January 2016 Stock Considerations

With January 2016 right around the corner it’s time, once again, to lay out potential stock investments for my dividend income portfolios. I really enjoy writing these posts as it gives me a pretty clear road map for stock selection. I have to say, that I follow these “stock considerations” posts pretty closely so there are few surprise buys I make in any particular month. Of course, I always qualify these posts with the notion that Mr. Market may present a new buying opportunity that I may have not considered. But I still think these posts are valuable as it takes some of the guesswork out of where to deploy my fresh capital. It’s as if the thinking has already been done which makes stock buying easier each month as I tend to not second guess my considerations.

 

Looking forward to 2016 I am excited to be able to contribute to my ROTH account once again. It’s been several months since I made any buys in that portfolio as it was fully funded for 2015. With that being said I’d like to highlight several of my January 2016 stock considerations.

 

As mentioned above, my ROTH portfolio is back in play which means one thing, Canadian banks. Going into 2016 I am once again looking to add to my The Toronto-Dominion Bank (TD), The Bank of Nova Scotia (BNS) and Royal Bank of Canada (RY). The past year has definitely been a year the Canadian bank stocks would want to forget as each of the “Big Five” have been beaten down in earnest. Of course, this simply translates into better prices, values and relatively high yields for each of those names mentioned. TD is yielding 3.87%, BNS is yielding 4.83% and RY a juicy 4.18%. We all know that as dividend growth investors we cannot live on yield alone. That yield must be sustainable and each of the Canadian banks mentioned have trailing twelve month payout ratios well under 50%. In other words, those dividends, based on current cash flows are quite safe.

 

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 4.49% and a current PE of 14.2 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 3.94% and with a current PE of 12.0 is selling at much better value relative to years past. While having a yield approaching 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.

 

Finally, I am considering adding to my Archer-Daniels-Midland Company (ADM). I have been nibbling on this stock for the last couple of 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 3.07% with a PE of 12.6, ADM is also offering some compelling value at current prices.

 

It seems that these days finding relatively high yield from solid long time dividend payers is easy. The energy sector is still in play along with several industrial names and more. There’s no need to chase those excessively high yielding companies in the mREIT or BDC world with questionable distributions. After all, we invest in dividend stocks for their reliability and predictability in this otherwise topsy-turvy market that shoots higher one day and falls like a rock the next.

 

What are some of the stocks you are considering for your January purchases? Are any of the above names on your monthly watch list? Please let me know below.

 

Disclosure: Long TD, BNS, RY, CAT, EMR, ADM

51 thoughts on “January 2016 Stock Considerations

    • Hi Oku9,

      I have not really followed or tracked CMI in a while but from what I can see it looks like a stock that’s selling at pretty good value and yield. Looks like 2015 was a rough year for this stock as well as many other industrial names. The dividend looks to be quite safe too based on current cash flow. Thank you for bringing CMI to my attention.

    • Hi JC,

      All solid names you are considering as well. VFC has started to look a little weaker in recent months and I’m guessing a strong dollar hasn’t helped one bit. VFC is on my radar but the names I mentioned are in the forefront of potential buys. Thank you for sharing your potential picks for January.

  1. Great names here, DivHut… At least one Dividend King and one Aristocrat in the lineup. I am opening a new position in the Aristocrat ADM and just opened a new position in the Aristocrat VFC. Mr. Market is still in the gift giving mood! Best of luck to you in 2016!
    Dividends recently posted…IBM or Microsoft?My Profile

    • Hi Dividends,

      Mr. Market is definitely in a giving mood. While the market as a whole may be riding high, there are still quite a few names to be found that are selling at great prices, value and relatively high yield. Both VFC and ADM look compelling at current levels. Happy to be a fellow shareholder with you in those solid names. Thank you for commenting.

  2. Thanks for sharing your thoughts DivHut. We are looking to add to our stake in Union Pacific in the near term. Additionally, we’ll add to Vanguard’s Emerging Markets ETF (VWO) on any reasonable sell off. I will also dig into the financials at Berkshire Hathaway(BRK-B) and Cummins (CMI) in the next couple weeks. I don’t think they are cheap enough yet, but I need to be sure.

