(Shhh…) Dividend growth stocks

Please excuse this discussion of dividends, if I have understood correctly, Saul’s outlook does not emphasize dividends at all…

But, hey, I’m thinking that the people who hang out here may have the best scoop on amazing dividend stocks that are also putting out strong growth.

Could we please have a side chat about the dividend stocks you own, whether they are amazeballs growers or just your pet rock that’s gathering some moss in your ports?

Thanks!
Karen

6 Likes

OK, Karen - I’ll start the ball rolling. Understand that the following comments are just my personal thoughts about the question of dividends, I don’t have a “strategy” or anything like that.

Not long ago, prior to getting tuned in here I had no investment strategies whatsoever. I bought stock primarily based on Supernova recommendations, but not exclusively. Being retired and all, I felt I should also invest in some income producing equities (but, I wouldn’t go so far as to invest in bonds).

So, what was paying a pretty high dividend rate? Fossil fuel energy patch, tobacco, some investment banks and a random smattering of other stocks. I read some stuff posted by TMF that spoke highly of BBEP, APU and others. I also referred to Cramer’s recommendations. And I did some more digging and came up with some other high rate of return dividend stocks.

I bought up quite a few dividend tickers. Growth was not something I paid attention to. Then, the relatively sudden drop in oil rippled through the energy sector and I saw a rapid decline in the value of my investments And all of a sudden I was seeing dividends around 20% (but mind you, not 20% of the price I paid).

It’s not a loss until I sell (I comforted myself). This is a false premise. It is a real and undeniable loss. Around this time I started dialing in this board. I finally conceded that hanging on to these losers with the hope that oil will rise again (as it has always done so in the past) was not only a loss with respect to holding a these companies, but it also tied up the diminished capital such that I couldn’t put it to gainful work elsewhere.

I sold all of the energy and investment bank stocks at a very significant loss. I redeployed the cash employing Saul’s techniques, and to be candid, to some extent I just bought some of the stuff he held without a lot of analysis.

Today, I hold some companies that pay a dividend: AAPL, DIS, SWKS, a few others. I do not consider the dividend at all when making an investment decision. If a dividend is paid, it’s gravy, but it just doesn’t figure in the decision process. I am very happy with this mode of operation.

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Good topic! This is where my strategy (which is still evolving) is different than Saul’s. Yes, I am trying to target stocks that have low 1YPEGs but also ones that pay nice, growing dividends. There are obviously exceptions to these in my portfolio, like FB, but this is how my portfolio largely seems to be shaping up. Here are a few I either already own or am currently considering (note that several of these I only learned of through this board):

AAPL
AFSI
AMGN
BA
GLW
HD
INBK (Saul stock)
NVDA
SWKS (Saul stock)

Note that some of these stocks are owned by Saul and some are probably the opposite of what he would want to own (like Apple, Boeing and Home Depot), but all have 1YPEGs less than 1. To me, using the common sense Saul espouses, that means my dividends being reinvested are buying shares of undervalued companies with lots of room to grow. A win-win, right?

While this approach radically differentiates from Saul’s, I can’t understate how much his thinking has shaped my investing style. Before I found this board, I was only interested in low P/E, dividend growth stocks. My plan was basically to pick the highest yielding Stock Advisor recommendations because I didn’t have enough confidence to pick stocks on my own.

Now I have the confidence to at least run a few simple tests to get a better idea if a company’s P/E is justified or not by its growth. I’m obviously still learning, but this skill set gave me the confidence to pass on Whole Foods and UA after their recent drops in prices.

I also like and own MasterCard. Yes, it’s 1YPEG is over 1, but I think the runway for MasterCard is so long when you factor in international growth and expansion, it was an exception I was willing to make. While its dividend is still relatively low yielding, it has been growing and is expected to grow at a nice clip going forward.

  • Matt
11 Likes

I just spotted this HCN on Kevin’s chart. It is called Health Care REIT and pays almost $5%

http://caps.fool.com/Ticker/HCN.aspx

0.16 1ypeg, 200% growth last year.

Interesting but I have always been wary of REITS. It’s curious.

Karen

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Yeah, I honestly don’t really know how to evaluate REITs either. It’s something I wish I knew more about.

I also meant to list QCOM. Nice healthy dividend and low YPEG.

  • Matt
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Karen and Matt,

TMF has a good REIT board which I think is public:

http://discussion.fool.com/real-estate-inv-trusts-reits-100061.a…

HCN has been mentioned there although I don’t know how long ago. There are some very astute posters on that board. REITnut comes to mind a but there are several.

David

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Yes it is public. No REIT are not a good bet now do to the increasing interest rates (?), but I’ve been in them since 1999 and they have been very good to me. HCN, was my first. REITs are good due to the large dividends. They have to give out 90% of there earnings. It’s a Real Estate play but you can get in and out quick. The board is slow but it was very informative. If you want to know about REITs it’s there.

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If you want to know more about REITs then there is a board for you:
http://discussion.fool.com/real-estate-inv-trusts-reits-100061.a…
If you want to understand REITs then read up posts from REITNut and Yodaorange.
Here’s a post from Reitnut on healthcare Reits including your HCN.
http://discussion.fool.com/healthcare-reits-31773528.aspx
Ant

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Thanks for the pointers everyone! Looks like I have some reading to do!

  • Matt
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I’ve added lots of allegedly “blue chip” stocks to Kevin’s spreadsheet the last week, the kind of stocks I used to be interested in like JNJ, Honeywell, General Mills, JP Morgan Chase, McCormick, Microsoft, NOV, CLB, Coke (someone added this before I did), and others. It’s pretty shocking how high some of their YPEGs were. These were stocks I always considered relatively “safe” investments. Companies that wouldn’t explode with growth but would provide slow and steady gains (with dividends reinvested of course) over a long time period. Now, I’m not so sure how “safe” they are.

