I’ve found a way to make one of the most popular dividend investing strategies even better!
In this video, I’ll narrow down a list of the best dividend stocks to three that need to be on your radar.
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Making Dividend Stocks Even Better
So everyone in the Nation knows by now how much I love dividends. In fact, most of my portfolio is in dividend stocks or some kind of income investment.
And one of the best dividend investing themes you can follow are what’s called the Dividend Aristocrats. The Aristocrats are any company in the S&P 500 index, so we’re talking very large U.S.-based companies, that has increased its dividend for at least 25 consecutive years.
So some things to work out in that. First is that these are amazing dividend payers. Just over the last 25 years, we’ve seen two major stock market crashes including the worst recession in 80 years. We’ve seen an Asian financial crisis, multiple financial crises in Russia and a banking crisis in Europe.
For a company to be able to increase its dividend every single year through all that, that is commitment to shareholder cash return!
It also means this list of Dividend Aristocrats changes. Some stocks are added as they hit that 25th year of increases and some get dropped if they miss a year.
I like this theme so much, I suggested it in our 12-month investing plan. That step-by-step plan to start investing and grow your first $1,000 portfolio.
Finding the Best Dividend Aristocrats Stocks
But if you’re just investing in all the Aristocrats, like with the ProShares S&P Aristocrats ETF, ticker NOBL, then I think you’re missing out on some upside potential in your portfolio.
That’s why for this video, and our February dividend stocks, I want to show you how to pick the top three stocks from this already amazing group.
I’m putting these stocks into my M1 Finance account and we’ll be adding to this portfolio each month with new stocks. I’m using M1 here because of that auto-invest tool that’s going to reinvest my dividends and the ability to invest evenly across all the stocks in my portfolio with one click.
Here’s all 64 of the Dividend Aristocrats, up from 57 last year, and the seven new adds are at the top of that third column starting with Amcor and down to International Expeditors.
Again, that entire list isn’t a bad place to start for dividend investing but I don’t want to invest in the entire group. All of these pay good dividends but factoring in price losses, some have severely underperformed the market return over the last two years. Both Stanley Black & Decker, ticker SWK, and Pentair, ticker PNR, have barely squeaked out positive returns including their dividend over the last two years.
How to Narrow the List of Stocks to Buy
So I want to narrow the list to three I think can really do well over the next year and longer. I’ll be using some of the old favorites for picking these stocks like sales growth and operating margin better than their sector average. I’ll also be looking at valuation, so how expensive the shares are on a price-to-earnings basis.
Of course, I’m not going to pick dividend stocks without looking at the dividend yield, so we’ll look at that and finally any catalysts that could send the shares higher.
And a few of these factors are ones I always look at and really important if you’re going to be picking stocks. That operating margin, basically the sales income left after paying suppliers and all the costs to run a business, so it’s the operating income divided by sales to give you a percentage margin and this is my favorite measure for how well a company is run, how well management is converting sales into profits.
Now I know investing can seem like another language, especially when you’re just starting out. When I started in 1999, while in the Marine Corps, I didn’t know an operating margin from an operating table.
So I wanted to put together a quick-start guide for stock analysis, a quick couple of pages with five factors I use to compare stocks and the investing terms every investor needs to know. It’s a great resource, everything you need to get started picking stocks in five minutes.
Stocks I'm Buying in February
PepsiCo, ticker PEP, is our first pick and its 2.9% dividend puts it on the bottom of the list but the total return on shares makes this a solid investment.
Shares have produced an 11.5% annual return over the last decade, above the 10% annual return on shares of Coke. And I gotta tell ya, I like the taste of Coca-Cola better but the fundamentals for Pepsi go down a whole lot easier.
Between the two, they control over 70% of the non-alcoholic beverage market which give them both massive pricing and distribution power. Pepsi’s annual sales are almost exactly twice that of Coca-Cola though and its payout ratio leaves a lot more room for growth.
Pepsi pays out just 68% of its earnings to cover the dividend versus Coca-Cola which needs 78% of its earnings to cover the dividend.
Shares of Pepsi don’t come cheap, something you’ll see in any stock in the sector, trading for a price of 24-times earnings. Profits are expected about 4% higher over the next year though I would put them closer to six percent higher given management’s history of beating expectations.
We see a broad band of price targets for the 11 analysts covering Pepsi with a low target of $115 and a high target of $155 per share. Despite the lackluster targets, this is one you can put in your portfolio and forget about and you’ll always know it’s going to produce.
Next here is Kimberly-Clark, ticker KMB, the $45 billion personal care products giant paying a 3.1% dividend yield.
What I’ve tried to do here as we’ve seen in those other videos in the series is to pick some of the best stocks across the different industries in the sector. So here with KMB you’ve got personal care products, we had beverages and snacks with Pepsi and we’ll see some of the other industries in our next picks.
What I really like about Kimberly-Clark though, besides the fact it’s only paying about 61% of its profits to cover the dividend which leaves a lot of room for growth, what I love here is that the company has been reinvesting an average of $5 billion annually over the last five years into product development and marketing.
You don’t see that level of reinvestment at its competitors so what I think could happen in the coming years is that KMB reaps those benefits with faster revenue growth and cash flow.
Shares trade for 19.6-times earnings which are expected 5.8% higher over the next year but I think those surprise revenues start to play out.
Analysts have a low target of $123 per share to a high target of $155 each for the stock over the next year and I like it at least up to that $150 per share for a long-term bet.
If you like Tesla then you should love shares of Albemarle, ticker ALB, the world’s largest lithium producer. Lithium is the powerhouse for electric vehicle batteries so if you believe in the long-term push for electric, this is one to watch.
Problem is, lithium producers are paying for huge supply growth earlier in the decade. Annual supply is now about 5% over demand and the global average price has plunged 50% since late 2017.
That’s a pretty common story in mining and commodities though. Miners always ramp up production to oversupply levels when prices are good and then get shocked when prices crash. It happens all the time but if you can time it to get in around the bottom of the supply/demand curve, you can usually do really well.
In fact, I actually recommended ALB last December in our best stocks for the Materials sector, part of our stock sector series and it looks like this one is turning around because it’s already up 10.7% in the last month, well over the market return.
The lower price is squeezing a lot of higher-cost lithium producers. ALB owns some of the lowest-cost mines in Chile and only about a billion in net debt, so it’s definitely got the financial power to survive as other producers fall out of the picture.
Shares trade for 11.2 times earnings though profits are expected about 8% lower next year as the market works through the excess lithium supply.
Demand for battery-quality lithium is expected to double through 2025 and ALB is expanding capacity from 65,000 tons last year to 155,000 tons by end 2021 to meet the demand. If that demand keeps increasing as expected, it could very quickly turn profits higher through the next few years.
Analysts are torn on the stock with a low estimate of $41 per share to a high around $109 for about the widest range we’ll see in the list. This one could still be painful over the next year but could also work out to be a great long-term buy.
I love the Dividend Aristocrats but it pays to narrow the list to find the best stocks to buy in February. With a little analysis, you'll find the best of the best dividend stocks for that extra return.