    I hope you have a great week and a Happy New Year!
    -Bryan
    Income Surfer recently posted…2015 Wrap-up and 2016 GoalsMy Profile

    • Hi IS,

      Looks like you have put together a nice list of potential buys yourself. I just started looking at CMI after a comment left here and was surprised it never really made my screens. Perhaps I favor a little more dividend growth longevity. The rails continue to look attractive as well. I have seen a few UNP buys among our fellow dividend bloggers. Rails, like many other sectors had a rough 2015 which is offering us some pretty good current buys. Have a great New Year! Thanks for commenting.

    • Hi EL,

      Some months I have a pretty narrow focus of where I’ll potentially deploy my fresh capital and some months it’s a little wider. January appears to be on the wider side as for the first time in several months my ROTH is back in play. Though I have quite a few names I’m considering, I’ll most likely only buy one or two names from the bunch. This is how I nibble on positions rather than gorge. It will be interesting to see how January starts off as the market has been very volatile in recent months with wild gyrations. If the markets continue to climb as they have, some of my considerations may not be the best value buy anymore. Thank you for stopping by and commenting.

  3. DivHut,
    Caught your last article on Seeking Alpha, this time I am catching it here. I like all of your picks. Right now ADM is probably at the top of my list for my next purchase, which will probably be a Roth move with my CB / ACE money. I also like MMM and LMT, but I want to only pursue those guys at or above 3% yields.
    – Gremlin
    Dividend Gremlin recently posted…Loyal3 Buys December, 2015My Profile

    • Hi DG,

      All solid picks you mention in your comment. I think I won’t touch my CB and wait for my ACE shares when they come in. CB has performed quite nicely for me and I may consider adding TRV eventually after the deal goes through. It’s nice to see some high quality names go on sale from time to time and watch those yields climb to attractive levels. This is what happened to ADM, CAT and EMR to name a few. Waiting for a 3%+ yield on MMM or LMT sounds about right to me. Looks like we have a similar thinking when it comes to making new buys. Thank you for stopping by and commenting.

    • Hi Tristan,

      ADM has such a long history of attractive dividend growth rates for multiple decades and there is no reason it should not continue going forward. Fundamentally the business has not changed one bit rather the company is facing near term headwinds in the form of a stronger U.S. dollar, weak demand from Asia and Europe and lower commodity prices. ADM has been here before and performed quite well through various economic climates over the years. It has come up quite a bit in the last two weeks but still looks like a compelling buy at these levels. With market volatility really high these days it will be interesting to see if ADM is still a good buy once January rolls around. Sometimes things change that quickly. As always, I appreciate your comment.

    • Hi Alex,

      I have considered DE a long time ago when first building my portfolio but went with CAT simply because of its dividend history relative to DE. Both are solid companies and feeling near term headwinds with world economies sluggish and commodity prices depressed. That being said, I still like CAT at current levels or less as it’s forward PE is about the same as it’s five year average so does not appear to be severely overvalued. Of course, CAT had a nice jump from its recent lows and a little pull back would be welcome. I also prefer the current yield of CAT to DE. Thank you for your comment.

  4. DH,

    While I didn’t intend to add to financials at the beginning of 2015, they got so juicy and the yields were so attractive that I did actually pick up some BNS. I might get tempted on RY as it approaches a 4.5% yield as well. I’m planning to diversify elsewhere, but it’s hard to resist. History suggests that the big Canadian banks are a solid value with such yields.

    All the best in the year to come, brother.

    – Ryan
    Get Rich Brothers recently posted…2015: Year In ReviewMy Profile

    • Hi GRB,

      I’m totally with you regarding the Canadian banks. While I still feel comfortable adding to the names mentioned going into 2016, those positions relative to others are starting to grow quite large. Of course, as a whole among all my portfolios my financial exposure is still relatively small which is why the value and yield of TD, BNS and RY still call out to me. I still have names in other sectors I’m considering so that may balance my financial exposure as well. Thank you for stopping by and commenting.

  5. No surprises, but that’s to be expected. Companies don’t fluctuate in quality overnight, and valuations TEND to stay relatively stable over a couple months (I don’t expect CAT to be massively overvalued tomorrow). This is good as sometimes we don’t always have the capital to act.

    I have OHI in my sights. I STILL haven’t initiated a position as the funds I was going to use to buy it went towards buying KMI after the dividend cut. I still somehow don’t have a single Canadian bank in my portfolio. I’ve been expecting them to go full 2008 on us and prefer to pull the trigger after rather than before. Considering that they seem to be a bit better insulated against any bubble burstings and have better underwriting policies than their American counterparts, perhaps I should rethink that mindset.

