Dividend Stocks at a Value: January 2015 Watchlist

A good dividend stock pays and even raises its dividend whether the market goes up or down. As long as you don’t sell the shares, you will always get a positive return (the dividends you receive) no matter how the market behaves. Recently, there has been a lot of volatility in the Energy sector due to oil price plummeting so an investor could value dig there to get a high starting yield and potential return once oil price goes up again…that is if one can stand the volatility and the possibility of more downside in the near-term. That’s why I like buying in small chucks at opportune times when a company on my watchlist is priced at a value. Dollar-cost averaging allows the flexibility of buying more shares at a lower price when the market behaves negatively.

For this month, I looked over my current holdings to see which dividend payers are good values to buy. There are also other good Energy companies to look into, including Exxon Mobil Corporation (NYSE:XOM), Enbridge Inc (TSX:ENB)(NYSE:ENB), TransCanada Corporation (TSX:TRP)(NYSE:TRP), Inter Pipeline Ltd (TSX:IPL), Suncor Energy Inc (TSX:SU)(NYSE:SU), Cenovus Energy Inc (TSX:CVE)(NYSE:CVE), Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ), and Vermilion Energy Inc (TSX:VET)(NYSE:VET).

Classic Dividend Companies

This list shows the current yields, and I believe are good starting yields (with respective to the company’s historical yields) to start buying into these companies if you believe in the future of these companies.

  • Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) – yield: 4.16%
  • Chevron Corporation (NYSE:CVX) – yield: 3.96%
  • International Business Machines Corp. (NYSE: IBM) – yield: 2.82%

Bank of Nova Scotia

Bank of Nova Scotia logo

Bank of Nova Scotia is the third largest bank in Canada. This Canadian leading bank provides financial services in over 55 countries. It’s medium-term objectives were met in 2014. The 2015 medium-term objectives is the same as 2014. For example, earnings per share growth is expected to be between 5 and 10%, while return on equity is expected to be between 15 and 18%.

A table for Scotiabank 2014 Medium-Term Financial Objectives Met
Source: Bank of Nova Scotia Q4 2014 Investor Presentation, Slide 5

Chevron

Chevron logo
Chevron is a large oil company, which pays an attractive dividend of over 3.9%, 20% higher than its 5-year average of 3.3%. It’s paying out 38% of its earnings for its dividends. Historically, this is at the higher end of its yield range, unless one wants to shoot for above 4.25%, which looks possible.
CVX Dividend Yield (TTM) Chart

CVX Dividend Yield (TTM) data by YCharts

If history is telling, then, having raised dividends for 27 years in a row, CVX will be increasing its dividend in Q2 of 2015 even amidst low oil prices. Additionally, Morningstar gives it 4-stars, meaning the shares are currently undervalued.

International Business Machines

IBM logo
International Business Machines is a global IT company operating in over 175 countries. It provides solutions which integrate information technology and business processes. Some investors maybe losing faith as IBM dropped the goal of “at least $20 Operating EPS” in 2015 as it previously promised. Still amidst stagnating revenues, IBM continues to return value to shareholders by buying back shares and paying a higher dividend. If you believe IBM is heading in the right direction by investing in Big Data and Cloud Centers around the world, then, it is worth looking into it.

Turnaround Dividend Stocks?

These companies could be viewed as priced cheap, but their technical charts look horrible. Here are a few:

  • BP p.l.c. (NYSE:BP) – yield: 6.36%
  • BHP Billiton (NYSE: BBL) – yield 5.97%

BP

Previously, I’ve placed BP, an integrated oil and gas company, on the watchlist when it paid a starting yield of 4.5%. Last quarter, its dividend was increased by $0.01, a raise of 1.7% from its last dividend raise, but is a 5.26% raise from a year ago. To me, this shows BP is committed to maintaining and raising the dividend even during harsh times such as the current scenario of low oil prices. Note that however, BP’s payout ratio is 78%, the highest in the last decade. Last month, Morningstar.com lowed BP’s fair value estimate from $56 to $54. With its current price around $35 and $36, there’s about 50% margin of safety.

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), the RRSP, or the non-registered, taxable account.

BHP Billiton

BHP Billiton is a diversified miner, which supplies a variety of minerals including coal, copper, iron ore, nickel, diamonds, uranium, and silver. Additionally, BHP Billiton also supplies oil. So, BBL is subject to the ups and downs of commodity prices.

If you’re a Canadian investor, you won’t get a withholding tax on its dividend by purchasing BBL in the Tax Free Savings Account (TFSA), the RRSP, or the non-registered, taxable account.

Valuation, Upside, and Technicals

From Morningstar, I brought up some quick numbers. Please note that fair value estimations changes as fundamentals change, so use the percentages as a guide only. 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 M* stars M* FV Est. Margin of Safety Upside Potential Technicals
TSX:BNS $63.49 4.16% 3 1$73 13% 15% In a downtrend
CVX $108.03 3.96% 4 $124 12.9% 14.8% In a downtrend
IBM $156.07 2.82% 4 $196 20.4% 25.6% On a free fall
BP $35.83 6.36% 5 $54 33.6% 50.7% In a downtrend
BBL $40.53 5.97% 5 $70 42.1% 72.7% In a downtrend
  • * Closing Prices & Yields of January 6, 2015.
  • M* = Morningstar
  • Margin of Safety = Margin of Safety from Fair Value Estimate (FV Est.)
  • Margin of Safety = (FV Est. – Price) / FV Est.
  • Upside Potential = Upside Potential to FV Est.
  • Technicals from Finviz
  • 1Fair Value estimation by end of 2015 in F.A.S.T Graphs

My Opinion

BP and BBL offers the best value from the above list. However, I wouldn’t bet fortunes worth on BP and BBL 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 the Bank of Nova Scotia, a classic dividend payer, I could buy a small position of $1250 in BP or BBL. 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.

Resources

If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.

Disclosure: At the time of writing, I am long the watchlist.

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.

Get Exclusive Articles from me on Seeking Alpha

  • Access my portfolio of high-quality U.S. and Canadian dividend stocks.
  • Real-time updates of when I buy or sell from this portfolio.
  • Get best ideas of the top 3 dividend stocks from my watchlist. Updated each month.
Learn More

2 thoughts on “Dividend Stocks at a Value: January 2015 Watchlist

  1. Cutter

    Good article and advice for a starting point to analyse stocks.

    Which dividend players on the TSE do you think are offering the best value and upside right now?

  2. Passive Income Earner Post author

    Hi Cutter,
    As I mentioned above, BNS with a nice 4.2% yield will provide nice capital appreciation in the long-term right now. Other dividend payers I’m following, which offers good value and upside potential include the Energy companies I listed in the article in the 2nd paragraph: Enbridge (ENB), TransCanada (TRP), Inter Pipeline (IPL) Suncor Energy (SU), Cenovus Energy (CVE), Canadian Natural Resources (CNQ), and Vermilion Energy (VET). They can all be found on the TSE.

    Sometimes, it’s not just looking for the best value and upside potential, but also whether the individual investor can take the volatility as well. For example, is one able to hold (and maybe even add more) if the price declines some more?

    It’d be even better if you’ve learned to read charts. I notice that it’s a good strategy to dollar-cost averaging into positions bit by bit or to buy when the trend indicates price is going up AFTER the downtrend. Currently, many of the Energy stocks I follow still haven’t showed that uptrend in price yet. So, be careful out there.

    To wait for that confirmed uptrend in price, one needs to be patient. I know I need to work on that more. So, I tend to employ the dollar-cost averaging strategy instead.

Comments are closed.