February 2016 Stock Considerations

With the final trading day of January upon us, it’s time once again, to outline my potential stock buys for the upcoming month. The point of these posts is to help take some of the guesswork out of where I plan to allocate my fresh capital going forward. By making my selections ahead of time I find it easier to commit to buys as all the homework and investment thesis has already been completed on my end. All that’s left to do is pull the ‘buy’ trigger. Of course, I always qualify these posts with the notion that Mr. Market may present new buying opportunities not mentioned here, and with all the volatility we have been witnessing recently it’s a definite possibility that some new stock buying opportunity will pop up. With that being said, let’s take a look at my February stock considerations.

 

It should come as no surprise that I still like the value and safe yields being offered among the large Canadian banks. Once again, I am considering The Toronto-Dominion Bank (TD), The Bank of Nova Scotia (BNS) and Royal Bank of Canada (RY) with generous yields of 3.86%, 4.96% and 4.45% respectively. All three banks mentioned have payout ratios under 60% based on current cash flow which makes their dividends quite safe with room for increases. To be blunt, it looks ugly for Canada going forward. Low oil prices, a weakened currency and a potential domestic real estate bust are all putting tremendous pressure on these banks. Of course, that simply translates into an opportune time to initiate or add to positions. Inevitably, the tide will turn but in the meantime you can be paid quite generously to wait it out.

 

Looking elsewhere for potential stock picks I find a couple dividend stalwart industrial companies back in play. My first consideration in this space is Caterpillar Inc. (CAT). 2015 has been a rough year for this heavy machinery company as weakened economies in Asia and Europe saw less demand for CAT products as well as depressed commodity prices affecting sales as mining activity has been curbed. Still, CAT is a dividend machine that is currently yielding a high 5.04% and a current PE of 12.7 which is well below its five year average. I have held CAT for many years and realize that it’s a company/stock that goes through boom and bust cycles as it is more sensitive to economic activity than say, consumer staples. At that yield, which is sustainable, and value, CAT is very compelling at these levels.

 

Next on my list of potential buys is another industrial dividend stalwart, Emerson Electric Co. (EMR). Like CAT, EMR had a rough 2015 which is presenting us with a great buying opportunity as it’s yield is sitting at a nice 4.26% and with a current PE of 11.1 is selling at much better value relative to years past. While having a yield over 4% can be a little worrisome for this stock it is fully covered with room for future growth in 2016. What that dividend growth rate will be remains to be seen but I’ll be happy with mid single digits from some of these beaten down names. It’s still an increase and much better than a cut.

 

I am also considering adding to my Archer-Daniels-Midland Company (ADM). I have been nibbling on this stock for the past few months as it too had a difficult 2015 with falling commodity prices hurting ethanol sales, along with a strong dollar and weakened overseas economies reducing demand for ADM products. Currently offering a historically high yield of 3.23% with a PE of 12.0, ADM is also offering some compelling value at current prices.

 

Another name that has taken a beating as a result of lower oil prices, stronger dollar and a weaker global economy is Dover Corporation (DOV). A company with a very long history of dividend raises, that is no doubt feeling a bit of pinch as demand for their oil and gas services are weakening in the near term, DOV still looks attractive at current prices. Currently yielding 2.97% with a moderate payout ratio of 43.2% DOV’s dividend still looks to be quite safe with room for future raises. With a current PE of 15.0 DOV is right around its five year average PE but will well below S&P averages.

 

The last sector I am considering for February is the health REITs. January has not been too kind to the sector as a whole and once again, better prices value and yield are showing up in names like HCP, Inc. (HCP), Welltower, Inc. (HCN) and Ventas, Inc. (VTR) which yield 6.46%, 5.46% and 5.43% respectively.