    Sincerely,
    ARB–Angry Retail Banker
    ARB recently posted…Another Day, Another IdiotMy Profile

    • Hi ARB,

      Exactly my point. Stock prices fluctuate dramatically from day to day but fundamental aspects of a corporation does not change on a dime which is why my list of potential stock buys essentially are good companies merely experiencing short term headwinds.

      Thanks for sharing some of your considerations. OHI is quite popular among the dividend bloggers and while I like the stock as well, for now my focus will remain on the big three health REITs and the CCP spin off. Keep watching those Canadian banks. Who knows what the future will bring? All you can do is look at present stats and make a decision based on current performance which is why, at present, the Canadian banks look attractive to me. Those yields, prices and deep value look very enticing. As always, I appreciate your comment.

  6. Good to hear about some of the companies that you are mulling over. I think accumulation of CAT at these levels will be a good buy. The business will eventually rebound once caped and commodity prices rebound. That may take some time, but will eventually occur. I’m personally avoiding commodities apart from just the integrated oil majors…but I think there is some good value there also.
    Integrator recently posted…2015 Wrap Up & Happy Holidays!My Profile

    • Hi Integrator,

      The reality of the day is that there are some deep value companies currently trading. Several industrial plays along with the Canadian banks, anything energy and material plays too. We always say that the best time to buy is when prices, value and yield look compelling but sometimes we get gun shy thinking that lower prices indicate something inherently wrong with the company. This isn’t aways the case. Industrial stocks are known to be cyclical going from boom to bust cycles and that’s to be expected with the likes of CAT. Nibbling on these dividend stalwarts when they are down makes sense to me. It may take a year or two even but I agree that eventually commodity prices will rebound and will lift many of the battered stocks of today. Thank you for stopping by and commenting.

  7. CAT has always been on my list. As a matter of fact, many years back when it completely fell apart, I wanted to go all in. This current situation reminds me of what was going on back then. For me, I would definitely hold out on CAT until some of the issues with commodity prices start to stabilize and actually reverse current trend. Hard to justify buying a megabuck machine that will just sit idle. Just my 2 cents. Good luck.

    Keep cranking,

    Robert the DividendDreamer
    AKA — Seeking Dividends

    Follow me on Twitter– Seeking Dividends@DividendDreamer
    dividenddreamer recently posted…GE-It’s A Balancing Act!My Profile

    • Hi dividenddreamer,

      You have a point about CAT experiencing near term weakness because of lower demand for their machinery. After all, sluggish economies in Asia and Europe demand less CAT products as do the mining companies because of lower commodity prices. The truth is that no one really knows when trends will reverse. All you can do is nibble on positions when they are beat up and by the likes of the 2015 performance of CAT it looks pretty beat up. For now it looks attractive to me even if prices may fall further in the short term. Safe yields and attractive valuation pull me towards it as with my other considerations. As always, I appreciate you stopping by and sharing your thoughts.

      • I too have looked at CAT for quite some time. As I said before, I missed the boat on the last true bottom, but I truly did underestimate it’s performance going forward from that point. I must admit that I have not read and looked at every nook an crannyconcerning CAT. As far as now is concerned, what concerns me with CAT is their lack forward thinking involving Tier 4 regulations. They are definitely going to lose ground to those companies that have Tier 4 compliance in place. Last time I looked, CAT was still not even developing the engine, let alone testing it. I am sure they have progressed since, but if they are not advancing their technology to meet the current EPA requirements, CAT may continue to lose market share and see revenue and earnings erosion going. I read this well over a year ago, and it might ring true today.
        forward.https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.fool.com/investing/general/2014/07/17/will-caterpillar-inc-lose-this-big-battle-to-gener.aspx&ved=0ahUKEwiwx-DSnYrKAhVLOyYKHZvVCFMQFghAMAY&usg=AFQjCNFsh_mJ-wjTrl0Q7A9YNetG7ZRfwQ

        I just find it hard to believe that CAT would not make locomotives a high priority on its list. It’s Tier 4 compliance in the other sectors seems to have been accomplished through retrofit which is perfectly fine, but it it possibly limited to barely reaching tolerances. That is where I find they might run into some roadblocks going forward. They make a great product, but even if demand turns higher, they have to be able to deliver products that not only meet but exceed current quid lines in order to keep taking market share. Just my 2 cents. Keep up the good work.

