Dividend Stocks at a Value: April 2014 Watchlist

I like dividend stocks because they pay out dividends from a part of the earnings. The dividend adds to my total return on top of capital gains that I take if any. As long as I keep my shares, I’m entitled to the dividends that they pay. Using these dividends, I can purchase more shares without adding in new money. On the other hand, as someone in the early stage of accumulation, it might make sense to add in new money along with the incoming dividends to grow my portfolio of stocks faster. This is exactly what I’m doing.

For this month, I looked over my current holdings to see which dividend payers are good values to buy now.

Classic Dividend Companies

  • Coca-cola (NYSE:KO) – yield: 2.99%
  • Procter & Gamble (NYSE:PG) – yield: 3.16%
  • Chevron (NYSE:CVX) – yield: 3.22% (dividend raise expected Q2 2014)
  • Cisco Systems (NASDAQ:CSCO) – yield: 3.25%

Since I’ve written about Coca-cola, Procter & Gamble, and Chevron in my February Dividend Watchlist, I will only write about Cisco this time.

Cisco Systems

Cisco logoCisco Systems designs, manufactures, and sells internet protocol-based networking products, and other products related to the communications and IT industry. Cisco also provides services related to these products and their use. Some of Cisco’s products and services include: Application Networking Services, Networking Software, Routers, Servers, Switches, and Unified Communications. It has an attractive yield of 3.25% right now after raising its dividend by north of 11% this month. Since initiating its dividend in 2011, it has grew at a compounded annual growth rate of 47%. However, that’s largely because its payout ratio expanded from 10% in 2011 to its present 45%. Going forward, Cisco should raise its dividend by around 9% to align with its estimated earnings growth (next 5 years) of north of 9%.

Turnaround Dividend Stocks?

Sometimes there are dividend stocks on sale which aren’t your typical dividend companies. Here are two:

  • BP p.l.c. (NYSE:BP) – yield: 4.53%
  • General Motors (NYSE:GM) – yield: 3.53%

BP

BP is an integrated oil and gas company. To pay for the fines and settlements of the 2010 oil spill disaster, it has sold off some of its assets, while keeping the best ones. Although its payout is still not back at the pre-spill levels, since 2012, BP has shown commitment to growing its dividend by raising it 10.7% annually. It could be a good addition to a dividend portfolio with a high starting yield of 4.5%. Furthermore, Morningstar currently gives it 4-stars, indicating it’s undervalued. If you’re a Canadian investor, you won’t get a withholding tax on its dividend by purchasing BP in the Tax Free Savings Account (TFSA) or the RRSP.

General Motors

General Motors initiated its dividend in the first quarter of 2014. If you believe the ignition switch issue is a temporarily problem, and believe that the US auto industry is recovering, then General Motors offers an attractive starting yield of 3.5% compared to SPY’s 1.8% yield. Using an estimated earnings per share of $3.44 in 2014, and its anticipated annual dividend of $1.20 per share ($0.30 per quarter), its payout ratio is 35%, which seems sustainable. Its competitor, Ford’s payout ratio of 23% is even more sustainable. Ford is also undervalued, being rated with 4-stars by Morningstar.

Valuation, Upside, and Technicals

From Morningstar, I brought up some quick numbers. The technical comment is my quick opinion after I look at the Finviz charts. In other words, this is a quick and dirty analysis. Remember to perform your own due diligence before investing, and determine whether a stock fits well into your portfolio.

Ticker * Price * Yield Morningstar stars Morningstar Fair Value Estimate Upside to Fair Value Finviz Technicals
KO $40.75 2.99% 4 $44 8%
PG $ 81.56 3.16% 4 $89 9%
CVX $124.24 3.22% 4 $132 6% Price is hitting a major resistance at $124 level.
CSCO $23.4 3.25% 4 $26 11% Currently hitting resistance level, but Head and Shoulders set up could mean higher price in the short-term.
BP $49.03 4.53% 4 $57 16% Price is at the lower end of the rising channel.
GM $33.98 3.53% 5 $57 68% GM quickly bounced back to a support line around $33.5 since hitting the $32 level a week ago.

* Closing Prices & Yields of April 21, 2014.

My Opinion

BP and GM offers the best value from the above list. However, I wouldn’t bet fortunes worth on BP and GM as they fall more into the turnaround category which could boost a higher return for an overall portfolio. For example, if I bought a full position of $5000 in Coca-cola, a classic dividend payer, I could buy a small position of $1250 in BP or GM.

Reflect on your investing experience, risk tolerance, and your current portfolio allocation and size. Then, set a goal for each of your possible buys. Finally, determine whether a real purchase is warranted.

My purpose is using BP and GM for trades, planning to hold them until they reach fair value, which I anticipate could take 2 years or more. Their generous dividends help with the wait.

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Disclosure: At the time of writing, I am long KO, PG, CVX, CSCO, BP, and GM.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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