviewed here, MSFT is the only stock with revenue growth close to dividend growth. Moreover, MSFT has a solid balance sheet and covered call opportunity. MSFT will be added to the 2016 portfolio this week.
See the table below and you will note MSFT has but one negative, the ratio of earnings paid out in dividends. Dividends paid out are nearly 100 percent of EPS; this is not a lot margin for error. However, the covered call potential and solid balance sheet, make MSFT worth the risk.
Exxon Mobil (XOM)
Exxon Mobil has never been my favorite major integrated oil company. I have always preferred Chevron (CVX.) Yet if Holland suggests it, why not take a look.
Exxon's yield is the best of the group at 3.6% and they have very good financials with a D/E ratio of .12. But, look at the revenue. The oil patch shake up has hurt XOM's revenues mightily. Since XOM has negative revenue growth, I will not include it in my 2016 portfolio, I will eliminate XOM immediately.
During this short week, which happens to include options expiration on Friday, I will look to add to JNJ as if it is a money market fund; I will look to add MMM provided the calls make it worth it; and I will add to MSFT. CB cannot be included in 2016 portfolio as the yield is too low, but if calls are good, I just might add. Although, I have a number of insurance companies in my stable right now.
I will post my trades should you be interested in seeing how this works out.
Thank you Mr. Holland for these seven ideas. Usually it takes me 20 tries to find even one stock I like and you gave me 3 out of 7. Good work.
Disclosure: Long JNJ, MSFT, May add CB and MMM