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