        Good luck,

        Keep cranking,

        Robert the DividendDreamer
        AKA — Seeking Dividends

        Follow me on Twitter– Seeking Dividends@DividendDreamer
        dividenddreamer recently posted…How to Trade Your IRA and Grow Your Retirement Nest EggMy Profile

  8. Keith,

    Looks like we’re on the same page. Initiated (and later added to) a position in ADM not too long ago. Then picked up additional shares in BNS earlier today. 🙂

    Let’s hope Mr. Market continues to offer such great opportunities in 2016 and beyond!

    Cheers.

      • A4I,

        Depends on what you mean by “kicking their butts”.

        Underlying business performance? Not really.

        Stock price? Yes, because TD’s valuation is higher. BNS is notably cheaper right now.

        I would recommend paying more attention to business performance and valuation than stock prices.

        I own both, but I think BNS is a more compelling buy based on yield, fundamentals, and definitely valuation.

        Cheers.

        • Hi Jason,

          I’m not knocking TD, I own it. BNS is up for consideration and I hope anyone investing in it is meeting their goals, however, your remark seemed a bit uncalled for (or maybe it was just taken out of context) – so I’ll explain a bit more where I was coming from.

          $10K invested 5 yrs ago in TD would have resulted in a value of $13,348.00, this week.
          $10K invested 5 yrs ago in BNS would have resulted in a value of $8,940, this week.

          That’s a 33.02% difference in favor of TD.

          Both are currently rated with 4 stars from both M* and S&P Capital IQ.

          The beta of BNS is about 9.1% higher, so it’s bouncing around quite a bit more than TD, which may mean different things to different folks if beta is taken into account.

          TD is the largest Canadian bank/holding company, while BNS is in 3rd place.

          As the energy sector troubles continue, BNS is likely to suffer more than TD due to much more exposure to Latin American economies.

          When speaking to growth rates, here are some recent comparisons:

          BNS 1yr = -13.25%. TD 1yr = -10.65%
          BNS 3yr = -1.39%. TD 3yr = +1.62%

          BNS wins in the S&P P/E comparison, as it is about a 9, while TD is trading at about 12. However, M* gives a totally separate set of P/E numbers in their latest report as they show BNS with a P/E of 10.4 and TD with a P/E of 13.2. Not that far off, but some may wish for lower P/E’s when assessing value.

          Yahoo is showing the mean recommendation by the analysts to be 2.2 for TD and 2.6 for BNS.

          Morningstar rates them both with wide moats and shows them both as “undervalued” in the valuations department, so that probably gives investors a bit of comfort I’d imagine.

          In the yield department, no question that BNS is winning there, but that yield has rocketed higher as we know, because the stock price has descended so much this year.

          M* is showing that both are trading at right about the same Price to Fair Value, with BNS at .72 and TD at .79

          Price to book and Price to sales on both are about the same with TD’s numbers being just a tad higher in both those departments.

          Morningstar shows about a whopping “Stock Total Return %” set of numbers that vastly favor TD by about 41.52% over the past 1yr.

          So, some more food for thought for our fellow investors/bloggers.

          Good luck to you all and Happy New Year!
          Dividends @ Affinity4investing.com recently posted…IBM or Microsoft?My Profile

          • I’m going to make a 2nd round of Canada banks at some point, reading these comments sure open my eyes.

            Keith, you have very smart commenters.

            Happy new year!
            Cheers!

            • Hi Vivianne,

              I think we’ll be reading quite a few Canadian bank buys among our dividend bloggers in 2016. These comments are great for our entire dividend investing community. I’m happy to read them and learn as well. Happy New Year to you as well. See you in 2016.

          • A4I,

            “However, M* gives a totally separate set of P/E numbers in their latest report as they show BNS with a P/E of 10.4 and TD with a P/E of 13.2. Not that far off, but some may wish for lower P/E’s when assessing value.”

            I think *most* would wish for a lower P/E when assessing value, not some. Anyone who wishes for a higher P/E ratio when all else is equal (as it seems to be that you’re making the argument that the two banks are fairy close operationally, which they are) is a fool. Moreover, a ~20% difference is more than “not that far off”, in my view. That’s a big reason why TD has provided so much more total return. Total return is capital gain (or loss) and yield. That’s it. If you get a valuation expansion (via a higher P/E ratio), then you get more capital gains.

