I invest in several dividend stocks every month. In order to end up with ideas to purchase, I have a rigorous screening process. Basically, I look for certain quantitative factors such as valuation, dividend sustainability, return on equity and historical EPS and DPS growth. In terms of qualitative factors, I look for competitive advantages, products with lasting impressions in customers and the ability to grow earnings and dividends.
After narrowing down the list to a handful of stocks, I might end up with several that might look very similar to each other. While some investors could create an elaborate model using currently available data to provide an objective way to screen out candidates, projecting the past into the future seldom produces the desired outcome. At the end of the day, one has to use their own judgment to select from a list of companies that sport similar characteristics.
Let�s assume that my quantitative screening process eliminated hundreds of dividend stocks from the dividend achievers index and narrowed the companies for further research to six. These six stocks are:
Johnson & Johnson (NYSE:JNJ): I have viewed Johnson & Johnson as the perfect dividend stock ever since I started investing in dividend stocks. As such, I have an above-average position in it. The recent product recalls and the lack of immediate action on behalf of executives are a potential issue for the company, although I doubt it will lead to JNJ�s demise. The company should be able to turn around, and those that entered at current levels likely will generate strong returns in the future. (analysis)
Procter & Gamble (NYSE:PG): The company has some of the strongest brands in the world. For example, Gillette truly is a wide-moat business brand. Men shave frequently, and the cartridges provide a recurring revenue stream for the company that sell them. Procter & Gamble is a well-positioned portfolio of strong consumer brands, and as a result, its business is relatively recession-resistant, while also capitalizing on such hot trends such as the growing middle class in emerging markets. The issue I have with this company is that I frequently add to it when there are not many other opportunities, which means that I have an above-average position in the stock. (analysis)
McDonald’s (NYSE:MCD): The company is one of the world�s most recognized brands. The Golden Arches has locations all over the world. McDonald�s has managed to continually reinvent itself and its menu, and delivered strong shareholder returns in the process. However, it is lagging behind Yum! Brands (NYSE:YUM) in China, which is a key market for growth. While the 10-year dividend growth rate is at 26%, I expect distribution growth over the next decade to average 10%. (analysis)
Wal-Mart (NYSE:WMT): I have a below-average position in the stock given the fact that, until the most recent dividend increase, it was yielding less than 2.5%. While the stock has been able to raise dividends for 36 years, future growth might be harder to realize given the fact the company already had $400 billion in sales. However, the company could increase its dividend payout ratio and try to squeeze efficiencies given its scale, which should aid in dividend growth. Its operations abroad also could be a leading growth indicator for the future. Each share of the company produces a dividend income of $1.46. (analysis)
Coca-Cola (NYSE:KO): I like the product, as do many consumers worldwide. Coke is a stronger brand abroad than PepsiCo, the company is trading at a higher valuation than PepsiCo and it is a more pure play in soft drinks than PepsiCo. Unfortunately, Coca-Cola is not without risks. Coca-Cola could generate a higher growth in the emerging markets than PepsiCo, mostly thanks to its stronger brand abroad (based on my travel in emerging markets). Both Coke and Pepsi have slowed down the rate of dividend increases during the past few years. (analysis)
PepsiCo (NYSE:PEP): Unlike its competitor, PepsiCo has a large exposure to the food industry. This has helped the company generate strong performance over the past decade versus Coca-Cola. I personally prefer the taste of Coke over Pepsi, however, and many consumers seem to have similar taste buds. PepsiCo tends to make large acquisitions, which have worked so far. Sometimes it tends to overpay them, like the recent acquisition of Wimm-Bill-Dann. PepsiCo is cheaper than Coca-Cola, and both have similar near-term prospects. (analysis)
Full Disclosure: Long all stocks listed above
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