 

So there you have it: TD, BNS, RY, CAT, EMR, ADM, DOV, HCN, HCP, VTR. A pretty long list of stocks I’ll potentially be buying in February. I would like to add to my consumer staples but they are holding up quite nicely relative to the Canadian banks and several industrial plays I have mentioned. I tend to follow the red and average down my positions. Are any of the above names on your monthly watch list? Please let me know below?

 

Disclosure: Long TD, BNS, RY, CAT, EMR, ADM, DOV, HCN, HCP, VTR

22 thoughts on “February 2016 Stock Considerations

    • Hi R2R,

      I think many of our fellow dividend bloggers are considering the same names that I am. Though these days it can be tough to be a Canadian investor buying U.S. stocks, value and great yield still exist. Let’s see if February continues to be as volatile as January. Thank you for commenting.

    • Hi EL,

      Well, I don’t plan to buy every name I mentioned on my list. I always like to put together a potential buy list for the upcoming month and may only buy one, two or three names from the list during the month. My trading fees are $2 a trade which is why most of my buys are, at minimum, $800. I’m comfortable paying $2 commission on that dollar amount. If I buy smaller amounts it’s usually because I am using a free promotional trade. EMR and DOV look attractive to me at these levels even after a nice jump in share price over the last two trading days. As always, I appreciate your comment.

  1. The CDN banks look very cheap here but they might carry the most risk right now of the companies you listed. I’ll be sitting on the sidelines but here’s the companies I have my eye on. LOW, ETN, DOV, DLR, TROW, UPS, CMI & UTX. JNJ, PEP & MMM all looked real good at the start of the week but not so much now. Guess I’ll have to wait for another pullback on them. Happy buying in February.
    JC @ Passive-Income-Pursuit recently posted…Dividend Growth Investing at Work – Health Care and Real Estate: 2 Great Trends for the Long TermMy Profile

    • Hi JC,

      I like some of those names you mention and think you’ll still have plenty of time to buy in 2016 as volatility and wild price swings seem to be the norm of the day. Though the Canadian banks still carry significant near term risk, from a dividend perspective they are still quite safe with plenty of room for continued distributions along with potential raises based on current cash flow. As I briefly mentioned in the post, I would love to buy more consumer staples but not at current prices when some of the industrial and Canadian banks are trading at such attractive levels. Thank you for sharing your thoughts.

  2. DivHut,

    As usual a solid short list going into next month. I probably won’t get to it this month, but I hope to bump up my position in my Canadian bank, CM, or a new one (my wife and I have a joint account now, so I get 2 free buys per year and am making sure I use her’s ASAP). Financial and Industrial stocks have been my got to of late, no reason to stop that for sure. I almost bought ADM earlier this past month too!

    REIT wise, I want to get one of those you mention, but I don’t have the funds. In the meantime, I am still ridge Realty Income (O). That stock has been a machine for me.

    Keep up the good work,
    Gremlin
    Dividend Gremlin recently posted…Recent Buy #2 January, 2016My Profile

    • Hi DG,

      Even with the nice bounce the market had the last couple of days, some solid names in the industrial and Canadian finance space are still trading at great values and yields. If you don’t have a lot of money to invest going into February, why not use those free trades you mentioned and buy a really low dollar amount just for the sake of keeping your investments consistent. In any case, I don’t think we will be in any rush to find great values as I suspect we’ll have plenty more opportunities to buy this year. Thank you for stopping by and commenting.

  3. DivHut, thank you for sharing your thoughts for February stock considerations. I’ve also got the Canadian banks on my list next month. I already hold some shares of RY and TD, will look to see about adding to those or maybe picking up some BNS. I agree that the industrials are looking attractive as well. Cheers
    Dividendniche recently posted…Dividend Income Update DecemberMy Profile

    • Hi Dividendniche,

      I have a feeling that we’ll continue reading quite a few Canadian bank buys in the coming weeks. As long as Canada remains weak because of low oil prices, a weakened currency and a general slowdown of the world economy, we’ll continue to see opportunities in the beaten down Canadian banking sector. Not bad considering you are getting paid a nice figure to wait for prices to recover and those yields still appear to be quite safe from a cash flow/payout perspective. It will be interesting to see if February picks up the volatility we have seen in January. As always, I appreciate your comment.