All of these had YPEGs over 2. General Mills’s score was over 6 and Coke was in the double digits! Yikes! One of the things Iliek most about calculating YPEG is that it forces you to really look at a company’s numbers. Something I rarely did before this. Because of this I’ve steered clear from a lot of, what I believe would have been, investing mistakes. I have been turned away from other investments too thanks to this board.

Thanks to Ray’s excellent post earlier this month highlighting Whole Foods’ rising competition, I had second thoughts about investing in them. After calculating their YPEG I decided they still weren’t a good value even though they had recently dropped significantly in price.

Ditto for Starbucks.

That’s kind of how I started looking for Saul-type stocks plus growing dividends. I have found a few such gems where EPS growth is still in line with the company’s valuation, at least after first glance. The list in my above comment are all such companies that warrant further investigation after this screen.

Anyways, I have been slowly but surely trying to calculate the YPEG from more dividend payers across the SA universe and dividend aristocrats’ club to see if other companies might fit this bill too. Last night I did Metlife and General Mills. Tonight I’m planning on doing Federated Investors and STX. If any more gems are like this are found I’ll try to highlight them.

  • Matt
9 Likes

I’m not sure 1YPEG is as valid for examining dividend stocks as it is for growth stocks, because it omits the value of the dividend. I mean, if 2 companies had identical earnings, revenue, growth prospects and financials, except company B paid a consistent 3% dividend, I think we’d all prefer company B. But A & B would have the same 1YPEG. So be careful there. And/or create a 1DYPEG. :slight_smile: I implemented one on my own but it’s a bit hokey.

That said if you are looking for a stock that grows 30% per year then perhaps a 1-3% dividend is not a big consideration.

Oh, I don’t expect the companies on my list: Apple, Boeing, Corning, HD, etc. to grow 30% per year. I’m not even necessarily saying all those companies are presently good buys. I just think the 1YPEG is a good screen to find undervalued companies that have decent EPS growth prospects. Applying this to dividend stocks, in my mind, is helpful at weeding out some companies that might be priced based more on past performance and reputation than future growth prospects. Just my thoughts.

And/or create a 1DYPEG. :slight_smile: I implemented one on my own but it’s a bit hokey.

I was thinking about tinkering around with some type of formula too! But I am not convinced that it would be more helpful than harmful. :slight_smile:

  • Matt

PEG is a useful measure for smallcap and microcap growth companies but I do not think it contributes anything to the valuation of large companies at all.

Why should a company with a huge capital base and possibly a solid board of proven people, which shows a remarkable history and likely future of ROIC, margins and cash flow generation; which has possibly rewarded investors over decades and is likely to continue to do so, conform to the same, very simple test applicable for small-fry?

The question answers itself. The two require quite different treatment. Tickets for great orchestras with notable conductors cost more than the local fiddle-scrape band.

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The question answers itself. The two require quite different treatment. Tickets for great orchestras with notable conductors cost more than the local fiddle-scrape band.

Unfortunately it didn’t answer itself for me :wink: And I’m not really sure I understand your explicit answer either: you seem to suggest that we should have to pay more for great, large companies? As in a higher 1YPEG? And yet Apple has a 1YPEG of just 0.45 according to my calculations, and it’s as big and great as they come. I would guess the market fears the law of large numbers and thinks that Apple’s growth simply can’t be sustainable, so they give the stock a large discount. I show a TTM P/E of 16 with an earnings growth rate of 35%. And maybe the market is right – I have no idea – but I also know it has almost consistently underestimated the company for the decade+ I’ve owned it.

So are you saying the 1YPEG will be lower for larger companies, then, as the market discounts their ability to maintain growth given their size?

Neil
Long AAPL

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I have to agree with Neil here. When comparing large cap companies to each other, I would definitely still prefer them to have a low 1YPEG. All a low 1YPEG means is that they have a higher rate of growth relative to their P/E. All else being equal, why wouldn’t you want that? Of course, the 1YPEG is just a starting point, not a finish line, in evaluating stocks, but seeking out a lower 1YPEG just seems to make sense to me - for any company.

Why should a company with a huge capital base and possibly a solid board of proven people, which shows a remarkable history and likely future of ROIC, margins and cash flow generation; which has possibly rewarded investors over decades and is likely to continue to do so, conform to the same, very simple test applicable for small-fry?

But you can find companies with all these things and a low 1YPEG. Why do they need to be mutually exclusive of each other? Apple, Home Depot, Corning, and Boeing all have the characteristics you mentioned plus a low 1YPEG. Why wouldn’t you at least consider it another positive attribute of a company to take into account when looking for further investment opportunities?

  • Matt
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Tickets for great orchestras with notable conductors cost more than the local fiddle-scrape band.

Great quote Strelna.

John

Been away on holiday but quick replies:

Neil: Apple may be as big but is not ‘as great as they come’ in investment terms because of its product. For example on a ten-year view, if the price of both was simultaneously attractive, I would much rather own Domino’s Pizza. (Neither has an attractive price at the moment; that is just an example.)

Matt: Because there are better measures which might include your companies but, and here’s the point, also much better ones.

Stelna, what measures do you like?

  • Matt

I think it would have to come down to the history of growth, followed by the history of various ratios, including generation of FCF, OM and ROIC; easily managed debt and the absence of boardroom time-wasting about corporate social responsibility, PR dressed up as charity and ‘stakeholders’ (all of which are signs it is probably time for owners of stock to look for a younger company with more vigor and sense).