            Again, BNS is cheaper across the board. BNS’s P/B ratio is 1.4. TD is sitting at a P/B ratio of 1.6. BNS has an earnings yield near 10%. TD: 7.7%. So on and so forth. You see that 20% or so difference play out across all the metrics, along with the higher yield that BNS offers. That higher yield is also more than “not that far off” since we’re talking about a difference of well over 100 basis points. That is substantial.

            Cheers.

    • Hi JF,

      Mr. Market has given us some great gifts in recent weeks. When you see solid long time dividend payers and raisers selling at such cheap valuations coupled with a sustainable relatively high yield you have to act. 2015 has been a disaster for the Canadian banks all of which trade at very compelling value and yield. The big cyclical industrial names like CAT, EMR and more are also selling at great prices as is ADM with its record high yield. Why not nibble on these positions while beaten down. After all, their dividends appear to be quite safe despite all the near term headwinds. As always, I appreciate your comment.

  9. Thanks for sharing, I’m also looking at CAT to get in while it’s low. Not sure how much longer it will stay down. Also reviewing the comments I’ll have to look at CMI. I think these will be great to add to my portfolio. Though I’m excited to do some research into RY, I’m not too familiar with them but I do like banks and that’s a great yield.
    Wallet Squirrel recently posted…My Dividend Investing StrategyMy Profile

    • Hi WS,

      One thing to remember about CAT is that it is a cyclical company going from boom to bust cycles every few years. No doubt 2015 has been tough for CAT which makes it much more attractive these days than a year ago. Of course, can low commodity prices and sluggish Asian and European economies keep CAT in check in 2016? Who knows. All you can do is nibble on positions when they trade at good value and sustainable “high” yield. As you can read from the comments the Canadian banks seem to be in play as well. As with many industrial and energy companies, the large Canadian banks had a rough 2015 and are all selling at really compelling prices, value and yield. Thank you for stopping by and commenting.

    • Hi IH,

      I believe we’ll be reading more Canadian bank buys among our dividend growth community in the coming weeks and months if prices and value remain attractive. BNS, with its high yield is really looking exceptionally cheap at current levels. Thanks for sharing your recent pick up of that stock. As always, I appreciate your comment.

    • Hi DAC,

      Sometimes buying a lower yielding stock that has room for dividend growth is better than chasing a high yield unsustainable dividend. Believe me, I know it’s enticing to capture high single digit or double digit yield but more often than not those yields often disappoint over time. Looking forward to seeing what you pull the trigger on in January. Thank you for stopping by and commenting.

    • Hi DB,

      The Canadian banks had a 2015 they’d like to forget in terms of stock performance. Of course, that just means we have a sector that has a long, solid history that’s selling for great prices, value and yield. BNS is my biggest loser by far and like you I will most likely be adding to that name and others in January. As always, I appreciate your comment.

  10. Hi,

    ADM is certainly a stock that I follow closely. I also keep an eye on Potash Corp of Saskatchewan. Do you know this society? And what do you think?
    Best regards
    David

    • Hi David,

      Well ADM certainly has hit a lot of near term headwinds in the last year with weaker economies in Asia and Europe, coupled with a strong U.S. dollar and lower commodity prices. All these factors really hammered the stock and resulted in record high yields for this name. I’ll be sticking with ADM for now and while I am familiar with POT I do not follow it closely. What I can say, is that it’s current yield is a little high for my taste and that payout ratio suggests flat or reduced dividends going forward. It’s not a bad stock or company just a little out of my comfort range. Thank you for commenting.

  11. I have all these stocks on my watch list. I also like WHR at this moment. We will have to pick one stock for my daughter this month, but for my portfolio, unless I sell one of my good performers stocks, I will have money to invest… I am paying taxes on my house and rental property December/January, so not much funds left over… 🙁
    Happy Healthy and Wealthy Girl recently posted…Project: Dividend Stocks for Teenager December updateMy Profile

    • Hi HHaWG,

      Tax time can always put a strain on investment portfolios. I know many in our DGI community that buy less during the first quarter of every year in case of a higher than expected tax bill. I wrote about WHR a while ago and on the surface looks like a solid company and stock. At least we are on the same page regarding the other potential picks. The industrials and Canadian banks still look like some of the best values around besides the energy sector. As always, I appreciate your comment.

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