  4. Thanks for the list DivHut. We’ve been adding to Union Pacific and our Emerging Market Index. Seeing Caterpillar above, I wondered if you’ve given Cummins (CMI) a look. I have just started digging in, but it looks like it could be a contender. I’m a little concerned about the Canadian banks, given Canada’s real estate boom…..but I certainly don’t have my head around that situation.

    I hope you have a great weekend.
    -Bryan
    Income Surfer recently posted…I’m Outta Here…My Profile

    • Hi IS,

      Any investment, no matter how “safe” carries some risk. I guess it’s all about the risk/reward ratio and how comfortable you are with the Canadian banks considering all the headwinds they are facing. For now, I am still comfortable adding and diversifying among three different banks in Canada and overall they still remain a relatively small part of my portfolio. But, I do agree with you that these days there is real concern with our neighbors to the north. Regarding CMI, I have not looked into that name in earnest but from a quick look it certainly appears to be a solid dividend payer that’s pretty beaten down and trading at a very attractive, price, value and high yield. Thanks for highlighting this name. I appreciate your comment.

  5. DH,

    As usual, we have a lot of the same companies on our watch list. BNS is probably at the top of mine right now despite the fact that I really haven’t wanted to add to financials since this is becoming overweight within my portfolio. Just hard to turn down such a high yield on such a solid company historically.

    Take care!
    Ryan
    Get Rich Brothers recently posted…OilMy Profile

    • Hi GRB,

      Like energy, I hear your concern about becoming too overweight with the Canadian banks. Too often I read about how “cheap” the big energy companies are only to see them continue to fall. I hope that a base has been put in for the Canadian banks as they have been bleeding over the last year. Still, their dividends are all safe currently and sometimes you just have to go a little “balls out” when making buys during a down market. Their values and yields continue to attract me too. I just hope not like a moth to a flame. Thank you for stopping by and commenting.

  6. DH,
    Thanks for the overview.
    Caterpillar is on my watchlist as well, with John Deere. Both are in a similar position right now, where they’re quite cheap if you;re willing to hold them for a while.
    However I think last week’s earnings moved CAT’s P/E quite a bit higher, to ~18.

    Any chance you want to look into European shares this year?

    Cheers,
    TZ

    • Hi TZ,

      With any industrial name that you plan to hold long term you have to expect both boom and bust cycles as that’s the nature of cyclical stocks. Of course, CAT and DE both fall into this category and sometimes buying when PEs and yield look very attractive can produce some great results long term. I currently hold several European shares including, DEO, UL, ALLE and IR. I’d consider adding more DEO or UL at better prices. For now, I’m focused on several industrial names along with the Canadian banks. Thank you for stopping by and sharing your thoughts.

    • Hi ARB,

      My list hasn’t changed much in the last two or three months but that’s only because I tend to buy where the best values and yield are which is currently in many industrial and Canadian banking names. That being said, I do have it in the back of my mind to veer off of my ‘usual suspects’ and add some solid consumer staples that are not trading at the best values necessarily but do offer very solid stability. I have to admit, while I’m familiar with SWK, this is the first time I see it being mentioned among any of the DGI bloggers. I know it’s a great name but haven’t looked into it in earnest. Thank you for stopping by and commenting.

    • Hi AFFJ,

      I think these types of posts are useful for two reasons. First, as you stated, it gives you an idea of what others are considering going forward and second it provides a road map of sorts of where I’d like to deploy my fresh capital. This helps take some of the guesswork out of deciding what to do when we are often bombarded with various conflicting financial headlines. I like all three names you mention and even though they each climbed quite nicely the last few days of January, they still offer compelling yield and values. Thank you for sharing your thoughts.

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